- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-9712 - -------------------------------------------------------------------------------- UNITED STATES CELLULAR CORPORATION (Exact name of Registrant as specified in its charter) - -------------------------------------------------------------------------------- <TABLE> <S> <C> DELAWARE 62-1147325 - ------------------------------ ------------------------------ (State or other jurisdiction (IRS Employer Identification of incorporation or No.) organization) </TABLE> 8410 WEST BRYN MAWR, SUITE 700, CHICAGO, ILLINOIS 60631 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER: (773) 399-8900 Securities registered pursuant to Section 12(b) of the Act: <TABLE> <S> <C> Name of each exchange Title of each class on which registered - --------------------------------- -------------------------- Common Shares, $1 par value American Stock Exchange Liquid Yield Option Notes due 2015 American Stock Exchange </TABLE> Securities registered pursuant to Section 12(g) of the Act: None ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K._X_ As of February 28, 1997, the aggregate market value of registrant's Common Shares held by nonaffiliates was approximately $429.6 million (based upon the closing price of the Common Shares on February 28, 1997, of $26.25, as reported by the American Stock Exchange). The number of shares outstanding of each of the registrant's classes of common stock, as of February 28, 1997, is 53,160,367 Common Shares, $1 par value, and 33,005,877 Series A Common Shares, $1 par value. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1996 Annual Report to Shareholders and of the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held May 14, 1997, described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Parts II and III of this report. - --------------------------------------------------------------------------------
CROSS REFERENCE SHEET AND TABLE OF CONTENTS - ---------------------------------------------------------------------------- <TABLE> <CAPTION> PAGE NUMBER OR REFERENCE (1) ------------ <S> <C> <C> Item 1. Business................................................................................................. 3 Item 2. Properties............................................................................................... 23 Item 3. Legal Proceedings........................................................................................ 23 Item 4. Submission of Matters to a Vote of Security Holders...................................................... 23 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 24(2) Item 6. Selected Financial Data.................................................................................. 24(3) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 24(4) Item 8. Financial Statements and Supplementary Data.............................................................. 24(5) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 24 Item 10. Directors and Executive Officers of the Registrant....................................................... 25(6) Item 11. Executive Compensation................................................................................... 25(7) Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 25(8) Item 13. Certain Relationships and Related Transactions........................................................... 25(9) Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 26 </TABLE> - ---------------------------------------------------------------------------- (1) Parenthetical references are to information incorporated by reference from Exhibit 13, which includes portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1996 ("Annual Report") and from the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held on May 14, 1997 (the "Proxy Statement"). (2) Annual Report section entitled "United States Cellular Stock and Dividend Information." (3) Annual Report section entitled "Selected Consolidated Financial Data." (4) Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of Changes in Common Shareholders' Equity," "Notes to Consolidated Financial Statements," "Report of Independent Public Accountants" and "Consolidated Quarterly Income Information (Unaudited)." (6) Proxy Statement sections entitled "Election of Directors" and "Executive Officers." (7) Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. (8) Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." (9) Proxy Statement section entitled "Certain Relationships and Related Transactions."
- -------------------------------------------------------------------------------- [LOGO] UNITED STATES CELLULAR CORPORATION 8410 WEST BRYN MAWR - CHICAGO, ILLINOIS 60631 TELEPHONE (773) 399-8900 - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS THE COMPANY United States Cellular Corporation (the "Company") provides cellular telephone service to 1,073,000 customers through 131 majority-owned and managed ("consolidated") cellular systems serving approximately 16% of the geography and approximately 8% of the population of the 48 contiguous United States. Since 1985, when the Company began providing cellular service in Knoxville, Tennessee, the Company has expanded its cellular networks and customer service operations to cover 140 markets in 27 states as of December 31, 1996. In total, the Company now operates nine market clusters, of which five have a total population of more than two million, and each of which has a total population of more than one million. Overall, 81% of the Company's 25.1 million population equivalents are in markets which are consolidated, 1% are in managed but not consolidated markets and 18% are in markets in which the Company holds an investment interest. The Company is the eighth largest cellular telephone company in the United States, based on the aggregate number of population equivalents it owns. The Company's corporate development strategy is to operate controlling interests in cellular market licensees in areas adjacent to or in proximity to its other markets, thereby building clusters of operating markets. Customers benefit from larger service areas such as these, which provide longer uninterrupted service and the ability to make outgoing calls and receive incoming calls within the designated area without special roaming arrangements. In addition, the Company anticipates that clustering will continue to provide the Company certain economies in its capital and operating costs. As the number of opportunities for outright acquisitions has decreased in recent years, and as the Company's clusters have grown, the Company's focus has shifted toward exchanges and toward divestitures of managed and investment interests which are considered less essential to the Company's clustering strategy. The following table summarizes the status of the Company's interests in cellular markets at December 31, 1996. <TABLE> <S> <C> Owns Majority Interest and Manages.................................... 131 Owns Minority Interest and Manages.................................... 9 --- Total Markets Managed or to be Managed by the Company................. 140 Markets Managed by Others (1)......................................... 64 --- Total Markets......................................................... 204 --- --- </TABLE> - ---------- (1) Represents markets in which the Company owns a minority or other noncontrolling interest and which are managed by third parties; as of December 31, 1996, the Company accounted for its interests in 35 of these markets using the equity method and accounted for the remaining 29 markets using the cost method. Cellular systems in the Company's 131 majority-owned and managed markets served 1,073,000 customers at December 31, 1996, and contained 1,328 cell sites. The average penetration rate in the Company's consolidated markets was 4.94% at December 31, 1996, and the churn rate in all consolidated markets averaged 1.9% per month for the twelve months ended December 31, 1996. 3
The Company was incorporated in Delaware in 1983. The Company's executive offices are located at 8410 West Bryn Mawr, Chicago, Illinois 60631. Its telephone number is 773-399-8900. The Common Shares of the Company are listed on the American Stock Exchange under the symbol "USM." The Company's Liquid Yield Option Notes ("LYONs") are also listed on the American Stock Exchange. Unless the context indicates otherwise: (i) references to the "Company" refer to United States Cellular Corporation and its subsidiaries; (ii) references to "TDS" refer to Telephone and Data Systems, Inc. and its subsidiaries; (iii) references to "MSA" or to a particular city refer to the Metropolitan Statistical Area, as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission ("FCC") in designating metropolitan cellular market areas; (iv) references to "RSA" refer to the Rural Service Area, as used by the FCC in designating non-MSA cellular market areas; (v) references to cellular "markets" or "systems" refer to MSAs, RSAs or both; (vi) references to "population equivalents" mean the population of a market, based on 1996 Donnelley Marketing Service Estimates, multiplied by the percentage interests that the Company owns or has the right to acquire in an entity licensed, designated to receive a license or expected to receive a construction permit ("licensee") from the FCC to construct or operate a cellular system in such market. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Annual Report on Form 10-K, including exhibits, contains "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. These statements contain potential risks and uncertainties; therefore, actual results may differ materially. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Important factors that may affect these projections or expectations include, but are not limited to: changes in the overall economy; changes in competition in markets in which the Company operates; advances in telecommunications technology; changes in the telecommunications regulatory environment; pending and future litigation; availability of future financing; start-up of Personal Communications Services ("PCS") operations; and unanticipated changes in growth in cellular customers, penetration rates, churn rates and the mix of products and services offered in the Company's markets. Readers should evaluate any statements in light of these important factors. CELLULAR TELEPHONE OPERATIONS THE CELLULAR TELEPHONE INDUSTRY. Cellular telephone technology provides high-quality, high-capacity communications services to in-vehicle and hand-held portable cellular telephones. Cellular technology is a major improvement over earlier mobile telephone technologies. Cellular telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Cellular telephone systems also offer a full range of ancillary services such as conference calling, call-waiting, call-forwarding, voice mail, facsimile and data transmission. Cellular telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers operating on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSO is connected to the conventional ("landline") telephone network and potentially other MTSOs. Each conversation on a cellular phone involves a transmission over a specific set of radio frequencies from the cellular phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSO and from there may be forwarded to the landline telephone network to complete the call. As the cellular telephone moves from one cell to another, the MTSO determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call. The FCC currently grants only two licenses to provide cellular telephone service in each market. However, competition for customers includes competing communications technologies such as conventional landline and mobile telephone, Specialized Mobile Radio ("SMR") systems and radio paging. PCS has become available in certain areas of the United States, including the Company's markets, and the Company expects PCS competitors to initiate service in substantially all of the Company's markets in 4
the next one or two years. Additionally, emerging technologies such as Enhanced Specialized Mobile Radio ("ESMR") and mobile satellite communication systems may prove to be competitive with cellular service in the future in some or all of the Company's markets. The services available to cellular customers and the sources of revenue available to cellular system operators are similar to those provided by conventional landline telephone companies. Customers are charged a separate fee for system access, airtime, long-distance calls and ancillary services. Cellular system operators often provide service to customers of other operators' cellular systems while the customers are temporarily located within the operators' service areas. Customers using service away from their home system are called "roamers." Roaming is available because technical standards require that analog cellular telephones be compatible in all market areas in the United States. The system that provides the service to these roamers will generate usage revenue. Many operators, including the Company, charge premium rates for this roaming service. There are a number of recent technical developments in the cellular industry. Currently, while most of the MTSOs process information digitally, most of the radio transmission is done on an analog basis. During 1992, a new transmission technique was approved for implementation by the cellular industry. Time Division Multiple Access ("TDMA") technology was selected as one industry standard by the cellular industry and has been deployed in several markets, including the Company's operations in Tulsa, Oklahoma and in its Florida/Georgia market cluster. Another digital technology, Code Division Multiple Access ("CDMA"), is expected to be deployed by the Company in a commercial trial during 1997. The Company may also deploy some CDMA digital radio channels in other markets on a trial basis in the near future. Digital radio technology offers several advantages including greater privacy, less transmission noise, greater system capacity and potentially lower incremental costs for additional customers. The conversion from analog to digital radio technology has begun on an industry-wide basis; however, this process is expected to take a number of years. The cellular telephone industry is characterized by high initial fixed costs. Accordingly, if and when revenues less variable costs exceed fixed costs, incremental revenues should yield an operating profit. The amount of profit, if any, under such circumstances is dependent on, among other things, prices and variable marketing costs which in turn are affected by the amount and extent of competition. Until technological limitations on total capacity are approached, additional cellular system capacity can normally be added in increments that closely match demand and at less than the proportionate cost of the initial capacity. THE COMPANY'S OPERATIONS. From its inception in 1983 until 1993, the Company was principally in a start-up phase. Until that time, the Company's activities had been concentrated significantly on the acquisition of interests in cellular licensees and on the construction and initial operation of cellular systems. The development of a cellular system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. The Company experienced operating losses and net losses from its inception until 1993. During the past three years, the Company generated operations-driven net income and has significantly increased its operating cash flows during that time. Management anticipates increasing growth in cellular units in service and revenues as the Company continues to expand through internal growth. Marketing and system operations expenses associated with this expansion may reduce the rate of growth in operating cash flows and operating income during the period of accelerated growth. In addition, the Company anticipates that the seasonality of revenue streams and operating expenses may cause the Company's operating income to vary from quarter to quarter. While the Company produced operating income and net income during 1994, 1995 and 1996, changes in any of several factors may reduce the Company's growth in operating income and net income over the next few years. These factors include: (i) the growth rate in the Company's customer base; (ii) the usage and pricing of cellular services; (iii) the churn rate; (iv) the cost of providing cellular services, including the cost of attracting new customers; (v) the introduction of competition from PCS and other emerging technologies; and (vi) continuing technological advances which may provide additional competitive alternatives to cellular service. The Company is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage cellular telephone systems. Its cellular interests include regional market clusters in the following areas: Iowa, Wisconsin/Illinois, Missouri, 5
Eastern North Carolina/South Carolina, Virginia, West Virginia/Maryland/Pennsylvania, Oregon/California, Washington/Oregon/Idaho, Indiana/Kentucky/Ohio, Maine/New Hampshire/Vermont, Eastern Tennessee/Western North Carolina, Oklahoma/Missouri/Kansas, Texas/Oklahoma, Florida/Georgia and Southwestern Texas. See "The Company's Cellular Interests." The Company has acquired its cellular interests through the wireline application process (21%), including settlements and exchanges with other applicants, and through acquisitions (79%), including acquisitions from TDS and third parties. CELLULAR SYSTEMS DEVELOPMENT ACQUISITIONS. During the last five years, the Company has expanded its size, particularly in contiguous or adjacent markets, through acquisitions which have been aimed at strengthening the Company's position in the cellular industry. This growth has resulted primarily from acquisitions of interests in mid-sized and rural markets and has been based on obtaining interests with rights to manage the underlying market. Including transfers of RSA interests from TDS, the Company has increased its population equivalents by 31%, from approximately 19.1 million at December 31, 1991, to approximately 25.1 million at December 31, 1996. Markets managed by the Company have increased from 91 markets at December 31, 1991 to 140 markets at December 31, 1996. As of December 31, 1996, 82% of the Company's population equivalents represented interests in markets the Company manages compared to 66% at December 31, 1991. Recently, the pace of acquisitions has slowed as industry-wide consolidation has reduced the number of markets available for acquisition. The Company's population equivalents grew at a compound annual rate of just 5% over the last five years due to the increased number of exchange and divestiture transactions in the last few years. The Company may continue to make opportunistic acquisitions or exchanges in markets that further strengthen its market clusters and in other attractive markets. The Company also seeks to acquire minority interests in markets where it already owns the majority interest. There can be no assurance that the Company, or TDS for the benefit of the Company, will be able to negotiate additional acquisitions or exchanges on terms acceptable to it or that regulatory approvals, where required, will be received. The Company plans to retain minority interests in certain cellular markets which it believes will earn a favorable return on investment. Other minority interests may be exchanged for interests in markets which enhance the Company's market clusters or may be sold for cash or other consideration. The Company also continues to evaluate the disposition of certain managed interests which are not essential to its corporate development strategy. The Company, or TDS for the benefit of the Company, has historically negotiated acquisitions of cellular interests from third parties primarily in consideration for the Company's Common Shares or TDS's equity securities. Cellular interests acquired by TDS in these transactions have been assigned to the Company. At that time, the Company reimbursed TDS for the value of TDS securities issued in such transactions, generally by issuing Common Shares to TDS or by increasing the balance due TDS under the Company's Revolving Credit Agreement in amounts equal to the value of TDS securities delivered at the time the acquisitions were completed. The fair market value of the Company's securities issued to TDS in connection with these transactions was equal to the fair market value of the TDS securities delivered in the transactions and was determined at the time the transactions were completed. In the past three years, the Company has also negotiated substantial divestitures and exchanges of cellular interests with third parties. The consideration received from these divestitures of non-strategic markets has primarily been cash, which has been used to reduce debt or for general corporate purposes. The exchanges have included the divestiture of controlling interests in non-strategic markets in exchange for controlling interests in markets which further enhance the Company's clusters. COMPLETED ACQUISITIONS. During 1996, the Company completed the acquisition of controlling interests in two markets and several additional minority interests representing approximately 1.0 million population equivalents for an aggregate consideration of $158.9 million. The consideration consisted of $116.4 million in cash and 1.3 million of the Company's Common Shares. Substantially all of the Company's Common Shares issued were delivered to TDS and $102.8 million of the cash consideration was paid to TDS. The Company's Common Shares were issued to TDS to reimburse TDS for TDS 6
Common Shares issued and cash paid to third parties in connection with these acquisitions. The cash paid to TDS was pursuant to an agreement entered into during 1996 under which the Company acquired certain minority interests from TDS. COMPLETED DIVESTITURES AND EXCHANGES. During 1996, the Company completed the divestiture of controlling interests in eight markets plus one market partition and minority interests in two other markets representing approximately 1.2 million population equivalents for an aggregate consideration of $176.5 million in cash. Also during 1996, the Company completed an exchange transaction which resulted in the acquisition of a controlling interest in one market, representing 116,000 population equivalents, and the divestiture of one market, representing 97,000 population equivalents. The Company also received $11.3 million in cash pursuant to this exchange. PENDING ACQUISITIONS, DIVESTITURES AND EXCHANGES. At December 31, 1996, the Company had entered into an agreement to purchase a controlling interest in one market representing approximately 213,000 population equivalents. Also at that date, pursuant to the agreement with TDS entered into earlier in 1996, the Company expects to acquire minority interests in two markets from TDS representing 104,000 population equivalents. Each of these pending transactions is expected to be completed during 1997. In February 1997, the Company announced that it had entered into an exchange agreement with BellSouth Corporation ("BellSouth"), pursuant to which the Company will receive controlling interests in twelve contiguous markets adjacent to its Iowa and Wisconsin/Illinois clusters. In exchange, the Company will trade its controlling interests in ten markets and investment interests in 13 markets and pay cash, the amount of which is dependent upon certain factors. The transaction is subject to various regulatory and other approvals. The Company maintains shelf registration of its Common Shares and Preferred Stock under the Securities Act of 1933 for issuance specifically in connection with acquisitions. The Company is a majority-owned subsidiary of TDS. TDS owns 80.6% of the combined total of the outstanding Common Shares and Series A Common Shares of the Company and controls 95.6% of the combined voting power of both classes of common stock. The Company benefits from the extensive telecommunications industry experience of TDS, which also operates telephone and paging businesses and is developing its PCS business. CELLULAR INTERESTS AND CLUSTERS The Company operates clusters of adjacent cellular systems in nearly all of its markets, enabling its customers to benefit from larger service areas than otherwise possible. Where the Company offers wide-area coverage, its customers enjoy uninterrupted service within the designated area. Customers may also make outgoing calls and receive incoming calls within this area without special roaming arrangements. In addition to benefits to customers, clustering also has provided to the Company certain economies in its capital and operating costs. These economies are made possible through increased sharing of facilities, personnel and other costs and have resulted in a reduction of the Company's per customer cost of service. The extent to which the Company benefits from these revenue enhancements and economies of operation is dependent on market conditions, population size of each cluster and engineering considerations. The Company may continue to make opportunistic acquisitions and exchanges which will complement its established market clusters. From time to time, the Company may also consider exchanging or selling its interests in markets which are not essential to its long-term strategies. The Company owned interests in cellular telephone systems in 204 markets at December 31, 1996, representing 25.1 million population equivalents. Including the controlling interest to be acquired from a third party and the two minority interests to be acquired from TDS, the Company owned or had the right 7
to acquire 207 markets, representing 25.4 million pops, at December 31, 1996. The following table summarizes the growth in the Company's population equivalents in recent years and the development status of these population equivalents. <TABLE> <CAPTION> DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (THOUSANDS OF POPULATION EQUIVALENTS)(1) <S> <C> <C> <C> <C> <C> Operational Markets: Majority-Owned and Managed.................................. 20,276 19,958 18,556 18,807 14,749 Minority-Owned and Managed (2).............................. 401 513 1,206 1,179 2,069 Markets to be Managed, Net of Markets to be Divested: (3) Majority-Owned.............................................. 213 272 2,212 1,026 1,859 Minority-Owned (2).......................................... -- -- -- 8 5 --------- --------- --------- --------- --------- Total Markets Managed and to be Managed..................... 20,890 20,743 21,974 21,020 18,682 Minority Interests in Markets Managed by Others............... 4,501 3,990 3,745 3,547 3,642 --------- --------- --------- --------- --------- Total....................................................... 25,391 24,733 25,719 24,567 22,324 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> - ---------- (1) Based on 1996 Donnelley Marketing Services estimates for all years. (2) Includes markets where the Company has the right to acquire an interest but does not currently own an interest. (3) Includes markets which are operational but which are currently managed by third parties. The following section details the Company's cellular interests, including those it owned or had the right to acquire as of December 31, 1996. The table presented therein lists clusters of markets that the Company manages or anticipates managing. The Company's market clusters show the areas in which the Company is currently focusing its development efforts. These clusters have been devised with a long-term goal of allowing delivery of cellular service to areas of economic interest and along corridors of economic activity. The number of population equivalents represented by the Company's cellular interests may have no direct relationship to the number of potential cellular customers or the revenues that may be realized from the operation of the related cellular systems. THE COMPANY'S CELLULAR INTERESTS The table below sets forth certain information with respect to the interests in cellular markets which the Company owned or had the right to acquire pursuant to definitive agreements as of December 31, 1996. <TABLE> <CAPTION> PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1996 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> MARKETS MANAGED BY THE COMPANY: MIDWEST REGIONAL MARKET CLUSTER: IOWA: Des Moines, IA.......................... 426,000 100.00% 100.00% 426,000 Davenport, IA-IL........................ 360,000 97.37 97.37 350,000 Humboldt (IA 10)........................ 181,000 100.00 100.00 181,000 Cedar Rapids, IA........................ 180,000 96.00 96.00 173,000 Muscatine (IA 4)........................ 155,000 100.00 100.00 155,000 Iowa (IA 6)............................. 155,000 100.00 100.00 155,000 Waterloo-Cedar Falls, IA................ 147,000 91.04 91.04 134,000 Hardin (IA 11).......................... 112,000 100.00 100.00 112,000 Jackson (IA 5).......................... 109,000 100.00 100.00 109,000 Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000 Lyon (IA 16)............................ 104,000 100.00 100.00 104,000 Iowa City, IA........................... 102,000 100.00 100.00 102,000 Dubuque, IA............................. 89,000 95.90 95.90 85,000 Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000 Mills (IA 1)............................ 62,000 100.00 100.00 62,000 Audubon (IA 7).......................... 55,000 100.00 100.00 55,000 </TABLE> 8
<TABLE> <CAPTION> PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1996 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> Union (IA 2)............................ 50,000 100.00% 100.00% 50,000 Monroe (IA 3)........................... 91,000 49.00 49.00 45,000 Winneshiek (IA 12)...................... 116,000 24.50 24.50 28,000 Ida (IA 9) *............................ 63,000 16.67 16.67 11,000 ----------- ----------- 2,732,000 2,512,000 ----------- ----------- WISCONSIN/ILLINOIS: Peoria, IL.............................. 347,000 100.00 100.00 347,000 Jo Daviess (IL 1)....................... 319,000 100.00 100.00 319,000 Wood (WI 7)............................. 289,000 100.00 100.00 289,000 Adams (IL 4) * (2)...................... 214,000 100.00 100.00 214,000 Mercer (IL 3)........................... 204,000 100.00 100.00 204,000 Vernon (WI 8) *......................... 236,000 74.00 74.00 174,000 La Crosse, WI........................... 102,000 95.11 95.11 97,000 Pierce (WI 5)........................... 95,000 100.00 100.00 95,000 Wausau, WI *............................ 122,000 71.76 71.76 87,000 Trempealeau (WI 6) (2).................. 83,000 100.00 100.00 83,000 Alton, IL............................... 21,000 100.00 100.00 21,000 ----------- ----------- 2,032,000 1,930,000 ----------- ----------- MISSOURI: Columbia, MO *.......................... 126,000 100.00 100.00 126,000 Stone (MO 15)........................... 117,000 100.00 100.00 117,000 Laclede (MO 16)......................... 98,000 100.00 100.00 98,000 Washington (MO 13)...................... 92,000 100.00 100.00 92,000 Callaway (MO 6) *....................... 86,000 100.00 100.00 86,000 Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000 Shannon (MO 17) *....................... 56,000 100.00 100.00 56,000 Linn (MO 5) (2)......................... 55,000 100.00 100.00 55,000 ----------- ----------- 686,000 686,000 ----------- ----------- TOTAL MIDWEST REGIONAL MARKET CLUSTER.............................. 5,450,000 5,128,000 ----------- ----------- MID-ATLANTIC REGIONAL MARKET CLUSTER: EASTERN NORTH CAROLINA/SOUTH CAROLINA: Northampton (NC 8)...................... 289,000 100.00 100.00 289,000 Rockingham (NC 7)....................... 286,000 100.00 100.00 286,000 Harnett (NC 10)......................... 286,000 100.00 100.00 286,000 Greene (NC 13).......................... 244,000 100.00 100.00 244,000 Greenville (NC 14)...................... 241,000 100.00 100.00 241,000 Hoke (NC 11)............................ 224,000 100.00 100.00 224,000 Chesterfield (SC 4)..................... 212,000 100.00 100.00 212,000 Ashe (NC 3)............................. 160,000 100.00 100.00 160,000 Chatham (NC 6).......................... 159,000 81.16 81.16 129,000 Sampson (NC 12)......................... 128,000 100.00 100.00 128,000 Camden (NC 9)........................... 120,000 100.00 100.00 120,000 ----------- ----------- 2,349,000 2,319,000 ----------- ----------- VIRGINIA: Roanoke, VA............................. 234,000 100.00 100.00 234,000 Bedford (VA 4).......................... 177,000 100.00 100.00 177,000 Lynchburg, VA........................... 160,000 100.00 100.00 160,000 Charlottesville, VA..................... 143,000 94.44 94.44 135,000 Buckingham (VA 7)....................... 90,000 100.00 100.00 90,000 Tazewell (VA 2) (2)..................... 83,000 100.00 100.00 83,000 Bath (VA 5)............................. 62,000 100.00 100.00 62,000 ----------- ----------- 949,000 941,000 ----------- ----------- </TABLE> 9
<TABLE> <CAPTION> PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1996 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> WEST VIRGINIA/MARYLAND/PENNSYLVANIA: Monongalia (WV 3) *..................... 270,000 100.00% 100.00% 270,000 Raleigh (WV 7) *........................ 256,000 100.00 100.00 256,000 Grant (WV 4) *.......................... 172,000 100.00 100.00 172,000 Tucker (WV 5) *......................... 132,000 100.00 100.00 132,000 Hagerstown, MD *........................ 127,000 100.00 100.00 127,000 Cumberland, MD *........................ 102,000 100.00 100.00 102,000 Bedford (PA 10) * (2)................... 49,000 100.00 100.00 49,000 Garrett (MD 1) *........................ 30,000 100.00 100.00 30,000 ----------- ----------- 1,138,000 1,138,000 ----------- ----------- TOTAL MID-ATLANTIC REGIONAL MARKET CLUSTER....................... 4,436,000 4,398,000 ----------- ----------- NORTHWEST REGIONAL MARKET CLUSTER: OREGON/CALIFORNIA: Coos (OR 5)............................. 259,000 100.00 100.00 259,000 Del Norte (CA 1)........................ 209,000 100.00 100.00 209,000 Medford, OR *........................... 170,000 100.00 100.00 170,000 Mendocino (CA 9)........................ 140,000 100.00 100.00 140,000 Crook (OR 6) *.......................... 192,000 62.50 62.50 120,000 Modoc (CA 2)............................ 59,000 100.00 100.00 59,000 ----------- ----------- 1,029,000 957,000 ----------- ----------- WASHINGTON/OREGON/IDAHO: Clark (ID 6)............................ 293,000 100.00 100.00 293,000 Pacific (WA 6) *........................ 183,000 100.00 100.00 183,000 Richland-Kennewick-Pasco, WA *.......... 182,000 100.00 100.00 182,000 Butte (ID 5)............................ 159,000 100.00 100.00 159,000 Yakima, WA *............................ 216,000 54.55 54.55 118,000 Okanogan (WA 4)......................... 116,000 100.00 100.00 116,000 Umatilla (OR 3) *....................... 150,000 60.42 60.42 91,000 Kittitas (WA 5) * (2)................... 71,000 83.50 83.50 59,000 Hood River (OR 2) *..................... 73,000 45.10 45.10 33,000 Skamania (WA 7) *....................... 28,000 45.10 45.10 13,000 ----------- ----------- 1,471,000 1,247,000 ----------- ----------- TOTAL NORTHWEST REGIONAL MARKET CLUSTER....................... 2,500,000 2,204,000 ----------- ----------- INDIANA/KENTUCKY/OHIO MARKET CLUSTER: Meade (KY 3)............................ 317,000 100.00 100.00 317,000 Evansville, IN.......................... 322,000 87.50 87.50 282,000 Owen (IN 7)............................. 224,000 100.00 100.00 224,000 Elliott (KY 9).......................... 204,000 100.00 100.00 204,000 Fulton (KY 1)........................... 189,000 100.00 100.00 189,000 Clay (KY 11)............................ 171,000 100.00 100.00 171,000 Powell (KY 10).......................... 154,000 100.00 100.00 154,000 Union (KY 2)............................ 129,000 100.00 100.00 129,000 Ross (OH 9) *........................... 249,000 49.00 49.00 122,000 Owensboro, KY........................... 91,000 96.07 96.07 88,000 Miami (IN 4) *.......................... 179,000 28.57 28.57 51,000 Warren (IN 5) *......................... 123,000 33.33 33.33 41,000 ----------- ----------- TOTAL INDIANA/KENTUCKY/OHIO MARKET CLUSTER....................... 2,352,000 1,972,000 ----------- ----------- </TABLE> 10
<TABLE> <CAPTION> PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1996 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER: Manchester-Nashua, NH................... 353,000 92.13% 92.13% 325,000 Kennebec (ME 3)......................... 223,000 100.00 100.00 223,000 Coos (NH 1) *........................... 223,000 100.00 100.00 223,000 Carroll (NH 2) #........................ 213,000 0.00 100.00% 100.00 213,000 Somerset (ME 2)......................... 150,000 100.00 100.00 150,000 Bangor, ME.............................. 147,000 91.47 91.47 135,000 Addison (VT 2) * (2).................... 107,000 100.00 100.00 107,000 Lewiston-Auburn, ME..................... 104,000 82.67 82.67 86,000 Washington (ME 4) *..................... 86,000 100.00 100.00 86,000 Oxford (ME 1)........................... 83,000 100.00 100.00 83,000 ----------- ----------- TOTAL MAINE/NEW HAMPSHIRE/ VERMONT MARKET CLUSTER............... 1,689,000 1,631,000 ----------- ----------- EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER: Knoxville, TN *......................... 555,000 96.03 96.03 533,000 Asheville, NC *......................... 210,000 100.00 100.00 210,000 Henderson (NC 4) * (2).................. 192,000 100.00 100.00 192,000 Giles (TN 6) *.......................... 159,000 100.00 100.00 159,000 Bledsoe (TN 7) * (2).................... 149,000 96.03 96.03 143,000 Hamblen (TN 4) * (2).................... 133,000 100.00 100.00 133,000 Macon (TN 3) *.......................... 340,000 16.67 16.67 57,000 Yancey (NC 2) * (2)..................... 31,000 100.00 100.00 31,000 ----------- ----------- TOTAL EASTERN TENNESSEE/ WESTERN NORTH CAROLINA MARKET CLUSTER....................... 1,769,000 1,458,000 ----------- ----------- TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER: OKLAHOMA/MISSOURI/KANSAS: Tulsa, OK *............................. 790,000 55.06 55.06 435,000 Joplin, MO *............................ 146,000 100.00 100.00 146,000 Seminole (OK 6)......................... 218,000 55.06 55.06 120,000 Elk (KS 15) *........................... 155,000 75.00 75.00 116,000 Nowata (OK 4) * (2)..................... 103,000 55.06 55.06 57,000 ----------- ----------- 1,412,000 874,000 ----------- ----------- TEXAS/OKLAHOMA: Garvin (OK 9)........................... 203,000 100.00 100.00 203,000 Haskell (OK 10)......................... 83,000 100.00 100.00 83,000 Wichita Falls, TX *..................... 137,000 51.65 51.65 71,000 Lawton, OK *............................ 115,000 51.65 51.65 60,000 Jackson (OK 8) *........................ 97,000 51.65 51.65 50,000 Hardeman (TX 5) * (2)................... 38,000 51.65 51.65 20,000 Briscoe (TX 4) * (2).................... 11,000 51.65 51.65 6,000 Beckham (OK 7) * (2).................... 10,000 51.65 51.65 5,000 ----------- ----------- 694,000 498,000 ----------- ----------- TOTAL TEXAS/OKLAHOMA/ MISSOURI/KANSAS REGIONAL MARKET CLUSTER....................... 2,106,000 1,372,000 ----------- ----------- </TABLE> 11
<TABLE> <CAPTION> PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1996 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- <S> <C> <C> <C> <C> <C> FLORIDA/GEORGIA MARKET CLUSTER: Tallahassee, FL......................... 279,000 100.00% 100.00% 279,000 Worth (GA 14)........................... 249,000 100.00 100.00 249,000 Gainesville, FL......................... 222,000 100.00 100.00 222,000 Toombs (GA 11).......................... 154,000 100.00 100.00 154,000 Fort Pierce, FL * (3)................... 289,000 49.00 49.00 142,000 Walton (FL 10).......................... 114,000 100.00 100.00 114,000 Putnam (FL 5) (2)....................... 70,000 100.00 100.00 70,000 Dixie (FL 6)............................ 55,000 100.00 100.00 55,000 Jefferson (FL 8) (2).................... 47,000 100.00 100.00 47,000 Calhoun (FL 9).......................... 41,000 100.00 100.00 41,000 ----------- ----------- TOTAL FLORIDA/GEORGIA MARKET CLUSTER.............................. 1,520,000 1,373,000 ----------- ----------- SOUTHWESTERN TEXAS MARKET CLUSTER: Corpus Christi, TX...................... 382,000 100.00 100.00 382,000 Atascosa (TX 19)........................ 228,000 100.00 100.00 228,000 Edwards (TX 18)......................... 216,000 100.00 100.00 216,000 Laredo, TX.............................. 176,000 93.74 93.74 165,000 Wilson (TX 20).......................... 141,000 100.00 100.00 141,000 Victoria, TX............................ 81,000 100.00 100.00 81,000 ----------- ----------- TOTAL SOUTHWESTERN TEXAS MARKET CLUSTER....................... 1,224,000 1,213,000 ----------- ----------- OTHER OPERATIONS: Hawaii (HI 3)........................... 141,000 100.00 100.00 141,000 ----------- ----------- TOTAL MANAGED MARKETS................. 23,187,000 20,890,000 ----------- ----------- MARKETS MANAGED BY OTHERS: Los Angeles/Oxnard, CA *................ 15,488,000 5.50 5.50 852,000 Nashville/Clarksville-Hopkinsville, TN-KY/ Lake (TN 1) (2)/Fayette (TN 5) (2)/Maury (TN 9) *..................... 1,550,000 49.00 49.00 760,000 Baton Rouge, LA *....................... 570,000 49.99 49.99 285,000 Tucson, AZ *............................ 772,000 29.36 29.36 227,000 Seattle-Everett/Tacoma/Bremerton, WA *...................................... 3,051,000 7.01 7.01 214,000 Biloxi/Pascagoula, MS *................. 361,000 49.00 49.00 177,000 Oklahoma City, OK *..................... 992,000 14.60 14.60 145,000 Portland, ME *.......................... 284,000 49.00 49.00 139,000 McAllen, TX............................. 494,000 26.20 26.20 129,000 Portsmouth-Dover-Rochester, NH-ME *..... 279,000 40.00 40.00 112,000 Garfield (CO 3) *....................... 284,000 36.50 36.50 104,000 Others (Fewer than 100,000 population equivalents each)...................... 1,357,000 ----------- Total Population Equivalents of Markets Managed by Others............ 4,501,000 ----------- Total Population Equivalents.......... 25,391,000 ----------- ----------- </TABLE> 12
Upon completion of the exchange transaction with BellSouth, the Company will acquire and divest interests in certain markets. The percentage interest acquired and divested for each market is listed below, along with a summary of cellular interests the Company will own or have a right to acquire after the transaction with BellSouth is completed. <TABLE> <CAPTION> TOTAL PERCENTAGE POPULATION OWNERSHIP EQUIVALENTS TO BE TO BE 1996 ACQUIRED ACQUIRED MARKET POPULATION (DIVESTED) (DIVESTED) - -------------------------------------------- ----------- ----------- ----------- <S> <C> <C> <C> MARKETS TO BE ACQUIRED FROM BELLSOUTH: Milwaukee, WI........................... 1,462,000 100.00% 1,462,000 Columbia (WI 9)......................... 382,000 100.00 382,000 Madison, WI............................. 398,000 92.50 368,000 Appleton, WI............................ 340,000 100.00 340,000 Rockford, IL............................ 304,000 98.99 301,000 Vernon (WI 8)........................... 236,000 100.00 236,000 Green Bay, WI........................... 213,000 99.01 211,000 Racine, WI.............................. 184,000 89.37 164,000 Kenosha, WI............................. 150,000 100.00 150,000 Door (WI 10)............................ 130,000 100.00 130,000 Janesville-Beloit, WI................... 142,000 80.54 114,000 Sheboygan, WI........................... 109,000 86.66 94,000 ----------- ----------- TOTAL MARKETS TO BE ACQUIRED FROM BELLSOUTH............................ 4,050,000 3,952,000 ----------- ----------- MARKETS TO BE TRADED TO BELLSOUTH: MARKETS MANAGED BY THE COMPANY: Meade (KY 3)............................ 317,000 (100.00) (317,000 ) Evansville, IN (4)...................... 322,000 (87.50) (282,000 ) Owen (IN 7)............................. 224,000 (100.00) (224,000 ) Elliott (KY 9).......................... 204,000 (100.00) (204,000 ) Fulton (KY 1)........................... 189,000 (100.00) (189,000 ) Clay (KY 11)............................ 171,000 (100.00) (171,000 ) Giles (TN 6)*........................... 159,000 (100.00) (159,000 ) Powell (KY 10).......................... 154,000 (100.00) (154,000 ) Union (KY 2)............................ 129,000 (100.00) (129,000 ) Owensboro, KY (4)....................... 91,000 (96.07) (87,000 ) ----------- ----------- TOTAL MARKETS MANAGED BY THE COMPANY...... 1,960,000 (1,916,000 ) ----------- ----------- MARKETS MANAGED BY OTHERS: Nashville/Clarksville-Hopkinsville, TN-KY/ Lake (TN 1) (2)/ Fayette (TN 5) (2)/Maury (TN 9) *...... 1,550,000 (49.00) (760,000 ) Baton Rouge, LA *....................... 570,000 (49.99) (285,000 ) Biloxi/Pascagoula, MS *................. 361,000 (49.00) (177,000 ) Others (Fewer than 100,000 population equivalents each) (5).................. (183,000 ) ----------- Total Markets Managed by Others....... (1,405,000 ) ----------- Total Markets to be Traded to BellSouth.......................... (3,321,000 ) ----------- MARKETS TO BE DIVESTED (6): Vernon (WI 8) *......................... 236,000 (74.00) (174,000 ) Markets Managed by Others (Fewer than 100,000 population equivalents each)... (110,000 ) ----------- Total Markets to be Divested.......... (284,000 ) ----------- Net Population Equivalents to be Acquired Related to BellSouth Transaction........................ 347,000 ----------- ----------- SUMMARY OF THE COMPANY'S CELLULAR INTERESTS AFTER THE COMPLETION OF THE TRANSACTION WITH BELLSOUTH: Total Managed Markets................... 25,041,000 22,752,000 Total Population Equivalents of Markets Managed by Others...................... 2,986,000 ----------- Total Population Equivalents.......... 25,738,000 ----------- ----------- </TABLE> - ------------ * Designates wireline market. # Designates operational market managed by a third party until the Company acquires a controlling interest. (1) The interest under this agreement is expected to be acquired at the time specified therein, following the satisfaction of customary closing conditions. (2) These markets have been partitioned into more than one licensed area. The 1996 population, percentage ownership and number of population equivalents shown are for the licensed areas within the markets in which the Company owns an interest. (3) The Company owns 80% of the entity which owns and operates this market but has only a 49% interest in the earnings and profits. (4) Pursuant to the agreement with BellSouth, the Company has agreed to transfer to BellSouth a 100% interest in these markets. If the Company owns less than 100% of these markets at the time of the completion of the transaction, the Company will pay cash to BellSouth in lieu of any interests the Company does not own at that time. 13
(5) In addition to these interests, the Company will deliver to BellSouth interests in two markets, representing approximately 93,000 population equivalents, which are currently owned by TDS and not the Company. (6) As a result of the transaction with BellSouth, the Company expects to divest its interests in these markets. SYSTEM DESIGN AND CONSTRUCTION. The Company designs and constructs its systems in a manner it believes will permit it to provide high-quality service to mobile, transportable and portable cellular telephones, generally based on market and engineering studies which relate to specific markets. Engineering studies are performed by Company personnel or independent engineering firms. The Company's switching equipment is digital, which reduces noise and crosstalk and is capable of interconnecting in a manner which reduces costs of operation. While digital microwave interconnections are typically made between the MTSO and cell sites, primarily analog radio transmission is used between cell sites and the cellular telephones themselves. In accordance with its strategy of building and strengthening market clusters, the Company has selected high capacity digital cellular switching systems that are capable of serving multiple markets through a single MTSO. The Company's cellular systems are designed to facilitate the installation of equipment which will permit microwave interconnection between the MTSO and the cell site. The Company has implemented such microwave interconnection in most of the cellular systems it manages. In other systems in which the Company owns or has a right to acquire a majority interest and where it is believed to be cost-efficient, such microwave technology will also be implemented. Otherwise, such systems will rely upon landline telephone connections or microwave links owned by others to link cell sites with the MTSO. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company, while generally improving system reliability. In addition, microwave facilities can be used to connect separate cellular systems to allow shared switching, which reduces the aggregate cost of the equipment necessary to operate both systems. The Company has continued to expand its internal network in 1996 to encompass all of its managed markets. This network provides automatic call delivery for the Company's customers and handoff between adjacent markets. The network has also been extended through links with certain systems operated by several other carriers, including GTE, US West, Ameritech, BellSouth, Centennial Cellular Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard Cellular Systems and others. Additionally, the Company has implemented four Signal Transfer Points which have allowed it to interconnect efficiently with network providers such as Illuminet and the North American Cellular Network. During 1997, the Company intends to extend the network for its customers through interconnection with additional system operators for call delivery and hand-off. This expanded network will increase the area in which customers can automatically receive incoming calls, and should further reduce the incidence of "tumbling" electronic serial number fraud due to the pre-call validation feature of networked systems. In addition, the extension of these networks will allow for the termination of wireless-to-wireless traffic without the inherent costs that are otherwise incurred if this traffic is routed through the landline network. Management believes that currently available technologies will allow sufficient capacity on the Company's networks to meet anticipated demand over the next few years. COSTS OF SYSTEM CONSTRUCTION AND FINANCING Construction of cellular systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, MTSOs, cell site equipment, microwave equipment, engineering and installation. The Company, consistent with FCC control requirements, uses primarily its own personnel to engineer and oversee construction of each cellular system it owns and operates. In so doing, the Company expects to improve the overall quality of its systems and to reduce the expense and time required to make them operational. The costs (exclusive of license costs) of the systems in which the Company owns an interest have historically been financed through capital contributions or intercompany loans from the Company to the entities owning the systems, and through certain vendor financing. In recent years, these funding requirements have been met with cash generated from operations and proceeds from the sales of cellular interests. MARKETING The Company's marketing plan is centered around rapid penetration of its market clusters, increasing customer awareness of cellular service and reducing churn through both the building of brand awareness and the implementation of marketing programs. The marketing plan stresses the value of the 14
Company's service offerings and incorporates combinations of rate plans and cellular telephone equipment which are designed to meet the needs of a variety of customer segments and their usage patterns. The Company's distribution channels include direct sales personnel, agents and retail service centers in the vast majority of its markets. In late 1996, the Company implemented its new site on the WorldWideWeb to support its marketing efforts and to be a future distribution channel. These Company-owned and managed locations are designed to market cellular service to the consumer segment in a familiar setting. The Company manages each cluster of markets from an administrative office with a local staff, which typically includes sales, customer service, engineering and in some cases installation personnel. Direct sales consultants market cellular service to business customers throughout each cluster. Retail associates work out of the retail locations and market cellular service primarily to the consumer and small business segment. The Company maintains an ongoing training program to improve the effectiveness of sales consultants and retail associates by focusing their efforts on obtaining customers and maximizing the sale of high-user packages. These packages provide for customers to obtain a minimum amount of usage at discounted rates per minute, at fixed prices which are charged even if usage falls below a defined monthly minimum amount. The Company continues to expand its relationships with agents, dealers and non-Company retailers to obtain customers. Agents and dealers are independent business people who obtain customers for the Company on a commission basis. The Company's agents are generally in the business of selling cellular telephones, cellular service packages and other related products. The Company's dealers include car stereo companies and other companies whose customers are also potential cellular customers. The non-Company retailers include car dealers, major appliance dealers, office supply dealers and mass merchants. The Company opened its first retail locations in late 1993, expanding to 220 stand-alone retail stores by the end of 1996. These Company-owned and operated businesses utilize rental facilities in high-traffic areas. The Company has implemented a uniform appearance in these stores, with all having similar displays and layouts. The retail centers' hours of business match those of the retail trade in the local marketplace, often staying open on weekends and later in the evening than a typical business supplier. To fully serve customer needs, these stores sell accessories to complement the phones and services the Company has traditionally provided. During 1996, the Company further expanded its retail presence by opening smaller retail kiosks within other larger merchandisers and grocery stores. At December 31, 1996, the Company had opened over 150 "stores within a store" in Wal-Mart and Kroger locations. In addition to its own retail centers, the Company actively pursues national retail accounts, as agents of the Company, which yield new customer additions in multiple markets. Agreements have been entered into with such national distributors as Chrysler Corporation, Ford Motor Company, General Motors, MCI, Radio Shack, Best Buy and Sears, Roebuck & Co. in certain of the Company's markets. Upon the sale of a cellular telephone by one of these national distributors, the Company receives, often exclusively within the territories served, the resulting cellular customer. The Company uses a variety of direct mail, billboard, radio, television and newspaper advertising to stimulate interest by prospective customers in purchasing the Company's cellular service and to establish familiarity with the Company's name. Advertising is directed at gaining customers, improving customers' awareness of the United States Cellular brand, increasing existing customers' usage and increasing the public awareness and understanding of the cellular services offered by the Company. The Company attempts to select the advertising and promotion media that are most appealing to the targeted groups of potential customers in each local market. The Company utilizes local advertising media and public relations activities and establishes programs to enhance public awareness of the Company, such as providing telephones and service for public events and emergency uses. 15
The following table summarizes, by operating cluster, the total population, the Company's customer units and penetration for the Company's consolidated markets as of December 31, 1996. <TABLE> <CAPTION> OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION - ------------------------------------------------------------------------ ------------- ----------- ----------- <S> <C> <C> <C> Iowa.................................................................... 2,462,000 145,000 5.89% Wisconsin/Illinois...................................................... 2,032,000 71,000 3.49 Missouri................................................................ 686,000 32,000 4.66 Eastern North Carolina/South Carolina................................... 2,349,000 98,000 4.17 Virginia................................................................ 949,000 42,000 4.43 West Virginia/Maryland/Pennsylvania..................................... 1,138,000 46,000 4.04 Oregon/California....................................................... 1,029,000 47,000 4.57 Washington/Oregon/Idaho................................................. 1,370,000 74,000 5.40 Indiana/Kentucky/Ohio................................................... 1,801,000 88,000 4.89 Maine/New Hampshire/Vermont............................................. 1,476,000 73,000 4.95 Eastern Tennessee/Western North Carolina................................ 1,429,000 90,000 6.30 Oklahoma/Missouri/Kansas................................................ 1,412,000 93,000 6.59 Texas/Oklahoma.......................................................... 694,000 32,000 4.61 Florida/Georgia......................................................... 1,520,000 82,000 5.39 Southwestern Texas...................................................... 1,224,000 47,000 3.84 Other Operations........................................................ 141,000 13,000 9.22 ------------- ----------- ----------- 21,712,000 1,073,000 4.94% ------------- ----------- ----------- ------------- ----------- ----------- </TABLE> CUSTOMERS AND SYSTEM USAGE Cellular customers come from a wide range of occupations. They typically include a large proportion of individuals who work outside of their offices, such as people in the construction, real estate, wholesale and retail distribution businesses, and professionals. Increasingly, the Company is providing cellular service to consumers and to customers who use their cellular telephones for security purposes. Although some of the Company's customers still use in-vehicle cellular telephones, most new customers are selecting portable cellular telephones. These units have become more compact and fully featured as well as more attractively priced, and they appeal to newer segments of the customer population. The Company's cellular systems are used most extensively during normal business hours between 7:00 am and 6:00 pm. On average, the local retail customers in the Company's consolidated systems used their cellular systems approximately 107 minutes per unit each month and generated retail revenue of approximately $43 per month during 1996, compared to 95 minutes and $44 per month in 1995. Revenue generated by roamers, together with local retail, toll and other revenues, brought the Company's total average monthly service revenue per customer unit in consolidated markets to $66 during 1996. Average monthly service revenue per customer unit decreased approximately 8% during 1996. This decrease is related to the industry-wide trend of newer customers tending to use fewer minutes during peak business hours, which has reduced the average local retail revenue per minute, and to the declining contribution of inbound roaming revenue per customer. The Company believes that its customer base is growing faster than that of the cellular industry as a whole, which has a dilutive effect on inbound roaming revenue per customer. The Company anticipates that average monthly service revenue per customer unit will continue to decline as its distribution channels provide additional customers who generate lower revenue per local minute of use and as roaming revenues grow more slowly. However, this effect is more than offset by the Company's increasing number of customers; therefore, the Company expects total revenues to continue to grow for the next several years. In addition to revenue from local retail customers, the Company generates revenue from roaming customers and other services. The Company's roaming service allows a customer to place or receive a call in a cellular service area away from the customer's home service area. The Company has entered into "roaming agreements" with operators of other cellular systems covering virtually all systems in the United States and Canada. These agreements offer customers the opportunity to roam in these systems. These reciprocal agreements automatically pre-register the customers of the Company's systems in the other carriers' systems. Also, a customer of a participating system roaming (i.e., travelling) in a Company market where this arrangement is in effect is able to make and receive calls on the Company's system. The charge for this service is typically at premium rates and is billed by the Company to the customer's 16
home system, which then bills the customer. The Company has entered into agreements with other cellular carriers to transfer roaming usage at agreed-upon rates. In some instances, based on competitive factors, the Company may charge a lower amount to its customers than the amount actually charged to the Company by another cellular carrier for roaming. The following table summarizes certain information about customers and market penetration in the Company's managed operations. <TABLE> <CAPTION> YEAR ENDED OR AT DECEMBER 31, ------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Majority-owned and managed markets: Cellular markets in operation (1).................... 131 137 130 116 92 Total population of markets in service (000s)...... 21,712 22,309 21,314 19,383 15,014 Customer Units: at beginning of period (2)....................... 710,000 421,000 261,000 150,800 97,000 additions during period (2)...................... 561,000 426,000 250,000 165,300 88,600 disconnects during period (2).................... 198,000 137,000 90,000 55,100 34,800 at end of period (2)............................. 1,073,000 710,000 421,000 261,000 150,800 Market penetration at end of period (3)............ 4.94% 3.18% 1.98% 1.35% 1.00% </TABLE> - ---------- (1) Represents the number of markets in which the Company owned at least a 50% interest and which it managed, including its reseller operation in 1992. The revenues and expenses of these cellular markets are included in the Company's consolidated revenues and expenses. (2) Represents the approximate number of revenue-generating cellular telephones served by the cellular markets referred to in footnote (1). The revenue generated by such cellular telephones is included in consolidated revenues. (3) Computed by dividing the number of customer units at the end of the period by the total population of markets in service as estimated by Donnelley Marketing Service for the respective years. PRODUCTS AND SERVICES CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types of cellular telephones, all of which are currently compatible with cellular systems nationwide. The Company offers a full range of vehicle-mounted, transportable and hand-held portable cellular telephones. Features offered in some of the cellular telephones include hands-free calling, repeat dialing, horn alert and others. The Company negotiates volume discounts from its cellular telephone suppliers. The Company discounts cellular telephones to meet competition or to stimulate sales by reducing the cost of becoming a cellular customer. In these instances, where permitted by law, customers are generally required to sign a service contract with the Company. The Company also cooperates with cellular equipment manufacturers in local advertising and promotion of cellular equipment. The Company has established service and/or installation facilities in many of its local markets to ensure quality installation and service of the cellular telephones it sells. These facilities allow the Company to improve its service by promptly assisting customers who experience equipment problems. Additionally, the Company maintains a repair facility in Tulsa, Oklahoma, which handles more complex service and repair issues. CELLULAR SERVICES. The Company's customers are able to choose from a variety of packaged pricing plans which are designed to fit different calling patterns. In 1996, the Company developed and introduced its new consumer line of products under the CarryPhone brand. These products include a) Express, a pre-packaged phone plus price plan aimed at the convenience buyer; b) TalkTracker, a cellular phone with usage prepaid; and c) Home and Away, a combination cordless and cellular phone in a single package. The Company's customer bills typically show separate charges for custom-calling features, airtime in excess of the packaged amount, and toll calls. Custom-calling features provided by the Company include wide-area call delivery, call forwarding, call waiting, three-way calling and 17
no-answer transfer. The Company also offers a voice message service in many of its markets. This service, which functions like a sophisticated answering machine, allows customers to receive messages from callers when they are not available to take calls. REGULATION REGULATORY ENVIRONMENT. The operations of the Company are subject to FCC and state regulation. The cellular telephone licenses held by USM are granted by the FCC for the use of radio frequencies and are an important component of the overall value of the assets of the Company. The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934 (the "Communications Act"). In 1996, Congress enacted the Telecommunications Act of 1996 (the "1996 Act"), which amended the Communications Act. The 1996 Act mandates significant changes in existing telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the nation and to streamline regulation of the telecommunications industry to remove regulatory burdens, as competition develops and makes regulation unnecessary. The FCC has promulgated regulations governing construction and operation of cellular systems, licensing (including renewal of licenses) and technical standards for the provision of cellular telephone service under the Communications Act, and is implementing the legislative objectives of the 1996 Act, as discussed below. LICENSING. For cellular telephone licensing purposes, the FCC has divided the United States into separate geographic markets (MSAs and RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the application process, the FCC reserved one block of frequencies for non-wireline applicants and another block for wireline applicants. Subject to FCC approval, a cellular system may be sold to either a wireline or non-wireline entity, but no entity which controls a cellular system may own an interest in another cellular system in the same MSA or RSA. The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny USM's application for approval of the proposed transfer. The FCC must be notified each time an additional cell is constructed which enlarges the service area of a given market. The FCC's rules also generally require persons or entities holding cellular construction permits or licenses to coordinate their proposed frequency usage with neighboring cellular licensees in order to avoid electrical interference between adjacent systems. The height and power of base stations in the cellular system are regulated by FCC rules, as are the types of signals emitted by these stations. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration ("FAA") regulations with respect to the siting and construction of cellular transmitter towers and antennas. Beginning in 1996, the FCC has also imposed a requirement that all licensees register and obtain FCC registration numbers for all of their antenna towers which require prior FAA clearance. USM is currently engaged in this registration process. All new towers must be registered at the time of construction and existing towers are being registered on a staggered state-by-state basis, to be concluded in May 1998. The FCC is currently considering whether to take action to pre-empt moratoria imposed by certain localities on the construction of wireless towers. USM has supported such FCC action. Initial cellular telephone licenses were granted for ten-year periods. The FCC has established standards for conducting comparative renewal proceedings between a cellular licensee seeking renewal of its license and challengers filing competing applications. The FCC has: (i) established criteria for comparing the renewal applicant to challengers, including the standards under which a renewal expectancy will be granted to the applicant seeking license renewal; (ii) established basic qualifications standards for challengers; and (iii) provided procedures for preventing possible abuses in the comparative renewal process. The FCC has concluded that it will award a renewal expectancy if the licensee has (i) provided "substantial" performance, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal," and (ii) complied with FCC rules, policies and the Communications Act. If a renewal expectancy is awarded to an existing licensee, its license is 18
renewed and competing applications are not considered. USM's Tulsa and Knoxville licenses were renewed in 1995, and USM's Des Moines, Iowa, Peoria, Illinois and Roanoke, Virginia licenses were renewed in 1996. USM's next renewal applications for several markets are due to be filed in 1997. USM conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and anticipates being able to qualify for a renewal expectancy in its upcoming renewal filings. Accordingly, USM believes that current regulations will have no significant effect on its operations and financial condition. However, changes in the regulation of cellular operators or their activities and of other mobile service providers could have a material adverse effect on USM's operations. The FCC has also provided that five years after the initial licenses are granted, unserved areas within markets previously granted to licensees may be applied for by both wireline and non-wireline entities and by third parties. Accordingly, many unserved area applications have been filed by USM and others. USM's strategy with respect to system construction in its markets has been and will be to build cells covering areas within such markets that USM considers economically feasible to serve or might conceivably wish to serve and to do so within the five-year period following issuance of the license. In cases where applications for unserved areas are filed which are mutually exclusive and would result in overlapping service areas, the FCC decides between the competing applicants by an auction process. Pursuant to 1993 amendments to the Communications Act, cellular service is classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service offered to the public, for a fee, which is interconnected to the public switched telephone network. The FCC has determined that it will forebear from requiring CMRS carriers to comply with a number of statutory provisions otherwise applicable to common carriers, such as the filing of tariffs. RECENT EVENTS. There are certain regulatory proceedings currently pending before the FCC which are of particular importance to the cellular industry. In one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular carriers. Enhanced 911 capabilities would enable cellular systems to determine the precise location of the person making the emergency call. The new rules will require cellular carriers to work with local public safety officials to process 911 calls, including those made from mobile telephones not registered with the cellular system, and will require cellular systems to improve their ability to locate wireless 911 callers over a five-year period. The FCC has adopted a limited expansion of the obligation of cellular carriers to serve the subscribers of broadband PCS providers, among others, even though the subscribers involved have no pre-existing service relationship with that carrier. Under these new policies, broadband PCS providers may offer their subscribers handsets which are capable of operating over broadband PCS and cellular networks so that when their subscribers are out of range of broadband PCS networks, they will be able to obtain non-automatic access to cellular networks. The FCC expects that implementation of these roaming capabilities will promote competition between broadband PCS and cellular service providers. The FCC has adopted requirements which will make it possible for subscribers to retain, at the same location, their existing telephone numbers when they switch from one service provider to another. This numbering portability will include switching between Local Exchange Carriers ("LECs") and other wireline providers, between wireless service providers and between LEC/wireline and wireless providers. LECs have implementation deadlines by the end of 1998. Broadband PCS, cellular and certain other wireless providers have phased implementation deadlines in 1998 and 1999. In another proceeding, the FCC in 1996 adopted rules regarding the method by which cellular carriers and LECs shall compensate each other for interconnecting cellular and local exchange facilities. The FCC rules provided for symmetrical and reciprocal compensation between LECs and cellular carriers, and also prescribed interim interconnection proxy rates, which are much lower than the rates formerly paid by cellular carriers to LECs. Symmetrical and reciprocal compensation means they must pay each other at the same rate. The U.S. Court of Appeals for the Eighth Circuit has stayed the effect of the rules prescribing interim rates because it has held that the 1996 Act requires that rate issues are to be decided by the states. However, the FCC's rules requiring reciprocal and symmetrical compensation remain in effect. If the U.S. Court of Appeals sustains its earlier ruling, interconnection rate issues will be 19
decided by the states. Whether the issue is decided by the states or the federal government, cellular carriers in the future can be expected to pay lower rates to LECs than they previously paid. This result is expected to be favorable to the wireless industry and somewhat unfavorable to LECs. The FCC is also proceeding to implement the 1996 Act. The 1996 Act provides that implementing its legislative objectives will be the task of the FCC, the state public utilities commissions and a Federal-state Joint Board. Much of this implementation is proceeding in numerous, concurrent proceedings with aggressive deadlines. The Company cannot predict the full extent, nature and interrelationships among state and federal implementation and other responses to the 1996 Act. The primary purpose and effect of the new law is to open all telecommunications markets to competition. The 1996 Act makes most direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries. Only narrow powers over competitive entry are left to state and local authorities. Each state retains the power to impose competitively neutral requirements that are consistent with the 1996 Act's universal service provision and necessary for universal services, public safety and welfare, continued service quality and consumer rights. While a state may not impose requirements that effectively function as barriers to entry, it retains limited authority to regulate certain competitive practices in rural telephone company service areas. The 1996 Act establishes principles and a process for implementing a modified "universal service" policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The 1996 Act also requires universal service to schools, libraries and rural health facilities at discounted rates. The FCC is now considering how to implement the mandate of the 1996 Act to create a new universal service support mechanism "to ensure that all Americans have access to telecommunications services." The 1996 Act requires all interstate telecommunications providers, including wireless service providers, to "make an equitable and non-discriminatory contribution," to support the cost of providing universal service, unless their contribution would be DE MINIMIS. At present, the provision of landline telephone service in high cost areas is subsidized by access charges and other payments by interexchange carriers to LECs. It is expected that the obligation to make some kind of payments to support universal service will be expanded to include other telecommunications service providers, including cellular carriers. It is not known how those payments may be calculated or what revenue base may be used. However, it is also possible that cellular carriers may become eligible to receive universal service support payments in certain circumstances under the new system. The FCC has also allocated a total of 140 megahertz ("MHz") to broadband PCS, 20 MHz to unlicensed operations and 120 MHz to licensed operations, consisting of two 30 MHz blocks in each of the 51 Major Trading Areas ("MTAs") and one 30 MHz block and three 10 MHz blocks in each of 493 Basic Trading Areas ("BTAs"). Cellular operators and those entities under common ownership with them are permitted to participate in the ownership of PCS licensees, except for those PCS licenses reserved for small businesses, and licenses for PCS service areas in which the cellular operator owns a 20% or greater interest in a cellular licensee, the service area of which covers 10% or more of the population of the PCS service area. In the latter case, the cellular license is limited to two 10 MHz PCS channel blocks. The FCC licensed the first two 30 MHz MTA frequency blocks in 1995 and the 30 MHz block which is reserved for small business entities in 1996, and has announced the winning bidders in the D, E and F Block auctions in 1997. TDS's subsidiary, Aerial Communications, Inc. ("Aerial"), was licensed in eight MTAs for 30 MHz blocks but has sold its license for the Guam and Alaska MTAs. It is now constructing PCS systems in the other six MTAs. See "Broadband PCS Operations." In compliance with FCC restrictions on common ownership of cellular and broadband PCS interests in overlapping market areas, USM entered into a series of arrangements for the divestiture or restructuring of certain of its cellular interests in market areas where Aerial was awarded broadband PCS licenses. A number of these proposed arrangements required FCC approval of assignment or transfer of control 20
applications before they could be consummated. All of these applications have been approved by the FCC and have been consummated. USM believes that it has taken reasonable steps to comply with the FCC's cross-interest policies. PCS technology is currently under development and is similar in some respects to cellular technology. Where it has become commercially available, this technology is capable of offering increased capacity for wireless two-way and one-way voice, data and multimedia communications services and will result in increased competition in USM's operations. The ability of these future PCS licensees to complement or compete with existing cellular licensees will be affected by future FCC rule-makings. These and other future technological and regulatory developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the services currently offered by USM. There can be no assurance that USM will not be adversely affected by such technological and regulatory developments. Media reports have suggested that certain radio frequency ("RF") emissions from portable cellular telephones might be linked to cancer. USM has reviewed relevant scientific information and, based on such information, is not aware of any credible evidence linking the usage of portable cellular telephones with cancer. In 1996 the FCC announced rules, now scheduled to go into effect in September 1997, dealing, INTER ALIA, with RF emissions from cellular towers of less than 10 meters in height and cellular telephones. It is anticipated that USM will be able to comply with RF tower emission standards and USM believes that the cellular telephones currently being sold by USM comply with the standards. STATE AND LOCAL REGULATION. USM is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. In 1993, Congress preempted states from regulating the entry of cellular systems into service and the rates charged by cellular systems to customers. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters are still subject to state or local zoning and land use regulations. In addition, states may still regulate other terms and conditions of cellular service. The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. USM and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and, through its membership in state associations of wireless providers, before state regulatory authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have a significant impact on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. USM is unable to predict the scope, pace or financial impact of policy changes which could be adopted in these proceedings. COMPETITION The Company's principal competitor for cellular telephone service in each market is the licensee of the second cellular system in that market. Since each competitor operates its cellular system on a 25 MHz frequency block licensed by the FCC using comparable technology and facilities, competition for customers between the two systems in each market is principally on the basis of quality of service, price, size of area covered, services offered, and responsiveness of customer service. The competing entities in many of the markets in which the Company has an interest have financial resources which are substantially greater than those of the Company and its partners in such markets. The FCC's rules require all operational cellular systems to provide, on a nondiscriminatory basis, cellular service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public. In addition to competition from the other cellular licensee in each market, there is also competition from, among other technologies, conventional mobile telephone and SMR systems, both of which are able to connect with the landline telephone network. The Company believes that conventional mobile 21
telephone systems and conventional SMR systems are competitively disadvantaged because of technological limitations on the capacity of such systems. The FCC has recently given approval, through waivers of its rules, to ESMR, an enhanced SMR system. ESMR systems may have cells and frequency reuse like cellular, thereby potentially eliminating any current technological limitation. The first ESMR systems were implemented in 1993 in Los Angeles and are being implemented in many other cities across the United States. ESMR providers have initiated service in several areas where the Company operates cellular systems. Although less directly a substitute for cellular service, wireless data services and one-way paging service (and in the future, two-way paging services) may be adequate for those who do not need full two-way voice service. PCS providers have initiated service in several markets across the United States, including markets where the Company has operations. PCS providers offer digital, wireless communications services to their customers. Similar technological advances or regulatory changes in the future may make available other alternatives to cellular service, thereby creating additional sources of competition. The Company expects PCS operators to continue deployment of PCS across all of the Company's markets over the next one or two years. The Company anticipates that PCS competitors will build out the larger metropolitan areas before the mid-sized metropolitan and rural areas where the Company operates. As a result, the effects of PCS competition may not reach the Company's markets as quickly as they may in other cellular operators' markets. Continuing technological advances in the communications field make it difficult to predict the extent of additional future competition for cellular systems. For example, the FCC has allocated radio channels to a mobile satellite system in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites, and several consortia to provide such service have been formed. Such a system is designed primarily to serve the communications needs of remote locations and a mobile satellite system could provide viable competition for land-based cellular systems in such areas. It is also possible that the FCC may in the future assign additional frequencies to cellular telephone service to provide for more than two cellular telephone systems per market. EMPLOYEES The Company had 3,800 employees as of December 31, 1996. Of these, 3,400 were based at the various cellular markets operated or managed by the Company with only 400 based at its corporate office in Chicago, Illinois. None of the Company's employees is represented by a labor organization. The Company considers its relationship with its employees to be good. 22
- -------------------------------------------------------------------------------- ITEM 2. PROPERTIES The property for mobile telephone switching offices and cell sites are either owned or leased under long-term leases by the Company, one of its subsidiaries or the partnership or corporation which holds the construction permit or license. The Company has not experienced major problems with obtaining zoning approval for cell sites or operating facilities and does not anticipate any such problems in the future which are or will be material to the Company and its subsidiaries as a whole. The Company's investment in property is small compared to its investment in licenses and cellular system equipment. The Company leases approximately 89,000 square feet of office space for its headquarters in Chicago, Illinois. The Company considers the properties owned or leased by it and its subsidiaries to be suitable and adequate for their respective business operations. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS The Company is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain cellular telephone systems and other interests. The Company does not believe that any such proceeding should have a material adverse impact on the Company. - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of securities holders during the fourth quarter of 1996. 23
- -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Exhibit 13, Annual Report section entitled "United States Cellular Stock and Dividend Information." - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from Exhibit 13, Annual Report section entitled "Selected Consolidated Financial Data," except for ratios of earnings to fixed charges, which are incorporated herein by reference from Exhibit 12 to this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from Exhibit 13, Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of Changes in Common Shareholders' Equity," "Notes to Consolidated Financial Statements," "Report of Independent Public Accountants," and "Consolidated Quarterly Income Information (Unaudited)." - -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24
- -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from Proxy Statement sections entitled "Election of Directors" and "Executive Officers." - -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. - -------------------------------------------------------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." - -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from Proxy Statement section entitled "Certain Relationships and Related Transactions." 25
- -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as a part of this report: (a)(1) Financial Statements <TABLE> <S> <C> Consolidated Statements of Operations............................................................................. Annual Report* Consolidated Balance Sheets....................................................................................... Annual Report* Consolidated Statements of Cash Flows............................................................................. Annual Report* Consolidated Statements of Changes in Common Shareholders' Equity................................................. Annual Report* Notes to Consolidated Financial Statements........................................................................ Annual Report* Report of Independent Public Accountants.......................................................................... Annual Report* Consolidated Quarterly Income Information (Unaudited)............................................................. Annual Report* </TABLE> - ------------------------ * Incorporated by reference from Exhibit 13. <TABLE> <CAPTION> LOCATION -------- <S> <C> <C> (2) Schedules Report of Independent Public Accountants on Financial Statement Schedule................................................ page 28 II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1996................ page 29 Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA Limited Partnership Combined Financial Statements....................................................................................................... page 30 Compilation Report of Independent Public Accountants on Combined Financial Statements.............................. page 31 Report of Independent Accountants.................................................................................. page 32 Reports of Other Independent Accountants........................................................................... page 33 Combined Statements of Operations (Unaudited)...................................................................... page 38 Combined Balance Sheets (Unaudited)................................................................................ page 39 Combined Statements of Cash Flows (Unaudited)...................................................................... page 40 Combined Statements of Changes in Partners' Capital (Unaudited).................................................... page 41 Notes to Unaudited Combined Financial Statements................................................................... page 42 </TABLE> All other schedules have been omitted because they are not applicable or not required or because the required information is shown in the financial statements or notes thereto. 26
(3) Exhibits The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this Report. <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ---------------------------------------------------------------------------------------------------------------------------------- <C> <S> 10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.10 Stock Option and Stock Appreciation Rights Plan is hereby incorporated by reference to Exhibit B to the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April 16, 1991. 10.11 Summary of 1996 Bonus Program for Senior Corporate Staff of the Company. 10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. 10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996, is hereby incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. </TABLE> (b) Reports on Form 8-K filed during the quarter ended December 31, 1996. No reports on Form 8-K were filed during the quarter ended December 31, 1996. 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of UNITED STATES CELLULAR CORPORATION: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in United States Cellular Corporation and Subsidiaries Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 29, 1997 (except with respect to the matter discussed in Note 16, as to which the date is February 4, 1997). Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedule listed in Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 29, 1997 (except with respect to the matter discussed in Note 16, as to which the date is February 4, 1997) 28
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS <TABLE> <CAPTION> COLUMN A COLUMN B COLUMN C1 COLUMN C2 COLUMN D COLUMN E - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, 1996 Deducted from deferred federal tax asset: For unrealized net operating losses............................ $ (8,141) $ 5,795 $ 199 $ -- $ (2,147) Deducted from deferred state tax asset: For unrealized net operating losses............................ (11,969) 2,305 (1,339) -- (11,003) Deducted from accounts receivable: For doubtful accounts.......................................... (3,820) (17,534) -- 17,155 (4,199) FOR THE YEAR ENDED DECEMBER 31, 1995 Deducted from deferred federal tax asset: For unrealized net operating losses............................ $ (23,761) $16,730 $(1,110) $ -- $ (8,141) Deducted from deferred state tax asset: For unrealized net operating losses............................ (14,203) 8,257 (6,023) -- (11,969) Deducted from accounts receivable: For doubtful accounts.......................................... (2,073) (12,532) -- 10,785 (3,820) FOR THE YEAR ENDED DECEMBER 31, 1994 Deducted from deferred federal tax asset: For unrealized net operating losses............................ $ (21,876) $ -- $(1,885) $ -- $ (23,761) Deducted from deferred state tax asset: For unrealized net operating losses............................ (8,441) 1,202 (6,964) -- (14,203) Deducted from accounts receivable: For doubtful accounts.......................................... (1,413) (7,314) -- 6,654 (2,073) Deducted from marketable equity securities: For unrealized loss............................................ (626) -- 626 -- -- </TABLE> 29
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED FINANCIAL STATEMENTS The following financial statements are the combined financial statements of the cellular system partnerships listed below which are accounted for by the Company following the equity method. The combined financial statements were compiled from financial statements obtained by the Company as a limited partner of the cellular limited partnerships listed below. The cellular system partnerships included in the combined financial statements, the periods each partnership is included, and the Company's ownership percentage of each cellular system partnership at December 31 of each year are set forth in the following table. <TABLE> <CAPTION> THE PERIODS COMPANY'S INCLUDED LIMITED IN COMBINED PARTNERSHIP CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST - --------------------------------------------------------------------------------------- ------------ ----------- <S> <C> <C> Los Angeles SMSA Limited Partnership................................................... 1994-96 5.5 % Nashville/Clarksville MSA Limited Partnership.......................................... 1994-96 49.0 % Baton Rouge MSA Limited Partnership.................................................... 1994-95 52.0 % Baton Rouge MSA Limited Partnership.................................................... 1996 49.99 % </TABLE> 30
COMPILATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of UNITED STATES CELLULAR CORPORATION: The accompanying combined balance sheets of the Los Angeles SMSA Limited Partnership, the Nashville/Clarksville MSA Limited Partnership and the Baton Rouge MSA Limited Partnership as of December 31, 1996 and 1995 and the related combined statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1996, have been prepared from the separate financial statements, which are not presented separately herein, of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, as described in Note 1. We have reviewed for compilation only the accompanying combined financial statements, and, in our opinion, those statements have been properly compiled from the amounts and notes of the underlying separate financial statements of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, on the basis described in Note 1. The separate financial statements of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships were audited by other auditors as set forth in their reports included on pages 32 through 37. We have not been engaged to audit either the separate financial statements of the aforementioned limited partnerships or the related combined financial statements in accordance with generally accepted auditing standards and to render an opinion as to the fair presentation of such financial statements in accordance with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois February 25, 1997 31
REPORT OF INDEPENDENT ACCOUNTANTS To The Partners of LOS ANGELES SMSA LIMITED PARTNERSHIP: In our opinion, the balance sheets and the related statements of income, partners' capital and of cash flows and the financial statement schedule II -- valuation and qualifying accounts present fairly, in all material respects, the financial position of Los Angeles SMSA Limited Partnership at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements, which are not presented separately herein, are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Francisco, California February 25, 1997 32
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of LOS ANGELES SMSA LIMITED PARTNERSHIP: We have audited the balance sheet of Los Angeles SMSA Limited Partnership as of December 31, 1994, and the related statements of operations, partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Los Angeles SMSA Limited Partnership as of December 31, 1994, and results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Newport Beach, California February 17, 1995 33
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1996, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 7, 1997 To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1995, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 9, 1996 34
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1994, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 10, 1995 35
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1996, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 7, 1997 To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1995, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 9, 1996 36
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1994, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 10, 1995 37
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Revenues................................................................... $ 953,110 $ 811,933 $ 648,896 Expenses Selling, general and administrative...................................... 537,897 460,048 370,938 Depreciation and amortization............................................ 101,633 71,748 66,234 ----------- ----------- ----------- Total expenses........................................................... 639,530 531,796 437,172 Operating income........................................................... 313,580 280,137 211,724 Other income............................................................... 1,324 985 573 ----------- ----------- ----------- Net Income................................................................. $ 314,904 $ 281,122 $ 212,297 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> The accompanying notes are an integral part of these combined financial statements. 38
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED BALANCE SHEETS (UNAUDITED) ASSETS <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> Current Assets Cash.................................................................................. $ 118 $ 214 Accounts receivable--customers, net................................................... 118,033 116,966 Accounts receivable--affiliates....................................................... 73,029 14,830 Notes receivable--affiliates.......................................................... 3,617 8,860 Other current assets.................................................................. 16,694 11,801 ----------- ----------- 211,491 152,671 Notes Receivable--Other................................................................. -- 3,184 Property, Plant and Equipment, net...................................................... 672,565 564,564 Other................................................................................... 3,558 23,715 ----------- ----------- Total Assets............................................................................ $ 887,614 $ 744,134 ----------- ----------- ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL <CAPTION> DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> Current Liabilities Accounts payable--other............................................................... $ 77,682 $ 53,526 Notes payable......................................................................... 10,772 5,084 Customer deposits..................................................................... 3,738 3,311 Other current liabilities............................................................. 51,839 50,191 ----------- ----------- 144,031 112,112 Other Liabilities....................................................................... 5,341 5,788 Partners' Capital....................................................................... 738,242 626,234 ----------- ----------- Total Liabilities and Partners' Capital................................................. $ 887,614 $ 744,134 ----------- ----------- ----------- ----------- </TABLE> The accompanying notes are an integral part of these combined financial statements. 39
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................ $ 314,904 $ 281,122 $ 212,297 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization....................................... 101,633 71,748 66,234 Deferred revenue and other credits.................................. 378 (966) 1,387 Loss on asset dispositions.......................................... 6,157 3,021 3,542 Change in accounts receivable....................................... (1,067) (20,709) (13,974) Change in accounts payable and accrued expenses..................... (3,775) (1,438) 28,772 Change in other assets and liabilities.............................. 288 13,036 (5,314) ------------ ------------ ------------ 418,518 345,814 292,944 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Change in notes payable............................................. 6,063 4,392 692 Change in notes receivable.......................................... 8,427 (7,355) 3,354 Capital contribution................................................ 26,255 5,096 - Capital distribution................................................ (229,151) (72,017) (166,300) ------------ ------------ ------------ (188,406) (69,884) (162,254) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment, net of retirements...... (169,753) (254,629) (143,807) (Increases) decreases in other assets............................... (937) (21,573) (44) Change in deferred charges.......................................... (1,319) (738) (827) Proceeds from sale of assets........................................ - - 34 Change in due from general partner.................................. (58,199) 1,186 13,965 ------------ ------------ ------------ (230,208) (275,754) (130,679) ------------ ------------ ------------ NET INCREASE IN CASH.................................................... (96) 176 11 CASH Beginning of period................................................. 214 38 27 ------------ ------------ ------------ End of period......................................................... $ 118 $ 214 $ 38 ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> The accompanying notes are an integral part of these combined financial statements. 40
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED) <TABLE> <S> <C> (DOLLARS IN THOUSANDS) Balance at December 31, 1993.................................................... $ 357,470 Distributions................................................................. (166,300) Net Income for the year ended December 31, 1994............................... 212,297 --------- Balance at December 31, 1994.................................................... 403,467 Contributions................................................................. 13,662 Distributions................................................................. (72,017) Net Income for year ended December 31, 1995................................... 281,122 --------- Balance at December 31, 1995.................................................... 626,234 Contributions................................................................. 26,255 Distributions................................................................. (229,151) Net Income for the year ended December 31, 1996............................... 314,904 --------- Balance at December 31, 1996.................................................... $ 738,242 --------- --------- </TABLE> The accompanying notes are an integral part of these combined financial statements. 41
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 1. BASIS OF COMBINATION: The combined financial statements and notes thereto were compiled from the individual financial statements of cellular limited partnerships listed below in which United States Cellular Corporation (AMEX symbol "USM") has a non-controlling ownership interest and which it accounts for using the equity method. The cellular partnerships, the period each partnership is included in the combined financial statements and USM's ownership interest in each partnership are set forth in the table below. The combined financial statements and notes thereto present 100% of each partnership whereas USM's ownership interest is shown in the table. <TABLE> <CAPTION> PERIOD INCLUDED LIMITED IN COMBINED PARTNERSHIP STATEMENTS INTEREST --------------- ------------- <S> <C> <C> Los Angeles SMSA Limited Partnership................................................ 1994-96 5.5 % Nashville/Clarksville MSA Limited Partnership....................................... 1994-96 49.0 % Baton Rouge MSA Limited Partnership................................................. 1994-95 52.0 % Baton Rouge MSA Limited Partnership................................................. 1996 49.99% </TABLE> Profits, losses and distributable cash are allocated to the partners based upon respective partnership interests. Distributions are made quarterly at the discretion of the General Partner for one of the Partnerships. Of the partnerships included in the combined financial statements, the Los Angeles SMSA Limited Partnership is the most significant, accounting for approximately 80.8% of the combined total assets at December 31, 1996, and substantially all of the combined net income for the year then ended. USM's investment in and advances to Los Angeles SMSA Limited Partnership totaled $28,353,000 as of December 31, 1996, of which $32,207,000 represents its proportionate share of net assets of the Partnership. USM's investment in and advances to the Nashville/Clarksville MSA Limited Partnership totaled $48,777,000 as of December 31, 1996, of which $51,566,000 represents its proportionate share of net assets. USM's investment in and advances to the Baton Rouge MSA Limited Partnership totaled $26,541,000 as of December 31, 1996, $23,702,000 of which represents its proportionate share of net assets. Effective May 1, 1996, a partner in one of the Partnerships purchased a 2.01% interest in the Partnership from an affiliate of USM. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR COMBINED ENTITIES: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated lives: <TABLE> <S> <C> Buildings.............................................. 10-15 years Equipment.............................................. 3-10 years Furniture and Fixtures................................. 5-10 years Leasehold Improvements................................. 10 years </TABLE> Effective January 1, 1995, one of the Partnerships changed its estimate of the useful lives of certain telecommunications equipment from 7 to 10 years. The change in estimate had the effect of reducing depreciation expense and increasing net income by approximately $14,844,000 for 1995. 42
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) Property, Plant and Equipment consists of: <TABLE> <CAPTION> DECEMBER 31, -------------------------- 1996 1995 ------------- ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> Land.................................................................................. $ 4,650 $ 3,974 Buildings and Leasehold Improvements.................................................. 174,890 149,644 Equipment............................................................................. 738,275 580,810 Furniture and Fixtures................................................................ 74,373 58,580 Under Construction.................................................................... 67,058 80,665 ------------- ----------- 1,059,246 873,673 Less Accumulated Depreciation......................................................... 386,681 309,109 ------------- ----------- $ 672,565 $ 564,564 ------------- ----------- ------------- ----------- </TABLE> Included in buildings are costs relating to the acquisition of cell site leases; such as legal, consulting, and title fees. Lease acquisition costs are capitalized when incurred and amortized over the period of the lease. Costs related to unsuccessful negotiations are expensed in the period the negotiations are terminated. Gains and losses on disposals are included in income at amounts equal to the difference between net book value and proceeds received upon disposal. OTHER CURRENT ASSETS Other current assets includes inventory consisting primarily of cellular phones and accessories held for resale. Two of the Partnerships state inventory at average cost. One of the Partnerships states inventory at the lower of cost or market. Costs are valued based upon the first-in, first-out method. Consistent with industry practice, losses on sales of cellular phones are recognized in the period in which sales are made as a cost of acquiring subscribers. REVENUE RECOGNITION Revenues from operations primarily consist of charges to customers for monthly access charges, cellular airtime usage, and roamer charges. Revenues are recognized as services are rendered. Unbilled revenues, resulting from cellular service provided from the billing cycle date to the end of each month and from other cellular carriers' customers using the Partnership's cellular systems for the last half of each month, are estimated and recorded as receivables. Unearned monthly access charges and bundled service packages relating to the periods after month-end are deferred and netted against accounts receivable and recognized the following month when services are provided. INCOME TAXES No provisions have been made for federal or state income taxes since such taxes, if any, are the responsibility of the individual partners. ADVERTISING Advertising costs are expensed as incurred. The advertising expense for 1996, 1995 and 1994 was $50,664,000, $42,046,000 and $38,691,000, respectively. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 43
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Under SFAS 121, the Partnerships are required to review long-lived assets and certain identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the book value of an asset may not be recoverable. An impairment loss should be recognized whenever the review demonstrates that the book value of a long-lived asset is not recoverable. Effective January 1, 1996, one of the Partnerships adopted SFAS No. 121. The implementation did not materially impact the financial condition or operating results of the Partnership. RECLASSIFICATIONS Certain reclassifications of the 1995 and 1994 financial statements of one of the Partnerships have been made to conform to the 1996 presentation. The reclassifications have not affected previously reported net income or partners' capital. 3. LEASE COMMITMENTS: Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1996, are as follows: <TABLE> <S> <C> (DOLLARS IN THOUSANDS) 1997............................................................. $ 22,351 1998............................................................. 22,093 1999............................................................. 20,666 2000............................................................. 17,299 2001............................................................. 6,151 Thereafter....................................................... 16,527 --------- $ 105,087 --------- --------- </TABLE> The initial lease terms generally range from 5 to 25 years with the majority of them having initial terms of 10 years and providing for one renewal option of 5 years and for rental escalation. Included in selling, general and administrative expense are rental costs of $20,713,000, $17,455,000 and $17,750,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The Partnership recognizes rent expense on a straight-line basis and recorded the related deferred rent as a noncurrent liability to be amortized as an adjustment to rental costs over the life of the lease. 4. SUPPLEMENTAL CASH FLOW INFORMATION: During 1996, one of the Partnerships replaced and upgraded certain of its cellular equipment with new cellular technology which supports both analog and digital voice transmissions. In connection with this equipment upgrade, the Partnership traded-in cellular equipment with a net book value of $10,331,000 for new cellular equipment with a cost of $51,967,000. The remaining balance was funded through the credit facility with its General Partner. 5. RELATED PARTY TRANSACTIONS: Certain affiliates of these cellular limited partnerships provide services for the system operations, legal, financial, management and administration of these entities. These affiliates are reimbursed for both direct and allocated costs (totaling $79.6 million in 1996, $63.1 million in 1995 and $60.3 million in 1994) related to providing these services. In addition, certain affiliates have established a credit facility with certain partnerships to provide working capital to the Partnership. One of the Partnerships participates in a centralized cash management arrangement with its General Partner. At December 31, 1996 44
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) and 1995, the interest-bearing balance amounted to $73,029,000 and $14,830,000, respectively. Effective January 1, 1989, the General Partner pays or charges the Partnership monthly interest, computed using the General Partner's average borrowing rate, on the amounts due to or from the Partnership. Interest earned in 1996, 1995 and 1994 was $3,088,000, $785,000 and $1,480,000, respectively. One of the Partnerships has a note receivable from its General Partner with a balance of $3,152,000 and accrued interest of $465,000 at December 31, 1996. The note bears interest at 12% per annum, compounded quarterly with all principal and interest due at maturity on May 10, 1997. 6. ACCOUNTS RECEIVABLE Accounts receivable of one of the Partnerships consists of: <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- <S> <C> <C> Retail.............................................................. $ 83,424 $ 83,682 Wholesale........................................................... 13,492 17,660 Intercarrier and other.............................................. 12,865 9,437 ----------- ----------- 109,781 110,779 Allowance for doubtful accounts..................................... (7,775) (8,719) ----------- ----------- $ 102,006 $ 102,060 ----------- ----------- ----------- ----------- </TABLE> Due to the large volume and diversity of the customer base of one of the Partnerships within the Los Angeles metropolitan market, concentrations of credit risk with respect to trade receivables are limited. The Partnership performs ongoing credit evaluations of its customers and in certain circumstances obtains refundable deposits. The Partnership maintains reserves for potential credit losses and, historically, such losses have been within management's expectations. Two of the Partnerships provide cellular service and sell cellular telephones to diversified groups of consumers within concentrated geographical areas. The General Partner performs credit evaluations of the Partnerships' customers and generally does not require collateral. Receivables are generally due within 30 days. Credit losses related to customers have been within management's expectations. 7. REGULATORY MATTERS: In the normal course of business, one of the Partnerships is subject to state regulation of the "terms and conditions" of cellular service excluding cellular rates. Additionally, the Partnership is subject to Federal Communication Commission regulation of cellular rates and market entry. Management does not expect such regulations to have a material adverse effect on the results of operations or financial position of the Partnership. 8. CONTINGENCIES AND COMMITMENTS: In November 1993, a class action complaint was filed on behalf of cellular customers of one of the Partnerships in Orange County Superior Court naming, among others, that Partnership. These complaints allege certain facts, including a similarity in the pricing structures of the two defendant cellular carriers, which plaintiffs contend are circumstantial evidence that the Partnership and Los Angeles Cellular Telephone Company conspired to fix the prices of retail and wholesale cellular radio services in the Los Angeles market. The complaint seeks damages for the class "in a sum in excess of $100 million." A similar agent case was settled for an immaterial amount. Trial has been set for July 7, 1997. The Partnership does not believe that this proceeding will have a material adverse effect on the Partnership's financial position or results of operations. 45
LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) The Partnership is also party to various other legal proceedings in the ordinary course of business. Although the ultimate resolution of these proceedings cannot be ascertained, management does not believe they will have a materially adverse effect on the results of operations or financial position of the Partnership. Two of the Partnerships are engaged in various legal actions arising in the ordinary course of business. Management does not anticipate any judgements against the Partnerships in excess of liabilities established which would have a material impact, individually or in the aggregate, on the financial position of the Partnerships. 46
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED STATES CELLULAR CORPORATION By: /S/ H. DONALD NELSON ----------------------------------- H. Donald Nelson PRESIDENT (CHIEF EXECUTIVE OFFICER) By: /S/ KENNETH R. MEYERS ----------------------------------- Kenneth R. Meyers SENIOR VICE PRESIDENT--FINANCE AND TREASURER (CHIEF FINANCIAL OFFICER) By: /S/ PHILLIP A. LORENZINI ----------------------------------- Phillip A. Lorenzini CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) Dated March 20, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE - ------------------------------------------------------ --------- ------------------ <S> <C> <C> /S/ H. DONALD NELSON DIRECTOR March 20, 1997 ------------------------------------------ H. Donald Nelson /S/ LEROY T. CARLSON, JR. DIRECTOR March 20, 1997 ------------------------------------------ LeRoy T. Carlson, Jr. /S/ LEROY T. CARLSON DIRECTOR March 20, 1997 ------------------------------------------ LeRoy T. Carlson /S/ WALTER C.D. CARLSON DIRECTOR March 20, 1997 ------------------------------------------ Walter C. D. Carlson /S/ MURRAY L. SWANSON DIRECTOR March 20, 1997 ------------------------------------------ Murray L. Swanson /S/ PAUL-HENRI DENUIT DIRECTOR March 20, 1997 ------------------------------------------ Paul-Henri Denuit /S/ ALLAN Z. LOREN DIRECTOR March 20, 1997 ------------------------------------------ Allan Z. Loren </TABLE>
- -------------------------------------------------------------------------------- INDEX TO EXHIBITS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION OF DOCUMENT - -------- -------------------------------------------------------------------------------------------------------------------- <C> <S> 3.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on Form 8 dated December 28, 1992, to the Company's Report on Form 8-A. 3.2 Restated Bylaws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on Form 8 dated December 28, 1992, to the Company's Report on Form 8-A. 4.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on Form 8 dated December 28, 1992 to the Company's Report on Form 8-A. 4.2 Restated by-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on Form 8 dated December 28, 1992 to the Company's Report on Form 8-A. 4.3(a) Amended and restated Term Loan Agreement between NTFC Capital Corporation and the Company dated December 22, 1994 is hereby incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.3(b) First Amendment to Amended and Restated Term Loan Agreement between NTFC Capital Corporation and the Company dated September 29, 1995 is hereby incorporated by reference to Exhibit 4.3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 4.4 Indenture dated June 1, 1995 between registrant and Harris Trust and Savings Bank, as Trustee, relating to the LYONs is hereby incorporated by reference to the Company's Form 8-K dated June 16, 1995. 4.5 Form of Certificate for Liquid Yield Option Note (included in Exhibit 4.4). 9.1 Voting Trust Agreement, dated as of June 30, 1989, with respect to Series A Common Shares of TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-38644). 9.2 Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 9.3 Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended is hereby incorporated by reference to Exhibit 9.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.2(a) Revolving Credit Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an exhibit to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 (Registration No. 33-23492). 10.2(b) Amendment dated as of June 29, 1995, to Revolving Credit Agreement between the Company and TDS is hereby incorporated by reference to Exhibit 10.2(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.3 Tax Allocation Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.4 Cash Management Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). </TABLE>
<TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION OF DOCUMENT - -------- -------------------------------------------------------------------------------------------------------------------- <C> <S> 10.5 Registration Rights Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.6 Exchange Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.7 Intercompany Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.8 Employee Benefit Plans Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.9 Insurance Cost Sharing Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.10 Stock Option and Stock Appreciation Rights Plan, is hereby incorporated by reference to Exhibit B to the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April 16, 1991. 10.11 Summary of 1996 Bonus Program for the Senior Corporate Staff of the Company. 10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.14 Securities Loan Agreement, dated June 31, 1995, between TDS and Merrill Lynch & Co. is hereby incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated June 16, 1995. 10.15 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated June 16, 1995. 10.16 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.3 to the Company's Form 8-K dated June 16, 1995. 10.17 LYONs Offering Agreement between TDS and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.4 to the Company's Form 8-K dated June 16, 1995. 10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996 is hereby incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. </TABLE>
<TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION OF DOCUMENT - -------- -------------------------------------------------------------------------------------------------------------------- <C> <S> 10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996 is hereby incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. 10.20 Cellular Interest Transfer Agreement by and between TDS and the Company dated June 20, 1996. 11 Statement regarding computation of per share earnings. 12 Statement regarding computation of ratios. 13 Incorporated portions of 1996 Annual Report to Security Holders. 21 Subsidiaries of the Registrant. 23.1 Consent of independent public accountants. 23.2 Consents of independent accountants. 27 Financial Data Schedules. </TABLE>
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