-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, TZ2beptyJnoZsqQCZWLMiT87W+sKJoWUaQYfCEmoZqG8RD1EbPE7V8GLFM8pPZW1 L8/VT3RacknBqIMhkQibxg== 0000950123-95-000560.txt : 19950615 0000950123-95-000560.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950123-95-000560 CONFORMED SUBMISSION TYPE: PRER14C PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTEL CELLULAR INC CENTRAL INDEX KEY: 0000822419 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 581413513 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14C SEC ACT: 1934 Act SEC FILE NUMBER: 000-16714 FILM NUMBER: 95521113 BUSINESS ADDRESS: STREET 1: 245 PERIMETER CENTER PKWY CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 4048043400 PRER14C 1 CONTEL CELLULAR, INC. - REVISED SCHEDULE 14C 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REVISED PRELIMINARY COPY DATED MARCH 16, 1995 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14C INFORMATION INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES EXCHANGE ACT OF 1934 CHECK THE APPROPRIATE BOX: /X/ PRELIMINARY INFORMATION STATEMENT / / DEFINITIVE INFORMATION STATEMENT CONTEL CELLULAR INC. (NAME OF REGISTRANT AS SPECIFIED IN CHARTER) CONTEL CELLULAR INC. (NAME OF PERSON FILING THE INFORMATION STATEMENT) PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX): / / $125 PER EXCHANGE ACT RULE 0-11(C)(1)(II), OR 14C-5(G). /X/ FEE COMPUTED ON TABLE BELOW PER EXCHANGE ACT RULES 14C-5(G) AND 0-11. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TITLE OF EACH PER UNIT PRICE OR OTHER CLASS OF SECURITIES AGGREGATE NUMBER OF UNDERLYING VALUE OF TRANSACTION PROPOSED MAXIMUM TO WHICH SECURITIES TO WHICH COMPUTED PURSUANT TO AGGREGATE VALUE AMOUNT OF TRANSACTION APPLIES TRANSACTION APPLIES EXCHANGE ACT RULE 0-11 OF TRANSACTION FILING FEE - --------------------------------------------------------------------------------------------------------------------- Class A Common Stock, par value $1.00 per share....... 9,970,953 $25.50 $254,259,301.50 $50,851.86 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $50,851.86 Filing Party: Contel Cellular Inc. Form, Schedule or Registration Statement No.: 14C Date Filed: January 30, 1995
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION STATEMENT ------------------------ CONCERNING THE MERGER OF CONTEL CELLULAR ACQUISITION CORPORATION, A SUBSIDIARY OF CONTEL CORPORATION, WITH AND INTO CONTEL CELLULAR INC., AT A PRICE OF $25.50 PER CLASS A SHARE ------------------------ WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ------------------------ This Information Statement is being furnished to the holders of outstanding shares of the Class A Common Stock (the "Class A Stockholders") of Contel Cellular Inc., a Delaware corporation (the "Company"), as of the Record Date (as defined below) in connection with the proposed merger (the "Merger") of Contel Cellular Acquisition Corporation, a Delaware corporation ("CCI Acquisition"), with and into the Company. The Company will be the corporation that survives the Merger (the "Surviving Corporation"). The Merger will be effected pursuant to an Agreement and Plan of Merger dated as of December 27, 1994, as amended (the "Merger Agreement"), among the Company, GTE Corporation, a New York corporation ("GTE"), Contel Corporation, a Delaware corporation in liquidation and a wholly owned subsidiary of GTE ("Contel"), and CCI Acquisition, which is a wholly owned subsidiary of Contel. In the Merger, (i) each outstanding share of the Class A Common Stock, par value $1.00 per share, of the Company (a "Class A Share") (other than Class A Shares as to which appraisal rights have been properly exercised under the General Corporation Law of the State of Delaware (the "DGCL")) will be converted into the right to receive $25.50 in cash, without interest, subject to applicable back-up withholding taxes (the "Merger Consideration"), (ii) each Class A Share held by the Company and each outstanding share of the common stock of CCI Acquisition will be cancelled, and no payment will be made with respect thereto and (iii) each outstanding share of the Class B Common Stock, par value $1.00 per share, of the Company (a "Class B Share") will continue to be outstanding. After the effective date of the Merger, the Class A Shares will cease to be quoted on the Nasdaq National Market. YOU ARE URGED TO REVIEW THIS INFORMATION STATEMENT CAREFULLY TO DECIDE WHETHER TO ACCEPT THE MERGER CONSIDERATION OR TO EXERCISE APPRAISAL RIGHTS PURSUANT TO THE DGCL. IF YOU WISH TO ACCEPT THE MERGER CONSIDERATION, PLEASE COMPLETE, EXECUTE AND SEND THE ENCLOSED LETTER OF TRANSMITTAL, TOGETHER WITH CERTIFICATES REPRESENTING YOUR CLASS A SHARES, TO CHEMICAL BANK, AS DISBURSING AGENT FOR THE MERGER (THE "DISBURSING AGENT"), IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH IN THE LETTER OF TRANSMITTAL. IF YOU WISH TO EXERCISE APPRAISAL RIGHTS PURSUANT TO THE DGCL, YOU MUST, WITHIN 20 DAYS OF THE DATE OF THE MAILING OF THIS INFORMATION STATEMENT, DELIVER TO THE COMPANY A WRITTEN DEMAND FOR A JUDICIAL APPRAISAL OF THE FAIR VALUE OF YOUR CLASS A SHARES AND OTHERWISE COMPLY WITH THE APPLICABLE PROVISIONS OF THE DGCL. SEE "DISSENTERS' RIGHTS OF APPRAISAL" AND THE TEXT OF SECTION 262 OF THE DGCL ATTACHED AS EXHIBIT D TO THIS INFORMATION STATEMENT. The record date for stockholders entitled to notice of or entitled to give consent to the Merger was March 16, 1995 (the "Record Date"). As of the Record Date there were issued and outstanding 9,970,953 Class A Shares and 90,000,000 Class B Shares. Each Class A Share is entitled to one vote per share and each Class B Share is entitled to five votes per share. On the Record Date, Contel owned 90,000,000 Class B Shares, which accounted for approximately 98% of the combined voting power of the outstanding Class A Shares and Class B Shares. Pursuant to the DGCL, Contel, as the owner of more than 50% of the combined voting power of the Class A Shares and Class B Shares, approved the Merger by written consent on March , 1995. Other than such written consent, no further action by the stockholders of the Company is necessary to approve or consummate the Merger and no such approval will be sought. The Company will not hold a meeting of the stockholders of the Company in connection with the Merger. The Merger will be consummated on April , 1995. This Information Statement is being mailed on March , 1995 to Class A Stockholders of record on the Record Date, and constitutes the notice of appraisal rights required by Section 262 of the DGCL and the notice of corporate action without meeting required by Section 228(d) of the DGCL. The principal executive offices of the Company are located at 245 Perimeter Center Parkway, Atlanta, Georgia 30346 and its telephone number is (404) 804-3400. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE DISBURSING AGENT FOR THE MERGER IS: CHEMICAL BANK The date of this Information Statement is March , 1995 3 TABLE OF CONTENTS
PAGE ----- SUMMARY.............................................................................. 4 SPECIAL FACTORS...................................................................... 9 Introduction; The Merger........................................................... 9 Background of the Merger........................................................... 9 Determination of the Special Committee and the Board; Fairness of the Merger....... 11 Opinion of Financial Advisor to the Special Committee.............................. 13 Determination of the Fairness of the Merger by GTE, Contel and CCI Acquisition..... 17 Opinions of Financial Advisors to GTE.............................................. 18 Certain Litigation................................................................. 24 Written Consent.................................................................... 24 Merger Consideration............................................................... 24 Accounting Treatment of the Merger................................................. 25 Certain Federal Income Tax Consequences of the Merger.............................. 25 Plans for the Company; Certain Effects of the Merger............................... 26 THE MERGER AGREEMENT................................................................. 27 General............................................................................ 27 Designation of Directors; Certificate of Incorporation and By-laws................. 27 Representations and Warranties..................................................... 27 Indemnification and Other Covenants................................................ 27 Conditions to the Merger........................................................... 28 Termination........................................................................ 28 Amendment.......................................................................... 28 Extension; Waiver.................................................................. 28 PAYMENT OF THE MERGER CONSIDERATION.................................................. 29 DISSENTERS' RIGHTS OF APPRAISAL...................................................... 30 MARKET PRICES AND DIVIDENDS ON THE COMMON STOCK OF THE COMPANY..................................................................... 32 SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY.................................. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................................... 34 Background......................................................................... 34 Acquisitions and Dispositions of Interests in Cellular Systems..................... 34 Results of Operations.............................................................. 35 Financial Condition................................................................ 37 PROJECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY................................. 39 BUSINESS OF THE COMPANY.............................................................. 41 Overview........................................................................... 41 Cellular Interests................................................................. 41 The Cellular Telephone Industry.................................................... 44 The Company's Cellular Operations.................................................. 45 Non-Controlled Systems............................................................. 49 International Interests............................................................ 49 Competition........................................................................ 49 Regulation......................................................................... 50 RELATED PARTY TRANSACTIONS........................................................... 51 Arrangements and Transactions with Contel and GTE.................................. 51 Payments to Optionholders.......................................................... 53 Transition Arrangements............................................................ 53
2 4
PAGE ----- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................................................... 54 Certain Beneficial Owners.......................................................... 54 Directors and Executive Officers of the Company.................................... 54 Directors and Executive Officers of GTE, Contel and CCI Acquisition................ 55 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................... 56 INDEX TO FINANCIAL STATEMENTS........................................................ F-1 EXHIBIT A -- AGREEMENT AND PLAN OF MERGER, AS AMENDED............................... A-1 EXHIBIT B -- OPINION OF LAZARD FRERES & CO.......................................... B-1 EXHIBIT C-1 -- OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED...................................................... C-1-1 EXHIBIT C-2 -- OPINION OF PAINEWEBBER INCORPORATED................................... C-2-1 EXHIBIT D -- DELAWARE GENERAL CORPORATION LAW SECTION 262........................... D-1 EXHIBIT E -- DIRECTORS AND EXECUTIVE OFFICERS OF GTE CORPORATION, CONTEL CORPORATION, CONTEL CELLULAR ACQUISITION CORPORATION AND CONTEL CELLULAR INC........................................................... E-1
3 5 SUMMARY The following is a summary of certain information contained elsewhere in this Information Statement. This Summary does not purport to be complete and is qualified in its entirety by the more detailed information contained elsewhere in this Information Statement and the Exhibits hereto. Unless defined in this Summary, capitalized terms used herein have the meanings ascribed to them elsewhere in this Information Statement. STOCKHOLDERS ARE URGED TO READ THIS INFORMATION STATEMENT AND THE EXHIBITS HERETO IN THEIR ENTIRETY IN ORDER TO DECIDE WHETHER TO ACCEPT THE MERGER CONSIDERATION OR TO EXERCISE APPRAISAL RIGHTS PURSUANT TO THE DGCL. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. SPECIAL FACTORS Introduction; The Merger. This Information Statement is being furnished to the holders of outstanding shares of the Class A Common Stock (the "Class A Stockholders") of Contel Cellular Inc., a Delaware corporation (the "Company"), in connection with the proposed merger (the "Merger") of Contel Cellular Acquisition Corporation, a Delaware corporation ("CCI Acquisition"), with and into the Company. The Company will be the corporation that survives the Merger (the "Surviving Corporation"). The Merger will be effected pursuant to an Agreement and Plan of Merger dated as of December 27, 1994, as amended (the "Merger Agreement"), among the Company, GTE Corporation, a New York corporation ("GTE"), Contel Corporation, a Delaware corporation in liquidation and a wholly owned subsidiary of GTE ("Contel"), and CCI Acquisition, which is a wholly owned subsidiary of Contel. Certain additional information relating to GTE, Contel, CCI Acquisition and the Company and each of their respective directors and executive officers is included in Exhibit E to this Information Statement. In the Merger, (i) each outstanding share of the Class A Common Stock of the Company, par value $1.00 per share (each a "Class A Share") (other than Class A Shares as to which appraisal rights have been properly exercised under the DGCL), will be converted into the right to receive $25.50 in cash, without interest, subject to back-up withholding taxes (the "Merger Consideration"), (ii) each Class A Share held by the Company and each outstanding share of the common stock of CCI Acquisition will be cancelled, and no payment will be made with respect thereto and (iii) each outstanding share of the Class B Common Stock of the Company, par value $1.00 per share (each a "Class B Share"), will continue to be outstanding. The Merger is subject to the satisfaction of certain conditions. See "THE MERGER AGREEMENT -- Conditions to the Merger". Assuming the satisfaction of such conditions, the Merger will be consummated on April , 1995. Background of the Merger. GTE, through its wholly-owned subsidiary Contel, owns all of the outstanding Class B Shares of the Company, which constitute 90% of the Company's outstanding common stock and approximately 98% of the combined voting power of the capital stock of the Company. The outstanding Class A Shares, which constitute 10% of the Company's outstanding common stock and approximately 2% of the combined voting power of the capital stock of the Company, are held by the public. GTE believes that the cellular communications businesses conducted by the Company and another wholly owned subsidiary of GTE, GTE Mobilnet Incorporated ("GTE Mobilnet"), can be conducted more effectively by acquiring the outstanding minority interest in the Company and consolidating GTE's cellular operations. GTE's decision is based on its belief that such consolidation will permit GTE to implement a unified marketing strategy for its cellular operations, provide increased flexibility in pursuing future opportunities, generate efficiencies in the combined cellular communications business and eliminate the complexities of operating two cellular businesses with overlapping but not identical ownership. For a discussion of GTE's reasons for acquiring the minority interest see "SPECIAL FACTORS -- Background of the Merger" and "SPECIAL FACTORS -- Plans for the Company; Certain Effects of the Merger". GTE believes that the most efficient way to effect the acquisition of the shares held by the public and to provide Class A Stockholders with cash for their Class A Shares is through the merger of a wholly-owned subsidiary of Contel into the Company. At the time the Company received GTE's initial proposal to acquire the Class A Shares, nine of the Company's twelve directors were executive officers or directors of GTE or the Company. Accordingly, the Board of Directors of the Company (the "Board") appointed a special committee of the 4 6 three independent directors (the "Special Committee") to negotiate the Merger on behalf of Class A Stockholders and make a recommendation to the Board of Directors in connection with the transaction. Record Date; No Action Required by Class A Stockholders to Consummate the Merger. The Record Date for stockholders entitled to notice of or entitled to give consent to the Merger was March 16, 1995. As of the Record Date, there were issued and outstanding 9,970,953 Class A Shares, each of which has one vote per share, and 90,000,000 Class B Shares, each of which has five votes per share. On the Record Date, Contel owned 90,000,000 Class B Shares, which accounted for approximately 98% of the combined voting power of the outstanding Class A Shares and Class B Shares. Pursuant to the DGCL, Contel, as holder of record of more than 50% of the combined voting power of the Class A Shares and Class B Shares, approved the Merger by written consent on March , 1995. Under the DGCL, no action on the part of any other stockholder of the Company is necessary to authorize or to consummate the Merger. The Company will not hold a meeting of stockholders in connection with the Merger. Determination of the Special Committee and the Board; Fairness of the Merger. On December 27, 1994, the Special Committee concluded that the acquisition of Class A Shares pursuant to the Merger was substantively and procedurally fair to the holders of the outstanding Class A Shares, including from a financial point of view, and unanimously recommended that the Board of Directors approve the Merger Agreement and approve the Merger at a price of $25.50 per Class A Share. Based on the recommendation of the Special Committee, the Board unanimously approved the Merger and the Merger Agreement. For a discussion of the factors the Special Committee considered in reaching its decision, see "SPECIAL FACTORS -- Determination of the Special Committee; Fairness of the Merger". Opinion of Financial Advisor to the Special Committee. At a meeting on December 22, 1994 (the "December 22 Special Committee Meeting"), Lazard Freres & Co. ("Lazard Freres"), financial advisor to the Special Committee, informed the Special Committee that it would be prepared to deliver a written opinion to the effect that the proposed price of $25.50 per Class A Share to be received by the Class A Stockholders in the Merger would be fair to such holders from a financial point of view. Subsequently, on December 30, 1994, Lazard Freres delivered its written opinion to the Special Committee that, as of such date, the consideration to be received by the holders of the Class A Shares in the Merger (other than GTE, Contel or any of their affiliates) is fair to such holders from a financial point of view. A copy of such written opinion, setting forth the assumptions made, matters considered and the review undertaken, is attached to this Information Statement as Exhibit B. Class A Stockholders are urged to read this opinion in its entirety. No limitations were imposed by the Special Committee upon Lazard Freres with respect to the investigation made or the procedures followed by Lazard Freres in rendering its opinion. For a discussion of the matters Lazard Freres considered in reaching its opinion, see "SPECIAL FACTORS -- Opinion of Financial Advisor to the Special Committee". Determination of Fairness of the Merger by GTE, Contel and CCI Acquisition. GTE, Contel and CCI Acquisition believe that the transaction is fair to the Class A Stockholders. GTE, Contel and CCI Acquisition did not retain financial advisors to evaluate the fairness of the transaction to the Class A Stockholders. See "SPECIAL FACTORS -- Determination of the Fairness of the Merger by GTE, Contel and CCI Acquisition". Plans for the Company; Certain Effects of the Merger. As a result of the transaction, the Class A Stockholders will no longer have an equity interest in the Company and, accordingly, will not continue to participate in the results of the Company as an equity holder. However, they will receive cash for their interest. The receipt of cash for the Class A Shares is a taxable transaction under federal and certain state laws. Generally, each Class A Stockholder will be required to recognize a gain or loss equal to the difference between the stockholder's basis in the Class A Shares and the amount of cash received pursuant to the Merger. See "SPECIAL FACTORS -- Certain Federal Income Tax Consequences of the Merger"; "SPECIAL FACTORS -- Plans for the Company; Certain Effects of the Merger". Also, as a result of the transaction the Class A Shares will cease to be registered under the federal securities laws and cease to be publicly traded. It is expected that the operations of the Company and GTE's other cellular subsidiary will be consolidated over time into a single business unit. For a discussion of the effects of the Merger on GTE, 5 7 Contel and the Company see "SPECIAL FACTORS -- Certain Federal Income Tax Consequences of the Merger"and "SPECIAL FACTORS -- Plans for the Company; Certain Effects of the Merger". Opinions of Financial Advisors to GTE. GTE retained Merrill Lynch, Pierce, Fenner & Smith Incorporated and PaineWebber Incorporated (the "GTE Financial Advisors") in connection with the transaction. The GTE Financial Advisors assisted GTE in its negotiations with the Special Committee and Lazard Freres. In connection with the transaction, the GTE Financial Advisors rendered opinions to GTE to the effect that the price to be paid for the Class A Shares in the Merger is fair to GTE from a financial point of view. A copy of the fairness opinions of the GTE Financial Advisors setting forth the assumptions made, matters considered and review undertaken, are attached to this information statement as Exhibits C-1 and C-2 and incorporated herein by reference. For a discussion of the matters the GTE Financial Advisors considered in reaching their respective opinions, see "SPECIAL FACTORS -- Opinions of Financial Advisors to GTE". PAYMENT OF THE MERGER CONSIDERATION CCI Acquisition will make available to Chemical Bank, as disbursing agent in connection with the Merger (the "Disbursing Agent"), the aggregate amount of cash to be paid in respect of the Class A Shares pursuant to the Merger. In order to receive the Merger Consideration, Class A Stockholders must send their certificates representing Class A Shares to the Disbursing Agent along with a Letter of Transmittal. All certificates so surrendered will be cancelled. A Letter of Transmittal setting forth the procedures for surrendering to the Disbursing Agent certificates representing Class A Shares in exchange for cash is enclosed with this Information Statement. Upon surrender of a certificate representing Class A Shares together with a duly executed Letter of Transmittal, the Class A Stockholder will receive in exchange for each Class A Share $25.50 in cash, without interest, subject to applicable back-up withholding taxes. Any cash held by the Disbursing Agent that remains unclaimed by stockholders for 180 days after the effective time of the Merger will be returned to the Surviving Corporation. After that time, Class A Stockholders may look only to the Surviving Corporation for payment of the Merger Consideration without interest and subject to applicable abandoned property, escheat and other similar laws. ALL QUESTIONS AND REQUESTS FOR INFORMATION RELATING TO THE PROCEDURE FOR PAYMENT OF THE MERGER CONSIDERATION FOR THE CLASS A SHARES SHOULD BE DIRECTED TO THE DISBURSING AGENT. SEE "PAYMENT OF THE MERGER CONSIDERATION". DISSENTERS' RIGHTS OF APPRAISAL By following the procedures prescribed by the DGCL, Class A Stockholders have the right to dissent from the Merger and to receive cash equal to the fair value of their Class A Shares as determined pursuant to appraisal proceedings in the Delaware courts. A WRITTEN DEMAND FOR APPRAISAL OF CLASS A SHARES MUST BE DELIVERED TO THE GENERAL COUNSEL OF THE COMPANY WITHIN 20 DAYS AFTER THE DATE OF THE MAILING OF THIS INFORMATION STATEMENT. Because of the complexity of the procedures for exercising the right to dissent, the Company believes that Class A Stockholders who consider exercising such right should seek the advice of counsel. Failure to take any step in connection with the exercise of dissenters' right of appraisal may result in the termination or waiver of such rights. See "DISSENTERS' RIGHTS OF APPRAISAL" and Exhibit D. MARKET PRICES AND DIVIDENDS ON THE COMMON STOCK OF THE COMPANY The Class A Shares are publicly traded in the over the counter market and quoted on the Nasdaq National Market under the symbol "CCXLA". There is no established trading market for the Class B Shares. The Company has not paid any dividends on its Class A Shares or Class B Shares and does not anticipate that it will do so in the foreseeable future. 6 8 The following table indicates the high and low sales prices for the Class A Shares during the designated periods:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1994 High.......................... $ 18.75 $ 17.25 $ 24.00 $ 25.25 Low........................... 14.00 13.00 16.00 23.50 1993 High.......................... $ 18.63 $ 16.25 $ 18.75 $ 22.00 Low........................... 13.25 13.50 15.50 15.00 1992 High.......................... $ 23.25 $ 18.50 $ 16.50 $ 19.00 Low........................... 17.25 13.00 13.50 13.25
On September 7, 1994, the last full day of trading prior to the announcement of GTE's intention to acquire the Class A Shares, the high, low and closing sales prices per Class A Share quoted on the Nasdaq National Market were $18.25, $17.75 and $17.75, respectively. For the period from January 1, 1995 through March 14, 1995, the high and low sales prices per Class A Share quoted on the Nasdaq National Market were $25.375 and $24.875, respectively. BUSINESS OF THE COMPANY The Company, through its subsidiaries and through partnerships, provides or participates in the provision of cellular telephone service in various metropolitan statistical areas ("MSAs") and rural service areas ("RSAs") throughout the United States. As of December 31, 1994, the Company had interests in cellular telephone systems in the United States representing approximately 23.9 million "POPs". ("POPs" refer to the population of a market area multiplied by the Company's percentage ownership in the cellular system serving that market). The Company's 23.9 million POPs include cellular systems which the Company controls or manages and cellular systems operated by partnerships in which the Company is not the controlling partner. As of December 31, 1994, approximately 19.5 million of the Company's 23.9 million POPs were located in 59 MSAs. The Company owned a controlling interest in and/or managed cellular systems servicing 32 of these 59 MSAs (representing approximately 69% of the Company's MSA POPs). The Company owned a non-controlling interest in cellular systems servicing the remaining 27 MSAs. The remaining 4.4 million of the Company's 23.9 million POPs were located in 52 RSAs. As of December 31, 1994, the Company owned controlling interests in entities licensed to provide cellular service in 24 RSAs, owned non-controlling interests in and managed 10 RSA markets and held non-controlling interests in 18 RSAs. Most of the Company's RSA POPs are in areas adjacent to MSAs currently served by the Company. See "BUSINESS OF THE COMPANY". RELATED PARTY TRANSACTIONS The Company, Contel and GTE have a number of financial, operating and other arrangements believed to be of mutual benefit. Those arrangements include, without limitation, a Third Restated Competition Agreement dated March 14, 1991 among Contel, GTE and the Company (the "Competition Agreement") which, among other things, allocates cellular business opportunities among GTE's cellular businesses and a Services Agreement dated May 1, 1991, as amended, between GTE Mobile Communications Service Corporation ("GTE Mobile") and the Company (the "Services Agreement"). The terms of these arrangements have been established by Contel and GTE in consultation with the Company but are not the result of arms-length negotiations. See "RELATED PARTY TRANSACTIONS -- Arrangements and Transactions with Contel and GTE". 7 9 SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1990 1991 1992 1993 1994 ---------- ---------- ---------- ---------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenues and sales................................. $ 167,178 $ 235,107 $ 286,999 $ 374,014 $ 562,955 Operating income (loss)(1)......................... (38,143) (68,577) (50,113) (28,305) 41,011 Loss from consolidated operations.................. (158,865) (223,726) (196,347) (188,011) (143,332) Equity in earnings of unconsolidated partnerships..................................... 19,069 15,687 29,027 37,351 62,792 Gains on sales of partnership interests............ -- 18,387 60,806 48,023 96,607 Net income (loss) before cumulative effect of change in accounting principles.................. (102,794) (118,900) (73,061) (74,918) 1,871 Cumulative effect of change in accounting principles(2).................................... -- -- (2,080) (241) -- Net income (loss).................................. (102,794) (118,900) (75,141) (75,159) 1,871 Net income (loss) per share before cumulative effect of change in accounting principles........ (1.03) (1.19) (0.73) (0.75) 0.02 Net income (loss) per share........................ (1.03) (1.19) (0.75) (0.75) 0.02 Weighted average shares outstanding (in thousands)....................................... 99,931 99,942 99,943 99,948 99,953 OTHER OPERATING DATA: Capital expenditures............................... 70,841 107,792 183,504 130,042 255,174 Ending subscribers................................. 155,285 236,282 327,645 521,226 789,580
AS OF DECEMBER 31, ---------------------------------------------------------------------- 1990 1991 1992 1993 1994 ---------- ---------- ---------- ---------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BALANCE SHEET DATA: Total assets....................................... $1,665,395 $1,870,669 $1,930,469 $2,052,984 $2,346,466 Long-term obligations: Notes payable -- affiliates...................... 1,540,000 1,735,034 1,814,327 1,901,726 2,136,263 Other............................................ 14,280 42,280 36,280 36,792 30,792 Stockholders' equity (deficit)..................... 27,525 (91,085) (166,084) (241,221) (238,920) Book value per share............................... 0.28 (0.91) (1.66) (2.41) (2.39)
- --------------- (1) The operating loss in 1991 includes approximately $12 million of integration costs associated with the merger of Contel with a wholly owned subsidiary of GTE. (2) In 1993, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." In 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and No. 109, "Accounting for Income Taxes." Earnings were not adequate to cover fixed charges in 1992, 1993 or 1994. The amount of such deficiency was $128 million, $129 million and $19 million for the years ended December 31, 1992, 1993 and 1994, respectively. PROJECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY The Company does not, as a matter of course, publicly disclose projections as to future revenues or earnings. As part of its normal planning process, the Company has prepared certain five year projected financial data for internal purposes. Additionally, the Company prepared ten year projected financial data which was based on an earlier version of the five year projected financial data. Differences between the ten and the five year projected data are attributable to the inclusion or exclusion of certain acquisitions which occurred subsequent to the preparation of the ten year projected data. These five year and ten year financial projections have been included in this Information Statement because such projections were made available to the Special Committee's financial advisor, GTE and the GTE Financial Advisors. See "PROJECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY". There can be no assurance that the projections will be realized and actual results may vary materially from the projections. 8 10 SPECIAL FACTORS INTRODUCTION; THE MERGER This Information Statement is being furnished to the holders of outstanding shares of the Class A Common Stock (the "Class A Stockholders") of Contel Cellular Inc., a Delaware corporation (the "Company"), in connection with the proposed merger (the "Merger") of Contel Cellular Acquisition Corporation, a Delaware corporation ("CCI Acquisition"), with and into the Company. The Company will be the corporation that survives the Merger (the "Surviving Corporation"). The Merger will be effected pursuant to an Agreement and Plan of Merger dated as of December 27, 1994, as amended (the "Merger Agreement"), among the Company, GTE Corporation, a New York corporation ("GTE"), Contel Corporation, a Delaware corporation in liquidation and a wholly owned subsidiary of GTE ("Contel"), and CCI Acquisition, which is a wholly owned subsidiary of Contel. Certain additional information relating to GTE, Contel, CCI Acquisition and the Company and each of their respective directors and executive officers is included in Exhibit E to this Information Statement. In the Merger, (i) each outstanding Class A Share (other than Class A Shares as to which appraisal rights have been properly exercised under the DGCL) will be converted into the right to receive $25.50 in cash, without interest, subject to backup withholding of taxes (the "Merger Consideration"), (ii) each Class A Share held by the Company and each outstanding share of the common stock of CCI Acquisition will be cancelled, and no payment will be made with respect thereto and (iii) each outstanding Class B Share will continue to be outstanding. The Merger is subject to the satisfaction of certain conditions. See "THE MERGER AGREEMENT -- Conditions to the Merger". The Merger will require notice filings in a number of states, but the approval of regulatory authorities will not be required in any jurisdiction. Assuming the satisfaction of such conditions, the Merger will be consummated on April , 1995. For a discussion of the effects of the Merger on each of the Class A Stockholders, the Company, GTE, Contel and CCI Acquisition, see "-- Certain Federal Income Tax Consequences of the Merger" and "-- Plans for the Company; Certain Effects of the Merger" below. BACKGROUND OF THE MERGER Existing Ownership. The outstanding stock of the Company consists of 9,970,953 Class A Shares, which represent approximately 2% of the voting power of the combined capital stock of the Company, and 90,000,000 Class B Shares, which represent approximately 98% of the voting power of the combined capital stock of the Company. GTE, through its wholly owned subsidiary Contel, owns all of the outstanding Class B Shares. The outstanding Class A Shares are held by the public and trade in the over the counter market with prices quoted on the Nasdaq National Market under the symbol "CCXLA". The Company was originally formed as a wholly owned subsidiary of Contel. In April 1988, a portion of the Company's stock was sold to the public in a public offering. In March 1991, a wholly owned subsidiary of GTE merged into Contel and Contel became a wholly owned subsidiary of GTE (the "GTE/Contel Merger"). As a result of this merger, the Company became an indirectly held subsidiary of GTE. GTE also provided and continues to provide cellular mobile services through another wholly owned subsidiary, GTE Mobilnet. GTE/Contel Merger; California Proceeding. At the time of the GTE/Contel Merger, both GTE and Contel had telephone and cellular operations in California subject to the jurisdiction of the California Public Utilities Commission (the "CPUC"). The CPUC asserted jurisdiction over the GTE/Contel Merger. Under California law, the CPUC is required to approve the merger of the California telephone operations of GTE and Contel (the "California Proceeding"). In order to complete the GTE/Contel Merger in jurisdictions other than California, the companies entered into a stipulation that was approved by the CPUC (the "Stipulation"). The Stipulation resulted in the approval of the GTE/Contel Merger on an interim basis. The Stipulation provided that the GTE and Contel telephone and cellular companies located in California would be operated as separate entities until the CPUC could conduct a detailed review of the GTE/Contel Merger under the provisions of California law. As of this date, the GTE/Contel Merger and the merger of the GTE and Contel regulated operations in California have not yet received final approval. 9 11 In April 1994, GTE received a proposed final decision with respect to the California Proceeding. As a result of concerns with certain provisions in the order with respect to the distribution of the GTE/Contel Merger benefits, GTE requested that the evidentiary record be reopened. That request was granted. The CPUC, however, has not yet acted based upon the additional evidence that has been submitted. GTE's Determination to Proceed and Discussions Regarding Structure. Since the date of the GTE/Contel Merger, GTE's management has, from time to time, discussed the concept of acquiring the publicly held shares of the Company. The discussions were held among GTE's management on a limited and confidential basis and no decision was made to proceed. In early 1994, GTE began to seriously consider acquiring the publicly held shares of the Company. As a result of the continuing delays in the CPUC proceedings, GTE's management concluded in early August 1994 that it would be advisable to proceed to acquire the publicly held shares of the Company. GTE management met with its legal and financial advisors to discuss structuring the transaction and decided that the most efficient way to effect the acquisition of the public minority would be through a merger of a wholly owned subsidiary of Contel into the Company. This structure would ensure that GTE acquired all of the Class A Shares in a single step. GTE's management considered using GTE Common Stock to effect the Merger. However, GTE's management believed that its Common Stock was undervalued and elected to use cash. GTE's management further considered two alternatives: whether the Company should merge with and into a subsidiary of Contel that would be created to accomplish the merger (the "New Subsidiary"), with the New Subsidiary being the survivor of the merger; or whether the New Subsidiary should merge with the Company, with the Company being the survivor of the merger. GTE's management elected to structure the transaction so that the Company would be the survivor of the Merger. The Company holds licenses to operate cellular systems in its name and, under applicable rules and regulations of the Federal Communications Commission (the "FCC"), if the Company was not the surviving company in the merger, the merger would be considered to be a transfer of the licenses. The Company would be required to obtain FCC approval for the transfer of the licenses before effecting such merger. The approval process could take up to six months and could delay the completion of the Merger and the payment of Merger Consideration to the Class A Stockholders. The tax consequences and other effects of a merger would be the same to the Class A Stockholders regardless of whether the Company or the New Subsidiary was the survivor of a merger. Approval by GTE Board. On September 8, 1994, the Board of Directors of GTE approved a proposal to acquire the Class A Shares for $22.50 per share and also authorized negotiations with the Company. On the same date, GTE notified the Board of Directors of the Company of its proposal to acquire the Class A Shares for $22.50 per Class A Share, or approximately $224 million. Purpose of the Merger. At the present time, the Company is operated separately from GTE's other cellular interests. The Company has retained its own name and own brand identity. Decisions regarding opportunities for the Company and the decisions on various actions to be taken by the Company have been made by its Board of Directors based upon the best interests of the Company, not the best interests of GTE's combined operations. The Merger will permit GTE to operate its cellular operations as a single unit; enable GTE to implement a unified marketing strategy for its cellular operations; provide increased flexibility to pursue joint ventures and other combinations and new business opportunities; generate efficiencies and reduce overhead in the combined cellular communications business; and eliminate the complexities raised by operating two cellular businesses under overlapping but not identical ownership. After the Merger, GTE plans to operate its combined cellular operations as a single business unit and to maximize the use of the GTE brand name for all of its cellular operations. These actions will expand the area covered by service that can be readily identified as being provided by GTE and increase recognition of the GTE brand name among consumers that are served by GTE's cellular operations. GTE acquired its majority equity position in the Company as part of the GTE/Contel Merger. From time to time, GTE has attempted to align its legal entities and simplify its corporate structure. In January 1993, Contel adopted a plan of liquidation to facilitate the realignment of GTE and Contel entities and is in the process of distributing its assets to GTE. Contel will continue to wind up its affairs and to distribute its assets 10 12 to GTE. When the distributions have been completed, Contel will be completely liquidated. Contel is the parent of the Company and, accordingly, is a party to the Merger. Contel is a wholly owned subsidiary of GTE and is not engaged in operations or making business determinations that are separate from GTE. The Merger and the consolidation of the cellular operations of the Company and GTE's other cellular subsidiary are a part of this process. Special Committee; Negotiations with GTE Financial Advisors. At the time GTE informed the Company of its offer to acquire the publicly held Class A Shares, nine of the Company's twelve directors were executive officers or directors of GTE or the Company. Accordingly, the Board of Directors of the Company at a meeting on September 9, 1994 appointed the three independent directors, Messrs. Irwin Schneiderman, Leo Jaffe and Robert LaBlanc, to a special committee (the "Special Committee") to review the fairness of and negotiate the material terms of the proposed Merger on behalf of the Class A Stockholders. Members of the Special Committee each received a fee of $35,000 and the Chairman of the Special Committee received a fee of $45,000. As part of the Stipulation entered into in the California Proceeding, at least three of the Company's directors are required to be independent directors who are not otherwise officers, directors or employees of GTE until the CPUC approval has been received. GTE has not at this time determined whether or not Messrs. Schneiderman, Jaffe and LaBlanc will remain as independent directors after the Merger. The Special Committee met for the first time on September 17, 1994 and authorized the retention of Cahill Gordon & Reindel ("Cahill") as legal counsel to the Special Committee. On September 17 and September 22, 1994, the Special Committee interviewed seven investment banking firms for possible engagement as a financial advisor to the Special Committee in its evaluation of the proposed Merger. On September 22, 1994, the Special Committee retained Lazard Freres & Co. ("Lazard Freres") as its financial advisor. Lazard Freres has not had any material relationship with GTE or any of its subsidiaries including the Company. Between September 28 and December 22, 1994, the Special Committee and Lazard Freres held thirteen meetings either in person or by telephone conference call to discuss the proposed Merger. During each of such meetings, members of the Special Committee asked questions of the representatives of Lazard Freres regarding numerous topics, including the experience of Lazard Freres in transactions of this type, the experience of Lazard Freres in transactions in this industry, and the methodology that Lazard Freres intended to use in valuing the Class A Shares from a financial point of view. The methodology Lazard Freres used and the various details of their analyses are set forth below under "-- Opinion of Financial Advisor to the Special Committee". Beginning on October 17, 1994, the Special Committee (acting through Lazard Freres) entered into negotiations with GTE's financial advisors, Merrill Lynch, Pierce, Fenner & Smith Incorporated and PaineWebber Incorporated (individually, "Merrill Lynch" and "PaineWebber", respectively, and, collectively, the "GTE Financial Advisors") relating to the proposed price to be paid in the Merger, which process continued for several weeks. During the course of such negotiations in October 1994, the GTE Financial Advisors furnished to GTE's management a preliminary draft of their background analysis and furnished to Lazard Freres a portion of such preliminary draft. A final version of such preliminary draft background analysis was never furnished to GTE or Lazard Freres by the GTE Financial Advisors. The GTE Financial Advisors based their fairness opinions to GTE on the analyses described below in "-- Opinions of Financial Advisors to GTE". In November 1994, GTE indicated that it might be willing to increase its offer to $25.00 per Class A Share. As a result of continued negotiations between Lazard Freres and the GTE Financial Advisors, and negotiations with counsel for certain stockholders who brought suit against the Company and certain of its affiliates in connection with the proposed transaction described below under "-- Certain Litigation", the price per Class A Share proposed to be given in the Merger was increased by GTE to $25.50. DETERMINATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE MERGER At a meeting on December 22, 1994 (the "December 22 Special Committee Meeting"), Lazard Freres informed the Special Committee that it would be prepared to deliver a written opinion to the effect that the proposed price of $25.50 per Class A Share to be received by the holders of the Class A Shares (other than 11 13 GTE, Contel or any of their affiliates) in the Merger would be fair to such holders from a financial point of view. Subsequently, on December 30, 1994, Lazard Freres delivered its written opinion to the Special Committee that, as of such date, the consideration to be received by the holders of the Class A Shares (other than GTE, Contel or any of their affiliates) in the Merger is fair to such holders from a financial point of view. On December 22, 1994 the Special Committee reviewed a draft of the Merger Agreement, pursuant to which (i) each outstanding Class A Share (other than Class A Shares as to which appraisal rights have been properly exercised under the DGCL) would be converted into the right to receive the Merger Consideration, (ii) each Class A Share held by the Company and each outstanding share of the common stock of CCI Acquisition would be cancelled, and no payment would be made with respect thereto and (iii) each outstanding Class B Share would continue to be outstanding. At a meeting held on December 27, 1994, the Special Committee unanimously decided that the acquisition of Class A Shares pursuant to the Merger was substantively and procedurally fair to the holders of the outstanding Class A Shares, including from a financial point of view, and, therefore, unanimously recommended to the Board of Directors of the Company that it approve the Merger at a price of $25.50 per Class A Share. Based on the recommendation of the Special Committee, the Company's Board of Directors unanimously found that the Merger was substantively and procedurally fair to the Class A Stockholders, including from a financial point of view and approved the Merger Agreement and approved the Merger at a price of $25.50 per Class A Share. In finding that the Merger was substantively and procedurally fair to the Class A Stockholders, the Board of the Company relied on the factors relied on by the Special Committee and the determinations of the Special Committee. In determining to recommend to the Board of Directors of the Company that it approve the Merger and the Merger Agreement, the Special Committee considered a number of factors. The material factors considered by the Special Committee were: (a) the Special Committee's evaluation of the Company's business, properties and future prospects (which evaluation was substantially the same as the evaluation by Lazard Freres summarized hereinafter under the caption "-- Opinion of Financial Advisor to the Special Committee"); (b) that the price of $25.50 per Class A Share represents (i) a premium of 43.7% over the closing sales price of the Class A Shares on the Nasdaq National Market on September 7, 1994, the last trading day prior to the public announcement of the proposed Merger, (ii) a premium of 37.8% over the closing sales price of the Class A Shares on the Nasdaq National Market one week prior to September 8, 1994, and (iii) a premium of 39.7% over the closing sales price of the Class A Shares on the Nasdaq National Market one month prior to September 8, 1994; (c) that the sales price of the Class A Shares on the Nasdaq National Market had not exceeded the price of $25.50 per Class A Share since October 10, 1989; (d) presentations by Lazard Freres regarding the financial condition, results of operations, business and prospects of the Company, including the possible dislocation and competitive uncertainty that could result from major changes in the cellular communication industry; (e) presentations by Lazard Freres regarding the industry in which the Company operates and the financial, operating and stock price history of the Company in comparison to certain companies operating in the Company's industry, including the Company's competitors as summarized below in "-- Opinion of Financial Advisor to the Special Committee"; (f) statements by Lazard Freres at the December 22 Special Committee Meeting that it would be prepared to deliver to the Special Committee a written opinion to the effect that the price of $25.50 per Class A Share was fair to the Class A Stockholders (other than GTE, Contel or any of their affiliates) from a financial point of view, which written opinion dated December 30, 1994 was in fact delivered to the Special Committee by Lazard Freres; and (g) the Special Committee's belief that GTE would not increase the price above $25.50 per Class A Share. 12 14 In view of the variety and nature of the factors considered by the Special Committee, the Special Committee did not attempt to assign relative weights to the specific factors considered in reaching its determination, except that the Special Committee placed particular emphasis on the opinion of Lazard Freres and the fact that the price of $25.50 per Class A Share represented a substantial premium over the price at which the Class A Shares had recently and historically traded. The Special Committee did not consider book value to be a material factor as it believed that the financial analysis by Lazard Freres provided more accurate implied values of the Class A Shares. The Special Committee did not consider liquidation value as the holders of Class A Shares do not have the power to liquidate the Company. GTE had not purchased any Class A Shares and there were no firm offers of which the Special Committee was aware made by any unaffiliated person, so the Special Committee did not consider such factors. Moreover, the quantifiable per share value of the factors considered did not exceed the price being offered except to the extent that Lazard Freres financial analyses produced ranges of values that in some cases partially exceeded or exceeded $25.50. The Special Committee determined that the Merger is fair despite such higher values for two reasons: (1) Lazard Freres advised the Special Committee that, in acquisition transactions where an acquiror already owned a controlling position in the company to be acquired (as in the case of GTE's existing ownership of the Company), the public stockholders would not obtain the full private market valuation as a result of such acquisitions, and (2) the price of $25.50 exceeded the mid-point and approached the high end of those other ranges that included a higher value. The approval of the Merger by a majority of the Class A Stockholders is not required and is not being sought. Notwithstanding this fact, the Special Committee believed that the acquisition of Class A Shares pursuant to the Merger is substantively and procedurally fair to the holders of Class A Shares because the Special Committee of independent directors of the Company was established to evaluate the transaction and because GTE and its financial advisors negotiated in good faith with the Special Committee and its financial advisor. Moreover, the Special Committee, unanimously approved the Merger. With the exception of the members of the Special Committee and the Board of Directors of the Company, no director, executive officer or affiliate of the Company, GTE, Contel or CCI Acquisition has made a recommendation in support of or opposed to the Merger. OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE General. Lazard Freres delivered its written opinion to the Special Committee that, as of December 30, 1994, the consideration to be received by the holders of the Class A Shares (other than GTE, Contel or any of their affiliates) in the Merger is fair to such holders from a financial point of view. The full text of the written opinion of Lazard Freres, dated December 30, 1994, which sets forth the assumptions made, matters considered and the review undertaken with regard to such opinion, is attached to this Information Statement as Exhibit B. Lazard Freres' opinion was delivered for the benefit of the Special Committee and is not on behalf of, and is not intended to confer rights or remedies upon any stockholders of the Company, GTE, or any other person. The summary of the opinion of Lazard Freres set forth below is qualified in its entirety by reference to the full text of the opinion. Class A Stockholders are urged to read this opinion in its entirety. Additional copies of such opinion are available for inspection and copying at the principal executive offices of GTE during regular business hours and are also available upon request directed to GTE Corporation, One Stamford Forum, Stamford, CT 06904, Attention: Ronald J. Tuccillo, Assistant Secretary. In rendering its opinion on December 30, 1994, Lazard Freres, among other things, (i) reviewed the terms and conditions of a December 29, 1994 draft of the Merger Agreement (the "Draft Merger Agreement"); (ii) analyzed certain historical business and financial information relating to the Company, including the Annual Report to Stockholders and Annual Reports on Form 10-K of the Company for each of the fiscal years ended December 31, 1991 through 1993, and Quarterly Reports on Form 10-Q of the Company for the quarters ended March 31, June 30 and September 30, 1994; (iii) reviewed certain financial forecasts and other data provided by the Company relating to the Company; (iv) held discussions with members of the senior managements of the Company and GTE with respect to the businesses and prospects of 13 15 the Company and its strategic objectives; (v) reviewed public information with respect to certain other companies in lines of business Lazard Freres believes to be generally comparable to the businesses of the Company; (vi) reviewed the financial terms of certain recent business combinations involving companies in lines of businesses Lazard Freres believes to be generally comparable to those of the Company, and in other industries generally; (vii) reviewed the financial terms of certain recent business combinations Lazard Freres believes to be comparable in certain respects to the proposed Merger; (viii) reviewed the historical stock prices and trading volumes of the Class A Shares; and (ix) conducted such other financial studies, analyses and investigations as Lazard Freres deemed appropriate. In arriving at its opinion and making its presentation to the Special Committee at the December 22 Special Committee Meeting, Lazard Freres was advised that the Company and an affiliate of GTE propose to exchange certain cellular assets owned by each of them for certain cellular assets owned by a publicly-held company (the "Cellular Exchange"). Lazard Freres received a copy of a letter dated December 19, 1994 from GTE's Senior Vice President - Finance addressed to the GTE Financial Advisors regarding the Cellular Exchange to the effect that it is an exchange of equivalent assets and, accordingly, is value neutral to the Company. Lazard Freres has neither received nor reviewed any other information regarding the Cellular Exchange, including any financial projections or any other non-public financial information prepared by GTE or the Company. With the consent of the Special Committee, Lazard Freres has assumed that the Cellular Exchange involves the exchange of assets with substantially equivalent value and, accordingly, would have an immaterial effect, if any, on the Company. For a discussion of the agreement entered into in February 1995 by the Company and certain affiliates of GTE relating to the Cellular Exchange, see "BUSINESS OF THE COMPANY -- The Company's Cellular Operations -- Cellular Exchange Transaction". For purposes of its opinion, Lazard Freres, with the Special Committee's concurrence, has ascribed no value to the Company's rights under either (i) the Competition Agreement or (ii) the Services Agreement. In rendering its opinion, Lazard Freres did not review this Information Statement or any similar document that may be prepared for use in connection with the proposed Merger. In addition, Lazard Freres was not asked by the Special Committee to solicit third party indications of interest in acquiring all or any part of the Company, nor did Lazard Freres seek any such offers. In connection with its review, Lazard Freres relied upon the accuracy and completeness of the financial and other information concerning the Company received by Lazard Freres and did not assume any responsibility for any independent verification of such information or any independent valuation or appraisal of any of the assets of the Company. With respect to the financial forecasts provided to it by the Company, Lazard Freres assumed that such financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of management of the Company as to the future financial performance of the Company. Lazard Freres assumed no responsibility for and expressed no view as to such forecasts or the assumptions upon which they were based. Lazard Freres' opinion was based on economic, monetary, market and other conditions as in effect on, and information made available to it as of, the date of the opinion. In rendering its opinion, Lazard Freres assumed that the Merger Agreement entered into among the parties thereto would be identical in all material respects to the Draft Merger Agreement, and that the Merger would be consummated on the terms described in the Draft Merger Agreement, without any waiver of any material terms or conditions by the Company. Lazard Freres also assumed that obtaining any necessary regulatory approvals for the Merger would not have an adverse effect on the Company. Lazard Freres has since advised the Special Committee that the changes included in the Merger Agreement from the Draft Merger Agreement on which its opinion was based would not have effected Lazard Freres ability to deliver its opinion set forth therein. In arriving at its opinion and making its presentation at the December 22 Special Committee Meeting, Lazard Freres considered and discussed certain financial analyses and other factors. In connection with its presentation, Lazard Freres presented the Special Committee with a summary of its analyses (the "Lazard 14 16 Freres Report"), which had been discussed in preliminary form at prior meetings of the Special Commitee. The following is a brief summary of the analyses performed by Lazard Freres in connection with rendering its opinion and discussed with the Special Committee at the December 22 Special Committee Meeting. In reviewing the background of GTE's initial offer to acquire the Class A Shares at $22.50 per share (the "GTE Initial Offer") and GTE's revised offer of $25.50 per share (the "GTE Revised Offer"), Lazard Freres noted the GTE Initial Offer implied a value for the Company's approximately 23.9 million POPs of approximately $194 of market capitalization (defined as the total market value of the Company's equity plus its net debt) per net POP, $181 of cellular asset value per net POP (which excludes from market capitalization the value of the Company's non-cellular assets), and $156 of cellular license value per net POP (which excludes from cellular asset value the value of the Company's non-cellular assets and the value of the Company's net cellular property, plant and equipment). Lazard Freres explained that the GTE Initial Offer also represented a 26.8% premium over the closing price per share of the Class A Shares on September 7, 1994, one day prior to GTE's announcement of the GTE Initial Offer, on which date the closing price per share of the Class A Shares was $17.75. In addition, Lazard Freres noted that the Revised GTE Offer recommended by the Special Committee implied a value of approximately $207 of market capitalization per net POP, $193 of cellular asset value per net POP, and $169 of cellular license value per net POP; the GTE Revised Offer also represented a 43.7% premium over the closing price per share of the Class A Shares one day prior to GTE's announcement of the GTE Initial Offer, and a 13.3% increase over the GTE Initial Offer. Lazard Freres explained that in arriving at its opinion, Lazard Freres performed a number of financial analyses, including: (i) a private market transaction analysis, in which Lazard Freres reviewed publicly available information on twenty-six private market sale transactions announced since July 1993, involving cellular operations in MSAs; (ii) a comparable public company analysis, in which Lazard Freres reviewed certain financial, operating, and stock market trading information of selected publicly traded companies engaged primarily in the cellular business; and (iii) a discounted cash flow analysis, in which Lazard Freres estimated the present value of the future cash flows that the management of the Company expects its businesses to generate. The material portions of the foregoing analyses (which are all of the material valuation methodologies performed by Lazard Freres) are summarized below. Private Market Transaction Analysis. Lazard Freres reviewed publicly available information on twenty-six private market sale transactions that were announced and consummated since July 1993, involving cellular operations in MSAs (the "Comparable Transactions"). Using regression analysis, private market value for cellular properties in the Comparable Transactions were estimated as a function of MSA ranking (e.g., New York City, as the largest MSA, ranked number 1). These results were then applied to the Company's MSA net POPs, with adjustments made to the resulting valuations depending upon (i) how expected population growth in each such MSA compared to the average population growth expected for the United States, as a whole; (ii) how median household income in each such MSA compared to median household income for the United States, as a whole; (iii) how average commuting time for each such MSA compared to average commuting time for the United States, as a whole; and (iv) whether each such MSA was contiguous to other MSAs or RSAs serviced by the Company. Such adjustments were calculated by applying to the valuation of each of the Company's MSA markets a 5% premium for each of the foregoing criterion which applied to such MSA market, and a 5% discount for each of the foregoing criterion which did not apply to such MSA market. Utilizing this methodology, the implied values of the Company's controlled MSA net POPs and non-controlled MSA net POPs were estimated at $211 per POP and $280 per POP, respectively. In view of the Company's substantial holdings of non-controlled MSA net POPs in large MSA markets, including non-controlling interests in four of the country's ten largest MSA markets (Los Angeles, San Francisco, Washington, D.C. and Houston), implied private market values for the Company's non-controlled MSA net POPs were also estimated utilizing a cash flow based comparable public company analysis to estimate the value of such non-controlled MSA net POPs as if such interests were held by a stand-alone company. In this analysis, which Lazard Freres analyzed for selected publicly traded companies in the cellular 15 17 communications business (the "Comparable Companies") the stock prices, market capitalizations, cellular asset values and publicly available estimates of projected operating cash flows for 1994 through 1996. This analysis showed an average ratio of market capitalization to projected cash flow in 1994 for the Comparable Companies of 23.9. Applying this multiple to the projected 1994 operating cash flow of the Company's non-controlled MSA net POPs provided by management, the implied value of such non-controlled MSA net POPs was estimated at $341 per POP. The Comparable Companies reviewed by Lazard Freres in this analysis included AirTouch Communications Inc., BCE Mobile Communications, Inc., Centennial Cellular Corp., Rogers Cantel Mobile Communications, Inc., United States Cellular Corporation, and Vanguard Cellular Systems, Inc. Implied private market valuations for the Company's net MSA POPs were then calculated for the Company's approximately 12.9 million controlled MSA net POPs (estimated at $211 per MSA net POP utilizing the regression analysis referred to above) and the Company's approximately 5.9 million non-controlled MSA net POPs (estimated ranging from $280 per MSA net POP utilizing the regression analysis referred to above to $341 per MSA net POP utilizing the comparable public company analysis referred to above). After adding (i) an assumed value of $130 per net POP for each of the Company's approximately 3.3 million controlled and clustered RSA net POPs (where "clustered RSA net POPs" refers to the POPs serviced by the Company in RSAs that are contiguous to other MSAs or RSAs serviced by the Company), (ii) an assumed value of $105 per net POP for each of the Company's approximately 0.5 million controlled and non-clustered RSA net POPs (where "non-clustered RSA net POPs" refers to the POPs that are not clustered RSA net POPs), (iii) an assumed value of $77 per net POP for each of the Company's approximately 1.2 million non-controlled RSA net POPs, (iv) an implied value of $300 million for the Company's wireless data business, estimated utilizing a discounted cash flow analysis described below, and (v) an assumed value of $30 million for the Company's international assets, and subtracting net debt, Lazard Freres arrived at estimated ranges of value for the common equity of the Company, including the Class A Shares. The assumed values referred to in clauses (i), (ii), (iii) and (v) above were derived based on consultations with management of the Company and Lazard Freres' experience with similar properties in other transactions. Utilizing this methodology, the implied full private market valuation of the Class A Shares was estimated at between $32.36 and $36.00 per share. While the estimated range of implied full private market valuations of the Class A Shares utilizing this methodology was higher than the GTE Revised Offer, the Lazard Freres Report noted that in acquisition transactions where an acquiror already owned a controlling position in the company to be acquired (as in the case of GTE's existing equity ownership of the Company), public stockholders would not obtain full private market valuation as a result of such acquisitions. Comparable Public Company Analysis. Lazard Freres compared certain publicly available financial data of selected publicly traded companies in the cellular communications business with the historical financial performance of the Company. Lazard Freres analyzed on a per net POP basis for each of the Company and such selected publicly traded companies, among other things, the market values (defined as the total market value of a company's equity), market capitalizations, cellular asset values and cellular license values. This analysis showed that the cellular asset values per net POP for such publicly traded companies ranged from an estimated low of $117 to an estimated high of $194, which compared to an implied value in the GTE Revised Offer of approximately $193 of cellular asset value per net POP. The publicly traded companies reviewed by Lazard Freres in this analysis included the Comparable Companies, Commnet Cellular, Inc. and PriCellular Corp. Utilizing this methodology, the implied value of the Class A Shares was estimated at between $23.29 and $25.68 per share, compared to $25.50 in the GTE Revised Offer. Discounted Cash Flow Analysis. Lazard Freres performed a discounted cash flow analysis of the Company based upon estimates of financial performance of the Company provided by management. Utilizing these projections, Lazard Freres discounted to the present (i) the projected stream of the Company's unlevered cash flows for its cellular business through the year 2004, and (ii) the projected terminal value of the Company's cellular business at such year based upon a range of multiples of cash flow in year 2004. Lazard applied several discount rates (ranging from 11% to 13%) and multiples of cash flow in year 2004 (ranging from 12.0 to 14.0). Similarly, for the Company's wireless data business, Lazard Freres discounted to the present projected streams of the Company's cash flows for its wireless data business and arrived at an 16 18 estimated valuation by applying several discount rates (ranging from 12.0% to 16.0%) and multiples of cash flow in year 2004 (ranging from 13.5 to 15.5). After adding an assumed value of $30 million for the Company's international assets and subtracting net debt, Lazard Freres arrived at estimated ranges of value for the common equity of the Company, including the Class A Shares. Utilizing this methodology, the implied value of the Class A Shares was estimated at between $19.99 and $28.60 per share, compared to $25.50 in the GTE Revised Offer. In arriving at its written opinion and in presenting the Lazard Freres Report to the Special Committee, Lazard Freres performed various financial analyses, portions of which are summarized above. The summary set forth above does not purport to be a complete description of Lazard Freres' analyses. Lazard Freres believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all such analyses, could create an incomplete view of the process underlying its analyses set forth in the opinion and the Lazard Freres Report. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. However, the Lazard Freres Report noted that the GTE Revised Offer fell within the range of implied values of the Class A Shares for each of the analyses performed and described above other than the private market transaction analysis, for which the Lazard Freres Report noted that since GTE already held a controlling position in the Company through its existing equity ownership, the Company's public stockholders would not obtain full private market valuation for the Class A Shares. With regard to the private market transaction analysis and the comparable public company analyses summarized above, Lazard Freres selected comparable public companies on the basis of various factors, including the size of the public company and similarity of the line of business; however, no public company utilized as a comparison is identical to the Company. Accordingly, an analysis of the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the acquisition or public trading value of the comparable companies to which the Company is being compared. In performing its analyses, Lazard Freres made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company. The analyses performed by Lazard Freres are not necessarily indicative of actual past or future results or values, which may be significantly more or less than such estimates. Additionally, analyses relating to the values of businesses do not purport to be appraisals or to reflect the price at which such companies may actually be sold, and such estimates are inherently subject to uncertainty. Lazard Freres regularly engages in the valuation of businesses and their securities in connection with mergers and acquisitions and for other purposes. The Special Committee selected Lazard Freres to act as its financial advisor on the basis of Lazard Freres' qualifications, expertise and reputation in investment banking, in general, and mergers and acquisitions, specifically. The Company has paid Lazard Freres a retainer fee of $250,000 and an additional fee of $500,000 upon delivery of its written opinion. The Company has also agreed to reimburse Lazard Freres for its out-of-pocket expenses, including reasonable fees and disbursements of counsel, and to indemnify Lazard Freres and its partners, employees, agents, affiliates and controlling persons against certain liabilities under the federal securities laws, relating to or arising out of its engagement. DETERMINATION OF THE FAIRNESS OF THE MERGER BY GTE, CONTEL AND CCI ACQUISITION GTE, Contel and CCI Acquisition reasonably believe that the Merger is fair to the Class A Stockholders. GTE, Contel and CCI Acquisition have concluded that the price to be paid to the Class A Stockholders is fair based solely on the previously described determinations of the Special Committee and Lazard Freres. The material factors considered in making such a determination are those that were considered by the Special Committee. See " -- Determination of the Special Committee and the Board; Fairness of the Merger". GTE, Contel and CCI Acquisition also believe that the Merger is procedurally fair because, in addition to the appraisal rights granted to the Class A Stockholders under the DGCL described below in "DISSENTERS' RIGHTS OF APPRAISAL", the final price and terms were negotiated in good faith by GTE and its financial 17 19 advisors and the Special Committee and the Merger was unanimously approved by the Company's Board including the independent directors of the Company. GTE retained its financial advisors to assist in the negotiation and determine whether the transaction was fair to GTE's shareholders. OPINIONS OF FINANCIAL ADVISORS TO GTE GTE was assisted in its negotiations with the Special Committee and Lazard Freres by its financial advisors, Merrill Lynch and PaineWebber. Merrill Lynch and PaineWebber regularly value businesses and their securities and provide advice in connection with merger and acquisition transactions. Merrill Lynch and PaineWebber previously served as financial advisors to GTE in connection with the merger of a wholly-owned subsidiary of GTE with and into Contel. As part of the agreements with Merrill Lynch and PaineWebber with respect to that transaction, GTE agreed to retain Merrill Lynch and PaineWebber as financial advisors in connection with any related restructuring. Based upon that agreement and the expertise of both Merrill Lynch and PaineWebber in evaluating transactions similar to the Merger, GTE decided to retain Merrill Lynch and PaineWebber as its financial advisors in connection with the Merger. PaineWebber has provided investment banking and other services to GTE from time to time, including serving as underwriter in connection with the issuance of GTE's debt and equity financings. During the last two years, PaineWebber has earned compensation with respect to all such services, other than fees in connection with the Merger, of approximately $5.0 million. In the future, GTE may retain PaineWebber from time to time for similar services. In the ordinary course of its business, PaineWebber actively trades debt and equity securities of GTE for its own account and the accounts of its customers, and PaineWebber therefore may, from time to time, hold a long or short position in such securities. Merrill Lynch has also provided investment banking and other services to GTE from time to time, including serving as a dealer in connection with the issuance of GTE's commercial paper and as an underwriter in connection with its issuance of its debt and equity financings. During the last two years, Merrill Lynch has earned compensation with respect to all such services, other than fees in connection with the Merger, of approximately $7.4 million. Merrill Lynch is presently providing GTE with financial and strategic advice in connection with a matter other than the Merger, for which it is receiving a fee of $150,000 per month which commenced in August 1994 and will continue until such matter is completed. In the future, GTE may retain Merrill Lynch from time to time for similar services. In the ordinary course of its business, Merrill Lynch actively trades debt and equity securities of GTE for its own account and the accounts of its customers, and Merrill Lynch therefore may, from time to time, hold a long or short position in such securities. In connection with the transaction, the GTE Financial Advisors rendered opinions to GTE to the effect that the price to be paid for the Class A Shares in the Merger is fair to GTE from a financial point of view. A copy of the fairness opinions of the GTE Financial Advisors are attached to this Information Statement as Exhibits C-1 and C-2. Additional copies of such opinions are available for inspection and copying at the principal executive offices of GTE during regular business hours and are also available upon request directed to GTE, One Stamford Forum, Stamford, CT 06904, Attention: Ronald J. Tuccillo, Assistant Secretary. Shareholders are cautioned that the opinions of the GTE Financial Advisors were prepared solely for the benefit of GTE, to provide GTE advice regarding the fairness of the price of $25.50 per Class A Share to GTE from a financial point of view. The GTE Financial Advisors were not engaged to evaluate the fairness of the transaction or the price to Class A Stockholders. The GTE Financial Advisors believe that their analyses must be considered as a whole and that selecting portions of their analyses and of the factors considered by them without considering all factors and analyses, could create an incomplete view of the processes underlying their analyses and opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analyses or summary descriptions. In rendering their opinions, the GTE Financial Advisors did not make or seek to obtain appraisals of the Company's assets in connection with their analyses of the valuation of the Company and did not determine the amount of consideration to be paid in the Merger. In addition, the GTE Financial Advisors were not requested to and did not solicit third parties who might be interested in acquiring all or any part of the Company. In their 18 20 respective analyses, the GTE Financial Advisors made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the Company's control. Any estimates of value contained therein are not necessarily indicative of actual values, which may be significantly more or less favorable than as set forth therein. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which companies may actually be sold. Because such estimates are inherently subject to uncertainty, none of the Company, GTE or the GTE Financial Advisors or any other person assumes responsibility for their accuracy. In arriving at their opinions, the GTE Financial Advisors (a) reviewed the Company's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 31, 1993 and the Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ending March 31, June 30, and September 30, 1994; (b) reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of the Company, furnished to them by the Company; (c) conducted discussions with members of senior management of the Company concerning its businesses and prospects; (d) reviewed the historical market prices and trading activity for the Class A Shares and compared them with that of certain publicly traded companies which they deemed to be reasonably similar to the Company; (e) compared the results of operations of the Company with that of certain companies which they deemed to be reasonably similar to the Company; (f) compared the proposed financial terms of the transactions contemplated by the Merger Agreement with the financial terms of certain other mergers and acquisitions which they deemed to be relevant; (g) considered the pro forma effect of the Merger on GTE's capitalization ratios, earnings and cash flow; (h) considered a discounted cash flow analysis on future cash flows that management of the Company expects the Company to generate; (i) reviewed a draft of the Merger Agreement; and (j) reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as they deemed necessary, including their assessments of general economic, market and monetary conditions. The GTE Financial Advisors will each receive an aggregate fee of $500,000 in connection with the transaction. A retention fee of $50,000 each was paid at the time the GTE Financial Advisors were retained and a fee of $450,000 each will be paid at the time of the Merger. In addition, GTE has agreed to reimburse the GTE Financial Advisors for all of their reasonable out-of-pocket expenses, including but not limited to, legal fees and travel expenses. GTE also agreed to indemnify and hold harmless the GTE Financial Advisors against certain liabilities, including liabilities under the federal securities laws or arising out of or in connection with their rendering of services. In preparing their opinions, the GTE Financial Advisors relied on the accuracy and completeness of all information supplied or otherwise made available to them by the Company, and the GTE Financial Advisors have not assumed any responsibility to independently verify such information. With respect to the financial forecasts furnished by the Company, the GTE Financial Advisors assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Company's management as to the expected future performance of the Company. The opinions of the GTE Financial Advisors do not address the relative merits of the Merger and any other transactions or business strategies which may have been discussed by the Board of Directors of GTE as alternatives to the Merger or the decision of the Board of Directors of GTE to proceed with the Merger. In rendering their opinions, the GTE Financial Advisors were not engaged to act as an agent or fiduciary of GTE's equity holders or any other third party. Summary of PaineWebber's Opinion to the Board of GTE Corporation The following paragraphs summarize the material financial and comparative analyses performed by PaineWebber in arriving at the PaineWebber opinion. The following does not purport to be a complete description of the analyses performed, or the matters considered by PaineWebber in arriving at the PaineWebber opinion. PaineWebber delivered its December 1994 Opinion Letter (the "PaineWebber Opinion Letter") to the Board of Directors of GTE at a meeting held on December 27, 1994. The PaineWebber Opinion Letter relied on the valuation methods described below to determine a range of values for the Company. 19 21 Discounted Cash Flow Analysis. PaineWebber prepared and reviewed the results of an unlevered discounted cash flow analysis of the Company based on certain operating and financial assumptions. The assumptions were based on two sets of financial projections provided to PaineWebber by the management of the Company: a five year strategic plan and a ten year projection. For a discussion of these projections, see "PROJECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY". The purpose of the discounted cash flow analysis was to determine the present value of each of the Company's unlevered after-tax free cash flows over the projected periods. To calculate the value of a business using a discounted cash flow analysis, the projected cash flows for each year together with the estimated value of the business in the final year of the projected period ("Terminal Value") are discounted to the present using various assumed discount rates. PaineWebber estimated the Terminal Value for the Company in two components. First, PaineWebber applied an earnings before interest, taxes, depreciation and amortization ("EBITDA") multiple to the Company's EBITDA, before minority interest and equity in unconsolidated affiliates, in the final year of the projected period. PaineWebber then applied a price/earnings multiple ("P/E multiple") to the net tax-affected amount of minority interests and equity in earnings of unconsolidated affiliates (discounted by 30% to reflect a minority interest). After discounting the projected cash flows and the Terminal Value, PaineWebber added the value of the Company's 10% interest in licenses in the states of Sonora and Sinaloa, Mexico, calculated as $48 per POP for the Company's approximately 0.4 million POPs. The sum of these components derived the implied total market capitalization of the Company at December 31, 1994. PaineWebber then subtracted the Company's estimated net debt at December 31, 1994 of $2,114.5 million and divided by the number of shares outstanding at December 31, 1994 of 100.0 million to determine the implied equity value per Class A Share. PaineWebber considered exit EBITDA multiples ranging from 10.5x to 12.5x for both sets of projections and exit P/E multiples ranging from 18.0x to 22.0x for the five year projections and 16.0x to 20.0x for the ten year projections. For the purposes of determining the appropriate discount rate to be applied in the discounted cash flow analyses, PaineWebber considered weighted average costs of capital ranging from 13.0% to 15.0% to discount all values from December 31, 1999 to January 1, 1995 and 10.0% to 12.0% to discount all values from December 31, 2004 to January 1, 2000. This analysis resulted in a range of equity values per share for the Class A Shares of between $19.56 to $30.46 using the five year projections and $13.57 to $24.31 using the ten year projections. PaineWebber noted that the per share price of $25.50 fell within the range implied by the five year projections. Due to the inherently less certain nature of the ten year projections, and the fact that the Company had advised PaineWebber that it had not prepared the ten year projections as part of its normal planning process, PaineWebber relied more heavily on the analysis derived from the five year projections. Comparable Transaction Analysis. PaineWebber reviewed several publicly announced merger and acquisition transactions in the cellular communications industry, together with information regarding certain transactions that GTE furnished to PaineWebber. The publicly announced transactions examined by PaineWebber included the following: McCaw Cellular Communications Inc.'s private market value guarantee of LIN Broadcasting Corp.; AirTouch Communications Inc.'s private market value guarantee of Cellular Communications Inc., Compagnie Generale des Eaux's indirect acquisition of cellular properties from SBC Communications Inc.; Independent Cellular Network, Inc.'s acquisition of cellular properties from C-TEC Corp.; Southwestern Bell Corp.'s acquisition of Associated Communications Corp.; Southwestern Bell Corp.'s acquisition of cellular properties from GTE Mobilnet; Century Telephone Enterprises Inc.'s acquisition of Celutel Inc.; AT&T Corp.'s then pending acquisition of McCaw Cellular Communications Inc.; InterCel Inc.'s acquisition of cellular properties from Unity Cellular Systems, Inc.; ALLTEL Corp.'s acquisition of cellular properties from Contel Cellular Inc.; Associated Communications Corp.'s acquisition of cellular properties from McCaw Cellular Communications Inc.; ALLTEL Corp.'s acquisition of cellular properties from SLT Communications Inc.; Sprint Corp.'s acquisition of cellular properties from Centel Corp.; Bell Atlantic Corp.'s acquisition of cellular properties from Metro Mobile CTS Inc.; McCaw Cellular Communications Inc.'s acquisition of cellular properties from Crowley Cellular Telecommunications Inc.; Ameritech Corp.'s acquisition of cellular properties from Cybertel Financial and Cybertel RSA Cellular L.P.; Comcast Corporation's acquisition of cellular properties from Metromedia Inc.; BellSouth Corp.'s acquisition of cellular 20 22 properties from McCaw Cellular Communications Inc.; and US WEST, Inc.'s acquisition of the minority interest in US WEST NewVector. Using information regarding the MSA market rank of the target's POPs in the comparable transactions, PaineWebber developed ranges of assumed private market values for the various categories of MSA market rank. These value ranges were: MSA markets ranked 1 to 25: $250 per POP to $350 per POP; MSA markets ranked 26 to 75: $175 per POP to $250 per POP; MSA markets ranked 76 to 125: $150 per POP to $200 per POP; MSA markets ranked 126 to 175: $125 per POP to $175 per POP; MSA markets ranked 176 to 275: $125 per POP to $150 per POP; and MSA markets ranked 276 and above: $75 per POP to $125 per POP. Based on the RSA transactions examined, PaineWebber developed a valuation assumption for RSA POPs of $90 per POP. PaineWebber then applied these per POP valuation ranges to the Company's POPs. PaineWebber applied a range of discounts between 0% and 30% to the Company's non-controlled POPs. PaineWebber selected this range of discounts based on its experience with similar transactions and its analysis of publicly disclosed information regarding other transactions. This methodology resulted in a range of values per Class A Share of $12.75 to $30.30. PaineWebber noted that the per share price of $25.50 fell within this range. Comparable Public Companies Analysis. PaineWebber compared selected historical stock and earnings data and financial ratios for the Company to the corresponding data and ratios of certain publicly-traded companies which PaineWebber deemed to be comparable to the Company. For the purposes of the PaineWebber Opinion Letter, the set of companies which PaineWebber deemed comparable to the Company was comprised of AirTouch Communications Inc., Cellular Communications, Inc., Cellular Communications of Puerto Rico, Inc., Centennial Cellular Corporation, Commnet Cellular, Inc., InterCel Inc., LIN Broadcasting Corporation, United States Cellular Corporation and Vanguard Cellular Systems, Inc. (the "Comparable Group"). This analysis resulted in a range of market capitalization of cellular assets (defined as total market capitalization, less minority interests, less estimated public market value of non-cellular assets) per POP of $330 to $111 with a median of $170 and a range of market capitalization of MSA cellular assets (defined as market capitalization of cellular assets less the value of RSA cellular assets at $90 per RSA POP) per POP from $451 to $133 with a median of $212. PaineWebber noted that the proposed price of $25.50 implied a market capitalization of cellular assets per POP for the Company of $198 and a market capitalization of MSA cellular assets per POP of $224. Minority Buy Out Analysis. PaineWebber examined the seventy-seven minority buy out transactions since January 1, 1988 for which PaineWebber was able to find adequate public information. Due to the limited information available regarding minority buy out transactions in the cellular communications industry, the analysis of transactions was not limited to those in the cellular communications industry. PaineWebber examined the transactions on the basis of percentage change from initial offer price to final offer price and percentage premium of the offer price to the trading price per share at six months prior to announcement, one month prior to announcement, one day prior to announcement, one day after announcement, the latest twelve months ("LTM") high and the LTM low. This analysis resulted in average premiums of 11.7% (percent change from initial offer price to final offer price) and 39.8%, 43.3%, 31.5%, 10.9%, 1.8% and 85.4%, respectively and resulted in median premiums of 4.6% (percent change from initial offer price to final offer price) and 33.3%, 33.3%, 20.4%, 7.4%, 2.2% and 58.9%, respectively. PaineWebber examined the premiums paid in the only recent minority buy out in the cellular communications industry, US WEST, Inc.'s purchase of US WEST NewVector Group, Inc. on November 12, 1990, which resulted in premiums of 22.2% (percent change from initial offer price to final offer price) and 47.9%, 74.3%, 44.3%, 28.0%, 2.9% and 122.8%, respectively. PaineWebber noted that the per share price of $25.50 implied premiums to the trading price per share of the Class A Shares of 13.3% (percent change from initial offer price to final offer price) and 56.9%, 39.7%, 43.7%, 10.3%, 6.3% and 96.2%, respectively. PaineWebber noted that these implied premiums were within the range of transactions examined. Historical Market Valuation and Ownership Analysis. PaineWebber reviewed the daily performance of the intra-day and closing market prices per share and trading volumes of the Class A Shares from April 21, 21 23 1988 to December 2, 1994. This analysis was utilized to provide historical background for the manner in which the public trading market had valued the Class A Shares since their initial public offering. PaineWebber also reviewed the volume of the Class A Shares which traded and the prices at which the Class A Shares traded for the period January 1, 1994 to December 5, 1994 and since the announcement of the Merger on September 8, 1994 to December 5, 1994. The implied premiums to the market price of the Class A Shares at specified intervals is set forth above in "SPECIAL FACTORS -- Opinions of Financial Advisors to GTE -- Summary of PaineWebber's Opinion to the Board of GTE Corporation -- Minority Buy Out Analysis". Summary of Merrill Lynch's Opinion to the Board of GTE Corporation The following paragraphs summarize the material financial and comparative analyses performed by Merrill Lynch in arriving at the Merrill Lynch Opinion. The following does not purport to be a complete description of the analyses performed, or the matters considered by Merrill Lynch in arriving at the Merrill Lynch Opinion. Merrill Lynch delivered its December 1994 Opinion Letter (the "Merrill Opinion Letter") to the Board of Directors of GTE at a meeting held on December 27, 1994. The Merrill Opinion Letter relied primarily upon two valuation methods to determine a range of values for the Company: a discounted cash flow analysis and a private market transaction analysis. In addition, the Merrill Opinion Letter relied upon analysis of comparable public companies, premiums paid in similar transactions, pro forma merger consequences, and historical market valuation and ownership. Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash flow analysis based upon forecasts provided by the Company's management. The Company's management provided Merrill Lynch with two sets of financial forecasts: a five year strategic plan projection and a ten year projection. For a discussion of these projections, see "PROJECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY". Due to the inherently less certain nature of the 10-year projections, and the fact that the Company had advised Merrill Lynch that it had not prepared the 10-year projections as part of its normal planning process, Merrill Lynch relied more heavily on the analysis derived from the five year projections. The following assumptions were made in the discounted cash flow analysis: (1) a range of discount rates from 12.0% to 14.0% was used to discount all values from December 31, 1999 to January 1, 1995 and in the case of the 10-year discounted cash flow analysis, a range of discounted rates from 10.0% to 12.0% was used to discount all values from December 31, 2004 to January 1, 2000; and (2) a range of EBITDA exit multiples from 10.0x to 12.0x was used to determine the terminal value using the EBITDA exit methodology. Merrill Lynch discounted to present value the projected five year and ten year streams of free cash flow, the year 1999 terminal value and the year 2004 terminal value based upon the ranges of discount rates and EBITDA multiples described above. Total enterprise value was adjusted for the Company's minority interest obligations and unconsolidated equity investments. Based on the exit multiple methodology, a P/E multiple of 16.0x to 20.0x was applied to the net amount of the minority interest obligations and the tax-affected equity income in unconsolidated subsidiaries (discounted 30% for the minority position) in the terminal year. Total enterprise value was also adjusted upward by the value of the Company's 10% interest in licenses in the states of Sonora and Sinaloa, Mexico, calculated as $48 per POP for the Company's approximately 0.4 million POPs. Utilizing the 5-year projections Merrill Lynch arrived at a range of values per Class A Share of approximately $19.63-$30.90 per share, and utilizing the 10-year projections Merrill Lynch arrived at a range of values per Class A Share of approximately $14.93-$25.97 per share. Comparable Transaction Analysis. Merrill Lynch reviewed several publicly announced merger and acquisition transactions in the cellular communications industry, together with information regarding certain transactions that GTE furnished to Merrill Lynch. The publicly announced transactions examined by Merrill Lynch included the following: McCaw Cellular Communications Inc.'s private market value guarantee of LIN Broadcasting Corp.; AirTouch Communications Inc.'s private market value guarantee of Cellular Communications Inc.; Compagnie Generale des Eaux's indirect acquisition of cellular properties from SBC Communications Inc.; Independent Cellular Network, Inc.'s acquisition of cellular properties from C-TEC Corp.; Southwestern Bell Corp.'s acquisition of Associated Communications Corp.; Southwestern Bell Corp.'s acquisition of cellular properties from GTE Mobilnet; Century Telephone Enterprises Inc.'s acquisition of 22 24 Celutel Inc.; AT&T Corp.'s then pending acquisition of McCaw Cellular Communications Inc.; InterCel Inc.'s acquisition of cellular properties from Unity Cellular Systems, Inc.; ALLTEL Corp.'s acquisition of cellular properties from Contel Cellular Inc.; Associated Communications Corp.'s acquisition of cellular properties from McCaw Cellular Communications Inc.; ALLTEL Corp.'s acquisition of cellular properties from SLT Communications Inc.; Sprint Corp.'s acquisition of cellular properties from Centel Corp.; Bell Atlantic Corp.'s acquisition of cellular properties from Metro Mobile CTS Inc.; McCaw Cellular Communications Inc.'s acquisition of cellular properties from Crowley Cellular Telecommunications Inc.; Ameritech Corp.'s acquisition of cellular properties from Cybertel Financial and Cybertel RSA Cellular L.P.; Comcast Corporation's acquisition of cellular properties from Metromedia Inc.; BellSouth Corp.'s acquisition of cellular properties from McCaw Cellular Communications Inc.; and US WEST, Inc.'s acquisition of the minority interest in US WEST NewVector. Using information regarding the MSA market rank of the target's POPs in the comparable transactions, Merrill Lynch developed ranges of assumed private market values for the various categories of MSA market rank. These value ranges were: MSA markets ranked 1 to 25: $250 per POP to $350 per POP; MSA markets ranked 26 to 75: $175 per POP to $250 per POP; MSA markets ranked 76 to 125: $150 per POP to $200 per POP; MSA markets ranked 126 to 175: $125 per POP to $175 per POP; MSA markets ranked 176 to 275: $125 per POP to $150 per POP; and MSA markets ranked 276 and above: $75 per POP to $125 per POP. Based on the RSA transactions examined, Merrill Lynch developed a valuation assumption for RSA POPs of $90 per POP. Merrill Lynch applied a range of discounts between 0% and 30% to the Company's non-controlled POPs to reflect reduced value based on absence of control. Merrill Lynch selected this range of discounts based on its experience with similar transactions and its analysis of publicly-disclosed information regarding other transactions. This methodology resulted in a range of values per Class A Share of $12.76 to $30.31 per share. Comparable Public Companies Analysis. Merrill Lynch compared selected historical stock and earnings data and financial ratios for the Company to the corresponding data and ratios of certain publicly-traded companies which Merrill Lynch deemed to be comparable to the Company. For the purposes of the Merrill Opinion Letter, the set of companies which Merrill Lynch deemed comparable to the Company was the Comparable Group. This analysis resulted in a range of market capitalization of cellular assets (defined as total market capitalization, less minority interests, less estimated public market value of non-cellular assets) per POP of $331 to $115 with a median of $169 and a range of market capitalization of MSA cellular assets (defined as market capitalization of cellular assets, less value of RSA assets at $90 per POP) per POP from $343 to $133 with a median of $215. Merrill Lynch noted that the price of $25.50 per Class A Share implied a market capitalization of cellular assets per POP for the Company of $198 and a market capitalization of MSA cellular assets per POP of $224. Premiums Paid in Selected Minority Buy Outs; Minority Buy Out Analysis. Merrill Lynch examined the seventy-seven minority buy out transactions since January 1, 1988 for which Merrill Lynch was able to find adequate public information. Due to lack of available information regarding minority buy out transactions in the cellular communications industry, these transactions were not limited to the cellular communications industry. Merrill Lynch examined these transactions on the basis of percentage change from initial offer price to the final offer price and percentage premium of the offer price to the trading price per share at six months prior to announcement, one month prior to announcement, one day prior to announcement, one day after announcement, the LTM high and the LTM low. This analysis resulted in average premiums of 11.7% (% change from initial offer price to final offer price) and 39.8%, 43.3%, 31.5%, 10.9%, 1.8% and 85.4%, respectively, and resulted in median premiums of 4.6% (percent change from initial offer price to final offer price) and 33.3%, 33.3%, 20.4%, 7.4%, 2.2%, and 58.9%, respectively. Merrill Lynch examined the premiums paid in the only recent minority buy out in the cellular communications industry examined by Merrill Lynch, US WEST, Inc's purchase of US WEST NewVector Group, Inc. on November 12, 1990, which resulted in premiums of 22.2% (percent change from initial offer price to final offer price) and 47.9%, 74.3%, 44.3%, 28.0%, 2.9% and 122.8%, respectively. Merrill Lynch noted that the price of $25.50 per Class A Share implied premiums to the trading price per share of the Class A Shares of 13.3% (percent change from initial offer 23 25 price to final offer price) and 56.9%, 39.7%, 43.7%, 10.3%, 6.3% and 96.2%, respectively. Merrill Lynch noted that these implied premiums were within the range of transactions examined. Pro Forma Merger Consequences. Merrill Lynch examined the potential impact of the Merger on the financial results and capitalization of GTE and found it to be immaterial. Historical Market Valuation and Ownership Analysis. Merrill Lynch reviewed the daily performance of the intra-day and closing market prices per share and trading volumes of the Class A Shares from April 21, 1988 to December 2, 1994. This analysis was utilized to provide historical background for the manner in which the public trading market had valued the Class A Shares since their initial public offering. Merrill Lynch also reviewed the volume of the Class A Shares which traded and the prices at which the Class A Shares traded for the period January 1, 1994 to December 5, 1994 and since the announcement of the Merger on September 8, 1994 to December 5, 1994. The implied premiums to the market price of the Class A Shares at specified intervals is set forth above in "-- Opinions of Financial Advisors to GTE -- Summary of Merrill Lynch's Opinion to the Board of GTE Corporation -- Premiums Paid in Selected Minority Buy Outs; Minority Buy Out Analysis". CERTAIN LITIGATION Following the public announcement of the proposed Merger on September 8, 1994, four class action lawsuits were brought on behalf of the Class A Stockholders of the Company alleging that the announced purchase price of $22.50 per Class A Share was inadequate. On November 29, 1994 counsel for GTE, Contel and CCI Acquisition began discussions with plaintiffs' counsel regarding the lawsuits. At a subsequent meeting, counsel for GTE, Contel and CCI Acquisition suggested that plaintiffs' counsel meet with counsel for the Special Committee and discuss the status and substance of negotiations between GTE and the Special Committee. Plaintiffs' counsel subsequently met with counsel for the Special Committee, reviewed certain financial information and met with and asked questions of the Special Committee and its financial advisors. On December 23, 1994 a tentative settlement agreement was reached with plaintiffs, subject to confirmatory discovery. The tentative settlement approves an increased price of $25.50 per Class A Share and the payment of $525,000 in plaintiffs' counsel fees and expenses. The tentative settlement agreement does not include provisions permitting Class A Stockholders to opt out of the settlement agreement. The confirmatory discovery was subsequently completed by plaintiffs' counsel and all documentation necessary to effect the settlement was approved by the parties to the lawsuits and their counsel. Such documentation is in the process of being submitted to the Delaware Court of Chancery. Following submission, a date will be set for a final hearing to approve the settlement. WRITTEN CONSENT The Record Date for stockholders entitled to notice of or entitled to give consent to the Merger was March 16, 1995. As of the Record Date there were issued and outstanding 9,970,953 Class A Shares and 90,000,000 Class B Shares. Each Class A Share is entitled to one vote per share and each Class B Share is entitled to five votes per share. On the Record Date, Contel owned 90,000,000 Class B Shares, which accounted for approximately 98% of the combined voting power of the outstanding Class A Shares and Class B Shares. Pursuant to the DGCL, Contel, as holder of record of more than 50% of the combined voting power of the Class A Shares and Class B Shares, approved the Merger by written consent on March , 1995. Consequently, no action on the part of any other stockholder of the Company is necessary to authorize or to consummate the Merger and no meeting of stockholders of the Company will be held in connection with the Merger. MERGER CONSIDERATION The aggregate consideration to be paid to Class A Stockholders in connection with the Merger is approximately $254 million. The acquisition of the minority interest in the Company will be financed through equity contributions from GTE. GTE will make an equity contribution to Contel and Contel will in turn make an equity contribution to CCI Acquisition. GTE will finance such equity contributions through cash, the 24 26 issuance of short term debt or a combination of cash and short term debt. Any short term debt required to fund the transaction is expected to be issued prior to the Effective Time with terms comparable to those pursuant to which GTE periodically issues short term debt in the ordinary course of its business. GTE plans to issue commercial paper to the extent any short term debt is required to fund the payment of the Merger Consideration. No specific plans have been made to refinance or repay the short term debt. Such short term debt will be either retired through internally generated funds or will remain outstanding until such time as GTE's total short term debt balance is replaced with long term funding in accordance with GTE's internal policies. ACCOUNTING TREATMENT OF THE MERGER The purchase method of accounting will be used to account for the Merger. After the Merger, GTE, through its ownership of Contel, will increase its interest in the Company from 90% to 100%. Because the Company's accumulated losses exceed the amount attributable to the 10% minority ownership interest, GTE currently is required to record 100% of the net book value and net income or net loss of the Company in its financial statements. Accordingly, the Merger will not alter GTE's present interest in such net book value or net income or loss of the Company. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The receipt of cash for Class A Shares purchased pursuant to the Merger will be a taxable transaction for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and may also be a taxable transaction under applicable state, local, foreign or other tax laws. Generally, a Class A Stockholder will recognize a gain or loss equal to the difference between such holder's basis in the Class A Shares held by such holder and the amount of cash received in exchange therefor pursuant to the Merger. The gain or loss will be treated as a capital gain or loss if the Class A Shares are held as capital assets. The gain or loss will be considered to be a long-term capital gain or loss if, on the date the stockholder receives cash for the Class A Shares, those shares have been held by such stockholder for more than one year. For 1995, the maximum federal income tax rate for individuals on net long-term capital gains is 28%, and the maximum individual marginal tax rate on net short-term capital gains and on ordinary income is 39.6%. The maximum federal income tax rate for corporations is 35% on all capital gains and ordinary income. If a Class A Stockholder recognizes a capital loss as a result of receiving cash for the Class A Shares pursuant to the Merger, such loss will only be deductible to the extent of other capital gains, plus, in the case of an individual Class A Stockholder, $3,000 per year. The federal income tax consequences described in the preceding paragraph may not apply to (i) Class A Shares acquired upon exercise of incentive stock options, non-qualified stock options, or otherwise as compensation, (ii) certain tax-exempt stockholders, (iii) stockholders that are subject to special tax provisions, such as banks and insurance companies and (iv) certain nonresident aliens and foreign corporations. THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR GENERAL INFORMATION ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS INFORMATION STATEMENT. EACH CLASS A STOCKHOLDER IS URGED TO CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS). The Merger will not cause additional federal tax liability for the Company, GTE, Contel or CCI Acquisition. 25 27 PLANS FOR THE COMPANY; CERTAIN EFFECTS OF THE MERGER Plans for the Company. Over time GTE intends to combine the operations of the Company and its other cellular subsidiary, GTE Mobilnet. A merger transition team has been formed to develop plans for the consolidation. The merger transition team has recommended that certain functions be centralized in Atlanta and that area operations focus on tactical operational issues, network planning, construction/maintenance, revenue goals and sales activities. The merger transition team is continuing to examine both the nature of GTE's cellular communications business and the structure of the cellular communications market. As part of the consolidation process most of the intercompany arrangements between GTE, Contel and the Company will be restructured or eliminated. For a description of the material intercompany arrangements see "RELATED PARTY TRANSACTIONS". It is expected that the Competition Agreement will be terminated immediately. The details of how other intercompany arrangements will be treated in the consolidation have not been determined at this time. Terry S. Parker who served as Chairman of the Company as well as Senior Vice President of GTE and President of Personal Communications Services -- GTE Service Corporation, will retire from GTE and resigned from those offices effective March 1, 1995. GTE plans to consolidate its cellular businesses under Personal Communications Services -- GTE Service Corporation. Mark S. Feighner has been named President of Personal Communications Services -- GTE Service Corporation. Certain Effects of the Merger on the Class A Stockholders. As a result of the transaction, the Class A Stockholders will no longer have an equity interest in the Company and, accordingly, will not continue to participate in the results of the Company as an equity holder. However, they will receive cash for their interest. For a discussion of the tax consequences of the Merger on the Class A Stockholders see "-- Certain Federal Income Tax Consequences of the Merger". Certain Effects of the Merger on GTE, Contel and the Company. As a result of the Merger, CCI Acquisition will merge into the Company and cease to exist and the Company will become wholly owned by Contel. The Merger will permit GTE to consolidate and realign its cellular businesses over time as described above under "-- Plans for the Company". The Company's Class A Shares will be deregistered and delisted as described below. The Merger will permit GTE and Contel to obtain certain operating efficiencies but will otherwise have no material effect on the operations of GTE, Contel or the Company. Deregistration and Delisting. The Company is currently subject to the informational filing requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and is required to file reports and other information with the Securities and Exchange Commission (the "Commission") relating to its business, financial statements and other matters. As a result of the Merger, there will cease to be any public market for the Class A Shares, and after the Effective Time (as defined below), the Class A Shares will cease to be quoted on the Nasdaq National Market. When the Merger occurs, the Surviving Corporation is expected to file with the Commission a Certification and Notice of Termination of Registration of the Class A Shares under the Exchange Act (the "Certification"). Upon filing of the Certification, the Surviving Corporation will no longer be required to file reports and other information under the Exchange Act. Once the Certification has been filed, the Exchange Act (including the proxy solicitation provisions of Section 14(a), the periodic reporting requirements of Section 13 and the short swing trading provisions of Section 16(b)) will no longer apply to the Surviving Corporation. Additionally, upon the termination of the registration of the Class A Shares, the shares will no longer constitute "margin securities" under the regulations of the Board of Governors of the Federal Reserve System. 26 28 THE MERGER AGREEMENT The following summary of the Merger Agreement is qualified in its entirety by reference to the provisions of the Merger Agreement, the full text of which is attached hereto as Exhibit A and incorporated by reference herein. GENERAL CCI Acquisition is a wholly-owned subsidiary of Contel formed for the purpose of the Merger. Contel, a wholly owned subsidiary of GTE, has adopted a plan of liquidation. The Merger Agreement provides, upon the terms and subject to the conditions set forth therein, that CCI Acquisition will be merged with and into the Company and that the Company will be the Surviving Corporation. Pursuant to the Merger, (i) each Class A Share outstanding immediately prior to the time of the filing of a certificate of merger with the Secretary of State of the State of Delaware (the "Effective Time"), other than any Class A Shares as to which appraisal rights have been properly exercised under the DGCL, will be converted into the right to receive the Merger Consideration, (ii) each Class A Share held by the Company and each share of common stock of CCI Acquisition outstanding immediately prior to the Effective Time will be cancelled, and no payment will be made with respect thereto and (iii) each outstanding Class B Share will continue to be outstanding. DESIGNATION OF DIRECTORS; CERTIFICATE OF INCORPORATION AND BY-LAWS The Merger Agreement provides that the directors of the Company at the Effective Time will be the directors of the Surviving Corporation and will hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the certificate of incorporation and by-laws of the Surviving Corporation. The certificate of incorporation and by-laws of the Company shall be the certificate of incorporation and by-laws of the Surviving Corporation. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains standard representations and warranties on the part of GTE, Contel, CCI Acquisition and the Company relating to, among other things, due organization and qualification and authority to enter into and perform the respective obligations of the parties under the Merger Agreement. In addition, CCI Acquisition represents in the Merger Agreement that it has not engaged in any business activities other than those related to the acquisition of the Company. INDEMNIFICATION AND OTHER COVENANTS Pursuant to the Merger Agreement, the Company has agreed that it will indemnify and hold harmless, and, after the Effective Time, the Surviving Corporation and GTE will indemnify and hold harmless, each present and former director and officer of the Company (each an "Indemnified Party") against any losses, claims, damages, liabilities, costs, expenses, judgments and amounts paid in settlement arising out of or pertaining to any action or omission occurring prior to the Effective Time (including without limitation, any actions or omissions which arise out of or relate to the transactions contemplated by the Merger Agreement) to the full extent permitted under the DGCL, provided that any determination required to be made with respect to whether an Indemnified Party's conduct complied with the standards set forth in the DGCL shall be made in accordance with the DGCL. GTE has agreed to maintain in place the current policy of insurance covering officers and directors of the Company (or an equivalent policy) for a period of three years after the Effective Time. The Company also covenants that, from the date of the Merger Agreement to the Effective Time, the Company will conduct its business in the ordinary course. The Company and CCI Acquisition each covenant that, promptly after the execution of the Merger Agreement, they will cooperate in the preparation of all materials necessary to be filed with the Commission in connection with the Merger. Additionally, each of the parties to the Merger Agreement agrees to use its commercially reasonable efforts to take all action and to do all things necessary to consummate the 27 29 transactions contemplated by the Merger Agreement, including using commercially reasonable efforts to (i) obtain all necessary contractual waivers and consents, (ii) obtain all necessary consents and authorizations as are required to be obtained under any federal, state or foreign law or regulations, (iii) defend all lawsuits or other legal proceedings challenging the Merger Agreement or the consummation of the transactions contemplated thereby, (iv) lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated by the Merger Agreement and (v) effect all registrations and filings necessary to consummate the transactions contemplated by the Merger Agreement. Pursuant to the Merger Agreement, Contel agreed to execute a written consent as majority stockholder of the Company approving the Merger and the Merger Agreement. CONDITIONS TO THE MERGER The respective obligations of CCI Acquisition, the Company, Contel and GTE to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (i) the Merger Agreement and the transactions contemplated by the Merger Agreement shall have been approved by any necessary vote of the stockholders of the Company and CCI Acquisition in accordance with applicable law and the terms of the Merger Agreement; (ii) no statute, rule, regulation, executive order, decree or injunction (preliminary or permanent) shall have been enacted, entered, promulgated or enforced by any federal or state court of competent jurisdiction in the United States or other governmental authority which prohibits the consummation of the Merger remains in effect after GTE, CCI Acquisition and the Company shall have used all commercially reasonable efforts to lift any injunction; (iii) no consents of or filings with any governmental entity shall be required for consummation of the Merger which have not been obtained or filed and (iv) the Special Committee shall not have modified or rescinded its recommendation with respect to the Merger. TERMINATION The Merger Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time, notwithstanding approval thereof by the stockholders of the Company: (i) by mutual written consent of each of the Company and CCI Acquisition, (ii) by the Company or CCI Acquisition if any court of competent jurisdiction in the United States or other United States governmental body has issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, judgment, injunction, ruling or other action has become final and nonappealable or (iii) by the Company or CCI Acquisition if the Merger does not occur within 120 days of the date of the Merger Agreement unless such delay is caused by regulatory review of required filings. AMENDMENT The Merger Agreement provides that any provision of the Merger Agreement may be amended by action taken by the Company and CCI Acquisition at any time prior to the Effective Time, provided that following approval of the Merger Agreement by the stockholders of the Company or CCI Acquisition any amendment of the Merger Agreement will be subject to compliance with Section 251(d) of the DGCL. The prior approval of a majority of the members of the Special Committee shall also be required in connection with any amendment or modification of the Merger Agreement by or on behalf of the Company. The Merger Agreement may not be amended, modified or supplemented except by an instrument in writing signed on behalf of the party against whom enforcement is sought. EXTENSION; WAIVER The Merger Agreement provides that at any time prior to the Effective Time, the Company, CCI Acquisition, GTE and Contel may (i) extend the time for the performance of any of the obligations or other acts of the other parties, (ii) waive any inaccuracies in the representations and warranties of the other parties contained therein or in any document, certificate or writing delivered pursuant to the Merger Agreement or (iii) waive compliance by the other parties with any of the agreements or conditions contained in the Merger Agreement other than those relating to indemnification. Any agreement on the part of any party to any such 28 30 extension or waiver shall be valid only if set forth in writing and signed on behalf of such party, and, in the case of an extension or waiver by the Company, if such extension or waiver has been approved by a majority of the members of the Special Committee. PAYMENT OF THE MERGER CONSIDERATION In order to receive $25.50 per Class A Share (less any applicable withholding taxes) (the "Merger Consideration"), Class A Stockholders must complete and return certificates representing their Class A Shares with the Letter of Transmittal that is being mailed to the Class A Stockholders with this Information Statement. These documents are being mailed to the Class A Stockholders with the Information Statement on March , 1995. After the Merger has been consummated, the Disbursing Agent will issue payment of the Merger Consideration when it receives a holder's Class A Shares and a validly completed Letter of Transmittal for those shares. Class A Stockholders should not send their Class A Shares without a completed Letter of Transmittal. Class A Stockholders who wish to exercise appraisal rights must not surrender their certificates representing Class A Shares pursuant to the Letter of Transmittal and must comply with the provisions of Section 262 of the DGCL. See "DISSENTERS' RIGHTS OF APPRAISAL". When a Class A Stockholder properly surrenders certificates for Class A Shares to the Disbursing Agent, those shares will be canceled and the Class A Stockholder will receive the Merger Consideration. No interest will be paid with respect to the Merger Consideration. Class A Stockholders who wish to receive the Merger Consideration promptly after the Merger should send their Class A Shares along with a properly completed and executed Letter of Transmittal to the Disbursing Agent as soon as possible. If the Merger is not consummated within 120 days of the date of this Information Statement, the Disbursing Agent will return all certificates representing Class A Shares to the Class A Stockholders. Any Class A Stockholder who has lost certificates representing their Class A Shares should make arrangements (which may include the posting of a bond or other satisfactory indemnification) to replace lost certificates. These arrangements should be made with the Disbursing Agent, which is also the transfer agent for the Class A Shares. The method of delivery of all required documents is at the option and risk of the Class A Stockholder. If a Class A Stockholder elects to mail certificates representing Class A Shares, the Company recommends properly insuring such certificates and sending them by registered mail with return receipt requested. Under Federal Income Tax Backup and Withholding Rules, unless an exception applies under applicable laws and regulations, the Disbursing Agent will be required to withhold and remit to the United States Treasury 31% of the cash payment for Class A Shares made to a stockholder, a dissenting stockholder or any other payee pursuant to the Merger, unless such stockholder or other payee provides his taxpayer identification number (employer identification number or social security number) and certifies that such number is correct. THEREFORE, EACH CLASS A STOCKHOLDER SHOULD COMPLETE AND SIGN THE MAIN SIGNATURE FORM, AND IF APPLICABLE, EACH PAYEE SHOULD COMPLETE AND SIGN THE SUBSTITUTE FORM W-9 INCLUDED AS PART OF THE LETTER OF TRANSMITTAL, IN ORDER TO PROVIDE THE INFORMATION AND CERTIFICATION NECESSARY TO AVOID BACKUP WITHHOLDING. FOREIGN STOCKHOLDERS MAY BE REQUIRED TO SUBMIT A FORM W-8 AND A FURTHER CERTIFICATION IN ORDER TO AVOID BACKUP WITHHOLDING. All questions as to the form of all documents and the validity, form and acceptance of any certificates representing Class A Shares for payment will be determined by the Disbursing Agent and the Company, whose determination will be final and binding. ALL QUESTIONS AND REQUESTS FOR INFORMATION RELATING TO THE PROCEDURE FOR PAYMENT OF THE MERGER CONSIDERATION FOR THE CLASS A SHARES SHOULD BE DIRECTED TO THE DISBURSING AGENT -- CHEMICAL BANK, REORGANIZATION DEPARTMENT, P.O. BOX 396, BOWLING GREEN STATION, NEW YORK, NY 10274. 29 31 DISSENTERS' RIGHTS OF APPRAISAL Under Section 262 of the DGCL ("Section 262"), Class A Stockholders who do not wish to accept the Merger Consideration have the right to seek appraisal of the fair value of their Class A Shares in the Delaware Court of Chancery. Section 262 is set forth in its entirely as Exhibit D to this Information Statement and incorporated by reference herein. The following discussion is not a complete statement of the law relating to appraisal rights and is qualified in its entirety by reference to Exhibit D. This discussion and Exhibit D should be reviewed carefully by any holder who wishes to exercise statutory appraisal rights or who wishes to preserve the right to do so, as failure to comply with the procedures set forth therein will result in the loss of appraisal rights. Moreover, because of the complexity of the procedures for exercising the right to dissent and seek appraisal rights, the Company believes that Class A Stockholders who consider exercising such rights should seek the advice of counsel. CLASS A STOCKHOLDERS WHO DESIRE TO EXERCISE THEIR APPRAISAL RIGHTS MUST NOT SURRENDER THEIR CERTIFICATES REPRESENTING CLASS A SHARES PURSUANT TO THE LETTER OF TRANSMITTAL AND MUST SATISFY ALL THE CONDITIONS SET FORTH IN THE FOLLOWING PARAGRAPHS. In order to exercise appraisal rights, a holder must deliver a written demand for appraisal of Class A Shares to the General Counsel of the Company within 20 days after the date of the mailing of this Information Statement. This Information Statement is being mailed on March , 1995. The address of the General Counsel of the Company is Contel Cellular Inc., 245 Perimeter Center Parkway, Atlanta, Georgia 30346, Attention: General Counsel. The telephone number of the General Counsel is (404) 804-3400. A demand for appraisal must be executed by or for the Class A Stockholder of record, fully and correctly, as such Class A Stockholder's name appears on the certificate or certificates evidencing such stockholder's Class A Shares. If the Class A Shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, such demand must be executed by the fiduciary. If the Class A Shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by all record owners. An authorized agent, including an agent for two or more record owners, may execute the demand for appraisal for a Class A Stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, such person is acting as agent for the owner. A record owner, such as a broker, who holds Class A Shares as a nominee for others, may exercise appraisal rights with respect to the Class A Shares held for all or less than all beneficial owners of Class A Shares as to which such person is the record owner. In such case the written demand must set forth the number of Class A Shares covered by such demand. Where the number of Class A Shares is not expressly stated, the demand will be presumed to cover all Class A Shares outstanding in the name of such record owner. Beneficial owners who are not record owners and who intend to exercise appraisal rights should instruct their record owners to comply strictly with the statutory requirements with respect to the exercise of appraisal rights. The Effective Time of the Merger shall be April , 1995. From and after the Effective Time, dissenters may not vote their Class A Shares or receive distributions on such Class A Shares declared after the Effective Time. Within 120 days after the Effective Time, but not thereafter, either the Surviving Corporation or any Class A Stockholder entitled to appraisal rights under Section 262 (who has notified the Company as described above within 20 days after the date of the mailing of this Information Statement) may file a petition in the Delaware Court of Chancery demanding a determination of the value of the Class A Shares of all Class A Stockholders entitled to appraisal, provided that during the first 60 days after the Effective Time any Class A Stockholder has the right to withdraw his demand for appraisal and accept the cash payment of the Merger Consideration provided for in the Merger Agreement. Within such 120 day period, any dissenting shareholder who has perfected his or her rights may, by written request to the Surviving Corporation, obtain a list of the aggregate number of holders of Class A Shares for which appraisal demands have been received. Such list must be delivered by the Surviving Corporation to the requesting Stockholder within 10 days of the date on which the request is received by the Surviving Corporation or the expiration of the period for delivery of demands under Section 262(d) of the DGCL, whichever is later. 30 32 Within 20 days after the service upon the Surviving Corporation of a copy of a petition filed in the Delaware Court of Chancery demanding an appraisal, the Surviving Corporation is obligated to file in the office of the Register in Chancery a verified list of all Class A Stockholders who have demanded appraisal and have not reached agreement as to the value of their Class A Shares with the Surviving Corporation or withdrawn the demand for appraisal of their Class A Shares. After notice to such Class A Stockholders, the Court of Chancery is empowered to conduct a hearing upon the petition of any such Class A Stockholder. The court shall then determine those Class A Stockholders entitled to appraisal and appraise the fair value of the Class A Shares held by them, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value. In determining fair value, the Court of Chancery is to take into account all relevant factors. In Weinberger v. UOP Inc., et al., decided February 1, 1983, the Delaware Supreme Court discussed the considerations that could be considered in determining fair value in an appraisal proceeding, stating the "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered and that "fair price obviously requires consideration of all relevant factors involving the value of a company". The Delaware Supreme Court stated that in making this determination of fair value the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which could be ascertained as of the date of the merger which throw any light on future prospects of the corporation. Section 262 provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger". In Weinberger, the Delaware Supreme Court construed Section 262 to mean that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered". Class A Stockholders considering seeking appraisal should bear in mind that the fair value of their Class A Shares determined under Section 262 could be more than, the same as or less than the consideration they are to receive pursuant to the Merger Agreement if they do not seek appraisal of their Class A Shares, and that an opinion of an investment banking firm as to fairness is not an opinion as to fair value under Section 262. Costs of the appraisal proceeding may be taxed upon the parties thereto by the court as the court deems equitable in the circumstances. Upon application of a dissenting stockholder, the Delaware Court of Chancery may order that all or a portion of the expenses incurred by any dissenting Class A Stockholder in connection with the appraisal proceeding, including without limitation reasonable attorney's fees and the fees and expenses of experts, be charged pro rata against the value of all Class A Shares entitled to appraisal. If a Class A Stockholder does not file a petition for an appraisal within 120 days after the Effective Time, then the right of such Class A Stockholder to an appraisal shall cease. In addition, if any Class A Stockholder shall deliver to the Surviving Corporation a written withdrawal of such holder's demand for an appraisal and an acceptance of the Merger Consideration, either within 60 days after the Effective Time or thereafter with the written approval of the Surviving Corporation, then the right of such Class A Stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Delaware Court of Chancery shall be dismissed as to any Class A Stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. The class action suits brought on behalf of the Class A Stockholders described in "SPECIAL FACTORS -- Certain Litigation" do not affect the appraisal rights summarized above. 31 33 MARKET PRICES AND DIVIDENDS ON THE COMMON STOCK OF THE COMPANY The Class A Shares are publicly traded in the over the counter market and quoted on the Nasdaq National Market under the symbol "CCXLA". There is no established trading market for the Class B Shares. As of March 14, 1995, the Company had 378 Class A Stockholders of record. The Company has not paid any cash dividends on the Class A Shares or Class B Shares, and it is not anticipated that the Company will pay any cash dividends in the foreseeable future. The following table indicates the high and low sales prices for the Class A Shares during the designated periods:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------ -------- 1994 High.............................. $ 18.75 $ 17.25 $24.00 $ 25.25 Low............................... 14.00 13.00 16.00 23.50 1993 High.............................. $ 18.63 $ 16.25 $18.75 $ 22.00 Low............................... 13.25 13.50 15.50 15.00 1992 High.............................. $ 23.25 $ 18.50 $16.50 $ 19.00 Low............................... 17.25 13.00 13.50 13.25
On September 7, 1994, the last full day of trading prior to the announcement of GTE's intention to acquire the Class A Shares, the high, low and closing sales prices per Class A Share on the Nasdaq National Market were $18.25, $17.75 and $17.75, respectively. For the period from January 1, 1995 through March 14, 1995, the high and low sales prices per Class A Share quoted on the Nasdaq National Market were $25.375 and $24.875, respectively. 32 34 SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY The selected consolidated financial data presented below as of December 31, 1990-1994 and for each of the years then ended have been derived from the audited consolidated financial statements of the Company. The consolidated financial statements as of December 31, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1994, have been included in this Information Statement on pages F-3 to F-24. This financial information should be read in conjunction with such financial statements and notes thereto.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1990 1991 1992 1993 1994 ---------- ---------- ---------- ---------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenues and sales................................. $ 167,178 $ 235,107 $ 286,999 $ 374,014 $ 562,955 Operating income (loss)(1)......................... (38,143) (68,577) (50,113) (28,305) 41,011 Loss from consolidated operations.................. (158,865) (223,726) (196,347) (188,011) (143,332) Equity in earnings of unconsolidated partnerships..................................... 19,069 15,687 29,027 37,351 62,792 Gains on sales of partnership interests............ -- 18,387 60,806 48,023 96,607 Net income (loss) before cumulative effect of change in accounting principles.................. (102,794) (118,900) (73,061) (74,918) 1,871 Cumulative effect of change in accounting principles(2).................................... -- -- (2,080) (241) -- Net income (loss).................................. (102,794) (118,900) (75,141) (75,159) 1,871 Net income (loss) per share before cumulative effect of change in accounting principles........ (1.03) (1.19) (0.73) (0.75) 0.02 Net income (loss) per share........................ (1.03) (1.19) (0.75) (0.75) 0.02 Weighted average shares outstanding (in thousands)....................................... 99,931 99,942 99,943 99,948 99,953 OTHER OPERATING DATA: Capital expenditures............................... 70,841 107,792 183,504 130,042 255,174 Ending subscribers................................. 155,285 236,282 327,645 521,226 789,580
AS OF DECEMBER 31, ---------------------------------------------------------------------- 1990 1991 1992 1993 1994 ---------- ---------- ---------- ---------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BALANCE SHEET DATA: Total assets....................................... $1,665,395 $1,870,669 $1,930,469 $2,052,984 $2,346,466 Long-term obligations Notes payable -- affiliates...................... 1,540,000 1,735,034 1,814,327 1,901,726 2,136,263 Other............................................ 14,280 42,280 36,280 36,792 30,792 Stockholders' equity (deficit)..................... 27,525 (91,085) (166,084) (241,221) (238,920) Book value per share............................... 0.28 (0.91) (1.66) (2.41) (2.39)
- --------------- (1) The operating loss in 1991 includes approximately $12 million of integration costs associated with the merger of Contel with a wholly owned subsidiary of GTE. (2) In 1993, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." In 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and No. 109, "Accounting for Income Taxes." Earnings were not adequate to cover fixed charges in 1992, 1993 or 1994. The amount of such deficiency was $128 million, $129 million and $19 million for the years ended December 31, 1992, 1993 and 1994, respectively. 33 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company, through its subsidiaries or through partnerships, provides cellular telephone services in MSAs and RSAs throughout the United States. As of March 3, 1995, the Company owned controlling interests in and managed cellular systems in 32 MSAs and owned non-controlling interests in cellular systems serving 27 other MSAs. In addition, the Company held controlling interests in cellular systems in 24 RSAs, held non-controlling interests in and managed cellular systems in 10 RSAs, and held non-controlling interests in cellular systems in 18 other RSAs and one cellular system in Mexico. All of the Company's systems were operational at March 3, 1995. Included in the consolidated statements of operations are all revenues and expenses of the MSA and RSA systems in which the Company holds a controlling interest. The Company's pro rata share of the net income or losses of the MSA and RSA systems in which the Company holds a non-controlling interest, regardless of whether the Company manages the system, is included in "Equity in earnings of unconsolidated partnerships" in the consolidated statements of operations. BACKGROUND In March 1991, Contel merged with a subsidiary of GTE in a tax-free exchange. The Company is a 90% owned subsidiary of Contel, which became a wholly owned subsidiary of GTE. During 1991, many of the staff and support functions previously performed separately by the Company were consolidated under GTE Mobile and allocated to the Company under a cost allocation methodology. In January 1993, a new management structure was announced. Certain functions previously provided by GTE Mobile are now provided by GTE Personal Communications Services, a division of GTE. Certain other functions, such as marketing and engineering, are performed directly by the Company. Refer to Note 10 of the "Notes to Consolidated Financial Statements" for additional information regarding related party transactions. A merger agreement was executed between the Company and GTE after the Company's Board of Directors voted to accept GTE's proposal to acquire the remaining 10% ownership of the Company. Under the terms of the agreement, a GTE subsidiary will merge into the Company and the Company will survive the merger. The holders of the approximately 10 million Class A Shares will receive $25.50 per share in cash. The Company's Class B Shares owned by GTE will remain outstanding. See "THE MERGER AGREEMENT". ACQUISITIONS AND DISPOSITIONS OF INTERESTS IN CELLULAR SYSTEMS The Company regularly evaluates its properties to assess their strategic attributes in terms of meeting its financial goals and objectives. The Company will purchase properties where the demographics and business climate are favorable to the development of core and contiguous cellular systems and will pursue the sale of properties which are deemed to be non-strategic. On February 3, 1995, the Company signed a definitive agreement relating to the Cellular Exchange. The agreement provides that the Company will exchange its cellular assets in the Minneapolis, Minnesota MSA and the Albuquerque, New Mexico MSA for a portion of US WEST NewVector Group, Inc.'s cellular assets in the San Diego, California MSA ("San Diego MSA"). The Exchange will give the Company a 28 percent interest in the assets of the cellular system serving the San Diego MSA. The Exchange will reduce the Company's POPs by approximately 290,000. The transaction is subject to regulatory approvals and is expected to close during 1995. See "BUSINESS OF THE COMPANY -- The Company's Cellular Operations, Cellular Exchange Transaction". In 1994, the Company purchased 100% of the cellular system serving Tennessee RSA 2, the remaining 51% interest in the cellular system serving Tennessee RSA 3, and 100% of the cellular systems serving the Huntsville, Alabama MSA and Alabama RSA 2, representing an aggregate increase of approximately 831,000 POPs. Through the purchase of the Huntsville, Alabama MSA, the Company gained an 80% interest in the partnership that currently operates the cellular system in Alabama RSA 1A pursuant to an interim operating license. Additionally, the Company increased its ownership interests in the cellular systems serving the 34 36 Tuscaloosa, Alabama MSA, Indiana RSAs 7, 8 and 9, and Alabama RSA 1B, representing an aggregate increase of approximately 33,000 POPs. Also during 1994, the Company sold its interest in several northeastern cellular properties (the "Northeast Properties"), pursuant to the agreement signed in December 1993 with NYNEX Mobile Communications Company ("NYNEX"), including the cellular systems serving Manchester, New Hampshire and Burlington, Vermont MSAs; New Hampshire RSA 2, Vermont RSAs 1 and 2A, and New York RSA 2. The Company recognized a pretax gain of approximately $80.0 million, on the sale of these Northeast Properties representing approximately 734,000 POPs. Additional sales completed during 1994 include the Company's interest in Iowa RSAs 1, 8 and 14, Oregon RSA 5, South Dakota RSAs 5B1 and 6B1, North Carolina RSA 1, Kentucky RSA 11, California RSA 7 and Alabama RSA 1B. The Company recognized an aggregated pretax gain of approximately $14.3 million with respect to these additional sales, representing approximately 711,000 POPs. Additionally, as part of the agreement, NYNEX will purchase the Company's interests in the Binghamton and Elmira, New York MSAs, Pennsylvania RSAs 3A and 4A, and New York RSA 3 pending certain regulatory approvals, which are expected to be completed in 1995. After the acquisitions and dispositions described above, the Company will provide or participate in the provision of cellular services in 56 MSA markets and 49 RSA markets with total combined POPs of approximately 23.3 million. During 1993, the Company purchased 100% of the cellular systems serving Tennessee RSAs 6 and 9, representing approximately 202,000 POPs. In addition, the Company increased its ownership interests in the cellular systems serving the Tuscaloosa, Alabama MSA, the San Francisco, San Jose, Vallejo, Santa Rosa, Santa Cruz, and Salinas, California MSAs and New York RSA 3, representing an aggregate increase of approximately 21,000 POPs. Also during 1993, the Company sold its interests in a number of non-strategic RSAs, primarily in Arizona, Minnesota and Washington, as well as its interests in the cellular systems serving the Rapid City, South Dakota MSA, and the Orange County and Poughkeepsie, New York MSAs. The pretax gain on the sale of these cellular interests was approximately $48.0 million and represented approximately 686,000 POPs. On December 31, 1992, the Company sold its stock in Contel Cellular of Arkansas, Inc. to Alltel Mobile Communications, Inc. Included in the sale were the Company's interests in the MSAs serving Fort Smith and Fayetteville, Arkansas RSAs 1 and 8, and Oklahoma RSA 4, resulting in a pretax gain of $60.8 million. Refer to Note 5 of the "Notes to Consolidated Financial Statements" for additional information regarding the acquisitions and dispositions of cellular interests. RESULTS OF OPERATIONS Service revenues, which include airtime, access, roaming, long-distance and other service revenues, increased $178.3 million in 1994 and $84.0 million in 1993. These increases are primarily attributable to revenues generated from subscriber gains and roaming revenues. The Company's subscriber base, net of the subscribers sold, increased from 521,200 as of December 31, 1993 to 789,600 as of December 31, 1994, an annual growth rate of 51% in 1994 compared to 59% in 1993 and 39% in 1992. Rates for airtime and access remained relatively unchanged from 1992 to 1994. Partially offsetting the increases in revenues resulting from subscriber growth were declines in average usage per subscriber. The declines in usage per subscriber are attributable to the increased number of casual users in the subscriber base, and are consistent with the industry. Average revenue per subscriber per month for 1994, 1993 and 1992 was $70, $73 and $78, respectively. Cost of services, which includes network expenses, facilities and maintenance, and the cost of long-distance, increased $37.2 million in 1994 and $6.3 million in 1993. The 1994 and 1993 increases are primarily the result of increased usage, cell sites and cost of toll, as well as increased salaries and other employee-related costs to support the increased network investment. Increased salaries, other employee costs and cost of toll 35 37 represented approximately $14.9 million of the 1994 increase. Additionally, roaming related expenses increased from $1.9 million in 1993 to $9.8 million in 1994 primarily due to increased roaming usage and additional charges associated with offering subscribers lower roaming rates in other carriers' markets. Cost of services as a percent of service revenues was between 14 percent and 16 percent for each of the past three years. Negative equipment margins of 106%, 79%, and 54% for the years ended December 31, 1994, 1993 and 1992, respectively, continue to reflect the intensely competitive market environment and the fact that equipment promotions are frequently used to attract new subscribers. Equipment unit sales for 1994, 1993 and 1992 were approximately 292,000, 165,000 and 99,000 which represent an annual increase for 1994 and 1993 of 77% and 67%, respectively. Selling, general and administrative expenses increased $46.1 million and $34.6 million in 1994 and 1993, respectively. Employee commissions, related compensation benefits and agent commissions associated with the acquisition of new subscribers and higher marketing and promotional fees related to expanding the type and number of distribution channels accounted for $23.5 million and $25.5 million of the increase in 1994 and 1993, respectively. These increases are directly related to the increase in customer additions during 1994 and 1993. The 1994 increase also includes an additional $8.4 million of bad debt expenses primarily attributable to increased sales and $3.7 million of relocation expenses associated with implementing a new organization structure that involved relocating and adding resources to eight new strategic market areas (Kentucky, Midwest, Tennessee, Virginia, California, Alabama, Gulf Coast and Southwest). Depreciation expense increased $11.3 million in 1994 compared to an increase of $12.2 million in 1993. These increases were primarily due to higher property and equipment balances resulting from enhancements to and expansion of existing cellular systems required to support the growth in the number of subscribers and quality of service expectations. Interest expense increased $16.3 million in 1994 and $14.8 million in 1993. The 1994 increase is primarily attributable to higher effective interest rates in 1994 of approximately 9.3% versus 8.8% in 1993 and increased variable-rate, affiliated debt. The rates of interest on both the variable-rate and the fixed-rate debt approximate the rate that the Company could obtain in the marketplace from non-affiliated lenders. The 1993 increase is primarily due to higher effective interest rates in 1993 of approximately 8.8% versus 8.1% in 1992 and a result of the refinancing through GTE of variable-rate debt to fixed-rate debt at higher market-based rates. Refer to Note 10 of the "Notes to Consolidated Financial Statements" for further information related to cash management and financing. Equity in earnings of unconsolidated partnerships increased $25.4 million in 1994 and $8.3 million in 1993. These increases are a result of improved operating results primarily in unconsolidated partnerships such as the Los Angeles SMSA Limited Partnership and the Washington D.C. SMSA Limited Partnership (the "Washington D.C. Partnership"). The increase in the 1993 earnings was partially offset by reduced equity in earnings in the Washington D.C. Partnership of $3.8 million resulting from a legal settlement against the Washington D.C. Partnership, subsequently reduced to $1.9 million during 1994. Refer to Note 4 of the "Notes to Consolidated Financial Statements" for further information relating to unconsolidated partnerships. The Company recognized combined federal and state income tax expense of $14.2 million for 1994 compared with income tax benefits recognized during 1993 and 1992 of $27.7 million and $33.5 million, respectively. The 1994 effective tax rate was impacted by $4.9 million of state income taxes related to the gains on sales of cellular interests and the amortization of goodwill. The reduced benefit rate in 1993 is primarily due to the change in the federal income tax rate from 34% to 35% subsequent to the enactment of the Omnibus Budget Reconciliation Act of 1993. Refer to Note 6 of the "Notes to Consolidated Financial Statements" for further information relating to federal and state income taxes expense. During the fourth quarter of 1993, the Company adopted Statement of Financial Accounting Standards ("FAS") 112, "Employers' Accounting for Postemployment Benefits". As a result of the adoption of FAS 112, a one-time, non-cash charge of $241 thousand was recorded to give effect to past service costs. During the fourth quarter of 1992, the Company adopted FAS 106, "Employers' Accounting for Postretire- 36 38 ment Benefits Other than Pensions" and FAS 109, "Accounting for Income Taxes," retroactive to January 1, 1992. As a result of the adoption of FAS 106, a one-time, non-cash charge of $2.1 million was recorded to give effect to past service costs. The adoption of FAS 109 had no impact on the financial statements in 1992. Refer to Note 3 of the "Notes to Consolidated Financial Statements" for additional information. The Company has experienced losses prior to the year ended December 31, 1994. The Company's results are highly affected by (a) interest expense and amortization of carrying costs associated with past acquisitions, (b) the cost of constructing the Company's network, and (c) the cost of acquiring new subscribers. The Company expects to continue to aggressively acquire new subscribers. As the subscriber base continues to grow, the Company believes that the higher level of revenues generated coupled with the operating efficiencies achieved will ultimately lead to more profitable results. The Company has achieved an average subscriber growth rate of approximately 50% for the past three years, while the industry has experienced a growth rate of approximately 43%. Additionally, management has taken steps to reduce its acquisition costs per subscriber through the introduction of innovative distribution channels and methods. This year's improved performance is reflected in the Company's operating income which increased $69.3 million, from an operating loss of $28.3 million in 1993 to operating income of $41.0 million in 1994. FINANCIAL CONDITION The Company requires capital to construct and enhance its cellular systems, make periodic interest payments on outstanding debt, fund operating costs for systems which the Company manages and to fund acquisitions and investments in unconsolidated partnerships. Cash provided from operating activities in 1994 was $21.8 million, an increase of $17.2 million from the prior year. This increase was primarily attributable to the increase in revenues, partially offset by additional cost of services and selling, general and administrative expenses. Cash provided from operating activities in 1993 was $4.6 million, a decrease of $33.6 million from the prior year. This decrease was primarily due to increased interest payments on outstanding debt as well as reduced income tax benefits, partially offset by improved cash flow margins resulting from higher revenues. Capital expenditures were $255.2 million, $130.0 million and $183.5 million in 1994, 1993 and 1992, respectively. Capital expenditures are primarily for network expansion and enhancements to maintain system capacity, quality and coverage as the customer base increases and demands greater service performance. Total capital expenditures for consolidated and unconsolidated markets for 1995 are estimated to be approximately $314 million. As the Company positions itself for the future, additional capital is required to expand network capacity, provide portable grade coverage in all core markets, enhance system quality and coverage, and position the network for digital technology in order to provide high value wireless communications services. It is currently estimated that these capital expenditures will be funded by additional borrowings from GTE, contributions from minority partners and cash provided from operations. The Company is required to fund its proportionate share of the construction and working capital requirements in unconsolidated partnerships. Funds contributed to unconsolidated partnerships for the year ended December 31, 1994, were $15.1 million compared to $13.8 million and $12.6 million for 1993 and 1992, respectively. The increase in funds used is primarily attributable to increased construction requirements for unconsolidated partnerships. In certain unconsolidated partnerships where the Company is managing partner, funds required for construction and working capital may be advanced by the Company and subsequently reimbursed from the limited partners or from operating results. Alternatively, the Company may request that capital contributions be made to the partnerships in advance of expenditures. Funds provided by changes in advances to unconsolidated partnerships for the year ended December 31, 1994, were $12.4 million compared to $6.9 million for 1993 and funds used of $0.6 million for 1992, respectively. The improvement in 1994 and 1993 is primarily the result of improved timing of the collection of advances from unconsolidated partnerships in managed RSAs. 37 39 In order to minimize the volatility associated with interest rate fluctuations, the Company's Board of Directors adopted a policy of maintaining variable-rate debt within a target range of 5% to 20% of total debt. In September 1992, the Company converted $300 million of variable-rate debt to $150 million of fixed-rate debt with a five-year maturity, and $150 million of fixed-rate debt with a seven-year maturity. In December 1992, the Company converted an additional $400 million of variable-rate debt to $200 million of fixed-rate debt with a three-year maturity and $200 million of fixed-rate debt with a four-year maturity. In August 1994, the Company converted $75 million of variable-rate debt to $75 million fixed-rate debt with a six-year maturity. Terms, interest rates and other information regarding affiliated debt are included in Note 10 of the "Notes to Consolidated Financial Statements." In addition to fixed-rate debt, the Company maintains a line of credit arrangement with GTE. Effective January 1, 1993, GTE adopted a policy wherein rates charged for variable-rate debt changed from GTE's cost of borrowing such debt plus 1.5% per annum, to the prime rate quoted in The Wall Street Journal plus 0.75% per annum. This change increased the Company's cost of borrowing variable-rate debt by 1.5% effective January 1, 1993. During 1994, the Company borrowed an additional $159.6 million under its line of credit arrangement primarily to fund network capital requirements and the Huntsville acquisition. At December 31, 1994, the Company had borrowed approximately $511.3 million through its intercompany borrowing arrangements at variable rates. Total borrowings are expected to increase in 1995 and for several years in the future, as the Company borrows to fund interest payments on its debt and fund network capital requirements due to growth and development of its operations. In Company controlled and managed markets, the Company maintains adequate financing through the line of credit arrangement with GTE to ensure proper management of the operations. A portion of this financing is reimbursed through contributions from minority partners. During 1994, the Company received $6.4 million from minority partners for collection of capital calls. The Company expects to continue making capital contributions to the unconsolidated partnerships and receiving capital contributions from minority partners. The timing and amounts of such contributions and advances are subject to future construction and working capital requirements of these partnerships as determined by the managing partner. Over the past three years, the capital required to enhance the existing cellular network and to finance the carrying costs of acquisitions and new investments has been substantially provided from operations, sales of non-strategic properties, and GTE or the Company's minority partners. Although net income before depreciation and amortization has increased over the past three years, additional financing will be required to fund the Company's growth and its debt service for the foreseeable future. These requirements are expected to be funded largely by GTE as a 90% owner of the Company and a major investor and operator of cellular networks nationwide and the Company's minority partners. Additionally, in January 1995, GTE provided the Company with a letter stating that GTE had no plans or intentions to discontinue providing financial support to the Company through intercompany credit facilities to meet ongoing operating and capital requirements, and that GTE would not demand payment under intercompany credit facilities before June 30, 1996. Refer to Notes 4 and 8 of the "Notes to Consolidated Financial Statements" for information regarding legal and regulatory matters affecting the Company and its unconsolidated partnerships. 38 40 PROJECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY(1) The Company does not, as a matter of course, publicly disclose projections as to future revenues or earnings. The following five year projections for the period 1995-1999 were prepared by management for GTE and internal planning purposes. These five year projections are included in this Information Statement because such projections were made available to the Special Committee's financial advisor and the GTE Financial Advisors. These projections, while presented with numerical specificity, are based upon a variety of estimates and assumptions. Such estimates and assumptions, some of which are described below, involve judgments with respect to, among other things, future economic and competitive conditions, the ability of the Company to continue operations, and future business decisions. These judgments, though considered reasonable by the Company at the time, may not be realized, and are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond the control of the Company. There can be no assurance that the results of operations set forth in such projections will be realized. Actual results may vary materially from those shown. In light of the uncertainties inherent in projections of any kind, the inclusion of projections herein should not be regarded as a representation by the Company or any other person that the projections will be achieved. The Company's independent auditors have not examined or compiled the projections presented herein and accordingly, assume no responsibility for them. Class A Stockholders are cautioned not to place undue reliance on these projections. Management has not and does not intend to update or otherwise revise the projections to reflect changing circumstances existing after the preparation of the projections included herein or to reflect the occurrence of unanticipated events that may have occurred. The significant assumptions underlying these projections are described in the footnotes following the projections. The projections provided to the Special Committee's financial advisor and the GTE Financial Advisors were based on forecasted results for 1994 since actual 1994 results were not available at the time.
YEARS ENDED DECEMBER 31,(1) ------------------------------------------ 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ (DOLLAR AMOUNTS IN MILLIONS) INCOME STATEMENT DATA: Service revenues(2)................................... $ 679 $ 831 $ 984 $1,140 $1,282 Depreciation and amortization(3)(4)................... 152 181 201 215 228 Operating income...................................... 116 186 263 325 431 Net income (loss)(5).................................. (36) (1) 40 81 153 OTHER OPERATING DATA: Capital expenditures(3)............................... 298 220 158 135 145 Operating cash flow................................... 268 367 464 540 659
AS OF DECEMBER 31,(1) ------------------------------------------ 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ (DOLLAR AMOUNTS IN MILLIONS) BALANCE SHEET DATA: Total assets.......................................... $2,541 $2,614 $2,602 $2,548 $2,488 Long-term liabilities(6).............................. 2,135 2,183 2,233 2,185 1,983 Stockholders' deficit(7).............................. (289) (290) (250) (169) (16)
- --------------- (1) Basis of presentation: The five year projections do not include the effect of the proposed Merger. The five year projections include the effect of the 1994 acquisitions of 100% of the cellular system serving the Huntsville, Alabama MSA and Alabama RSA 2, a controlling interest in a company with interim operating authority to provide cellular service in Alabama RSA 1 and the acquisition of a controlling interest in California RSA 4. Prior to completion of these five year projections, ten year projections were prepared that did not include the effects of the acquisitions referred to above. These ten year projections were prepared outside of the Company's normal planning process and therefore, in addition to being inherently less certain, they received less management review than the five year projections. The ten year 39 41 projections, as presented below, were made available to the Special Committee's financial advisor, GTE and the GTE Financial Advisors. Both the ten year and five year projections include the effect of the proposed sales in 1994 of certain properties to NYNEX Mobile Communications Company, including the Company's cellular interests in the MSAs of Binghamton and Elmira, New York, and New York RSA 3. These sales are expected to close sometime in 1995. Additionally, the California RSA 4 acquisition is not expected to close until sometime in 1995.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ (DOLLAR AMOUNTS IN MILLIONS) INCOME STATEMENT DATA: Service revenues......... $ 656 $ 799 $ 945 $1,092 $1,228 $1,270 $1,287 $1,285 $1,315 $1,347 Depreciation and amortization........... 148 176 196 210 223 233 248 270 294 315 Operating income......... 103 182 257 316 421 432 425 411 408 404 Net income (loss)........ (37) 4 43 83 154 181 198 216 239 266 OTHER OPERATING DATA: Capital expenditures..... 298 214 156 134 143 123 135 127 126 100 Operating cash flow...... 251 358 453 526 644 665 673 681 702 719
(2) Service revenues: Service revenues include airtime, access, roaming, long-distance and other service revenues, but do not include revenues for the sale or rental of cellular equipment. The projections generally assume that service revenues will increase over prior years due to increasing volumes; however, revenue per subscriber will continue to decline as an increasing number of casual users are added to the base and as new entrants in the wireless communication market compete for subscribers. (3) Capital expenditures/depreciation: The projections assume that increased capital will be required to provide high quality, portable network coverage, to accommodate volume and provide for economies of scale. (4) Amortization: The five year projections include the amortization of intangibles related to the acquisitions described in Note 1 above. (5) Net income: The projections assume a federal income tax rate of 35% for all periods presented. (6) Long term liabilities: The projections assume increases in long-term debt between 1995 and 1997 reflecting the expected increase in required capital as described in Note 3. Thereafter, the projections assume that operating cash flow will be sufficient to satisfy operating requirements and capital expenditures and enable the Company to gradually repay outstanding debt. (7) Stockholders' deficit: Stockholders' deficit includes the par value of the Class A Shares and Class B Shares, additional paid-in capital, the cost of the Class A treasury stock and the accumulated deficit all as of December 31, 1993, adjusted for the projected net results for the year ended December 31, 1994 and for each of the years included in the above projections. 40 42 BUSINESS OF THE COMPANY OVERVIEW The Company, through its subsidiaries and through partnerships, provides or participates in the provision of cellular telephone service in various MSAs and RSAs throughout the United States. As of December 31, 1994, the Company had interests in cellular telephone systems in the United States representing approximately 23.9 million "POPs". ("POPs" refer to the population of a market area multiplied by the Company's percentage ownership in the cellular system serving that market). The Company's 23.9 million POPs include cellular systems which the Company controls or manages and cellular systems operated by partnerships in which the Company is not the controlling partner. As of December 31, 1994, approximately 19.5 million of the Company's 23.9 million POPs were located in 59 MSAs. The Company owned a controlling interest in and managed cellular systems servicing 32 of these 59 MSAs (representing approximately 69% of the Company's MSA POPs). The Company owned a non-controlling interest in cellular systems servicing the remaining 27 MSAs. The remaining 4.4 million of the Company's 23.9 million POPs were located in 52 RSAs. As of December 31, 1994, the Company owned controlling interests in entities licensed to provide cellular service in 24 RSAs, owned non-controlling interests in and managed 10 RSA markets and held non-controlling interests in 18 RSAs. Most of the Company's RSA POPs are in areas adjacent to MSAs currently served by the Company. CELLULAR INTERESTS The Company's controlled MSA interests, non-controlled MSA interests, controlled RSA interests, managed RSA interests and non-controlled RSA interests, are set forth below.
COMPANY COMPANY PERCENTAGE 1994 ESTIMATED POPULATION MARKET MSA RANK OWNERSHIP POPULATION(1) EQUIVALENTS - ------------------------------------------- -------- ---------- -------------- ----------- CONTROLLED MSA INTERESTS Memphis, TN................................ 36 100.00% 1,030,496 1,030,496 Louisville, KY............................. 37 100.00% 931,413 931,413 Birmingham, AL............................. 41 100.00% 904,436 904,436 Norfolk, VA................................ 43 95.01% 1,020,794 969,856 Nashville, TN.............................. 46 100.00% 1,051,872 1,051,872 Richmond, VA............................... 59 95.01% 797,942 758,125 Fresno, CA................................. 74 92.00% 735,494 676,654 Knoxville, TN.............................. 79 94.12% 544,045 512,055 El Paso, TX................................ 81 100.00% 652,655 652,655 Mobile, AL................................. 83 100.00% 510,599 510,599 Johnson City, TN........................... 85 100.00% 452,809 452,809 Chattanooga, TN............................ 88 100.00% 451,120 451,120 Bakersfield, CA............................ 97 92.00% 618,209 568,752 Davenport, IA.............................. 98 100.00% 362,249 362,249 Newport News, VA........................... 104 95.01% 474,518 450,840 Huntsville, AL............................. 115 100.00% 393,160 393,160 Lexington, KY.............................. 116 100.00% 367,623 367,623 Evansville, IN............................. 119 88.87% 318,396 282,959 Binghamton, NY............................. 122 41.00% 309,418 126,861 Pensacola, FL.............................. 127 100.00% 374,969 374,969 Rockford, IL............................... 131 59.00% 301,026 177,605 Visalia, CA................................ 150 92.00% 347,899 320,067 Roanoke, VA................................ 157 40.00% 239,829 95,932 Clarksville, TN............................ 209 100.00% 172,410 172,410
41 43
COMPANY COMPANY PERCENTAGE 1994 ESTIMATED POPULATION MARKET MSA RANK OWNERSHIP POPULATION(1) EQUIVALENTS - ------------------------------------------- -------- ---------- -------------- ----------- Tuscaloosa, AL............................. 222 80.40% 161,333 129,705 Florence, AL............................... 226 91.09% 138,073 125,771 Petersburg, VA............................. 235 95.01% 130,585 124,069 Anniston, AL............................... 249 100.00% 116,063 116,063 Gadsden, AL................................ 272 90.00% 101,153 91,038 Elmira, NY................................. 284 100.00% 95,612 95,612 Las Cruces, NM............................. 285 100.00% 153,838 153,838 Owensboro, KY.............................. 293 88.87% 89,993 79,977 -------------- ----------- 32 TOTAL CONTROLLED MSAs.................................. 14,350,031 13,511,590 =========== ========= NON-CONTROLLED MSA INTERESTS Los Angeles, CA............................ 2 11.20% 14,718,542 1,648,477 San Francisco, CA.......................... 7 11.25% 3,832,050 431,106 Washington, DC............................. 8 35.27% 3,783,479 1,334,433 Houston, TX................................ 10 4.40% 3,897,637 171,496 Minneapolis, MN............................ 15 30.00% 2,569,391 770,817 San Jose, CA............................... 27 11.25% 1,541,573 173,427 San Antonio, TX............................ 33 30.00% 1,382,982 414,895 Sacramento, CA............................. 35 0.98% 1,479,697 14,501 Jacksonville, FL........................... 51 14.24% 1,003,832 142,946 Greenville, SC............................. 67 10.83% 667,011 72,237 Oxnard, CA................................. 73 11.20% 697,369 78,105 Austin, TX................................. 75 3.00% 874,277 26,228 Albuquerque, NM............................ 86 49.00% 590,335 289,264 Beaumont, TX............................... 101 4.40% 384,136 16,902 Stockton, CA............................... 107 0.98% 517,135 5,068 Vallejo, CA................................ 111 11.25% 489,096 55,023 Santa Rosa, CA............................. 123 11.25% 411,058 46,244 Santa Barbara, CA.......................... 124 39.00% 378,431 147,588 Salinas, CA................................ 126 11.25% 372,027 41,853 Modesto, CA................................ 142 0.98% 415,482 4,072 Galveston, TX.............................. 170 4.40% 237,243 10,439 Reno, NV................................... 171 0.98% 279,735 2,741 Santa Cruz, CA............................. 174 11.25% 230,417 25,922 Chico, CA.................................. 215 0.98% 197,623 1,937 Anderson, SC............................... 227 10.83% 146,845 15,903 Redding, CA................................ 254 0.98% 167,321 1,640 Yuba City, CA.............................. 274 0.98% 135,636 1,329 -------------- ----------- 27 TOTAL NON-CONTROLLED MSAs.............................. 41,400,360 5,944,593 =========== ========= 59 TOTAL MSAs............................................. 55,750,391 19,456,183 =========== =========
42 44
COMPANY COMPANY PERCENTAGE 1994 ESTIMATED POPULATION MARKET OWNERSHIP POPULATION(1) EQUIVALENTS - ------------------------------------------------------- ---------- -------------- ----------- CONTROLLED RSA INTERESTS Alabama 2.............................................. 100.00% 127,611 127,611 California 6........................................... 100.00% 28,183 28,183 California 9........................................... 100.00% 140,612 140,612 Kentucky 2............................................. 100.00% 127,813 127,813 Kentucky 7............................................. 100.00% 166,424 166,424 Tennessee 1............................................ 100.00% 297,449 297,449 Tennessee 2............................................ 100.00% 159,071 159,071 Tennessee 3............................................ 100.00% 329,746 329,746 Tennessee 5............................................ 100.00% 336,480 336,480 Tennessee 6............................................ 100.00% 156,906 156,906 Tennessee 7............................................ 100.00% 248,005 248,005 Tennessee 9............................................ 100.00% 67,581 67,581 Virginia 7............................................. 100.00% 38,853 38,853 Virginia 8............................................. 95.01% 84,513 80,296 Virginia 9............................................. 95.01% 87,028 82,685 Virginia 11............................................ 95.01% 111,650 106,079 Virginia 12............................................ 95.01% 33,536 31,863 California 12.......................................... 92.00% 110,515 101,674 Illinois 1............................................. 91.50% 316,168 289,294 Virginia 5............................................. 77.00% 63,347 48,777 Texas 10............................................... 75.00% 29,489 22,117 New Mexico 6-I......................................... 71.43% 60,988 43,564 Virginia 3............................................. 51.00% 183,153 93,408 Virginia 4............................................. 51.00% 66,772 34,054 -------------- ----------- 24 TOTAL CONTROLLED RSAs................................. 3,371,893 3,158,545 =========== ========= MANAGED, NON-CONTROLLED RSA INTERESTS Kentucky 1............................................. 50.00% 187,079 93,540 New Mexico 3........................................... 50.00% 78,980 39,490 New Mexico 5........................................... 43.00% 56,850 24,446 Iowa 4................................................. 38.10% 155,924 59,407 Indiana 7.............................................. 38.09% 220,819 84,119 Indiana 8.............................................. 38.09% 252,283 96,105 Indiana 9.............................................. 38.09% 142,859 54,421 New York 3............................................. 22.50% 492,406 110,791 California 4........................................... 20.83% 338,983 70,610 Iowa 5................................................. 14.29% 108,063 15,442 -------------- ----------- 10 TOTAL MANAGED RSAs.................................... 2,034,246 648,371 =========== =========
43 45
COMPANY COMPANY PERCENTAGE 1994 ESTIMATED POPULATION MARKET OWNERSHIP POPULATION(1) EQUIVALENTS - ------------------------------------------------------- ---------- -------------- ----------- NON-CONTROLLED RSA INTERESTS New Mexico 1........................................... 44.44% 251,919 111,953 Illinois 8............................................. 41.13% 331,629 136,399 Illinois 9............................................. 41.13% 152,791 62,843 Illinois 2............................................. 40.00% 145,844 58,338 California 5........................................... 39.00% 218,249 85,117 California 3........................................... 27.73% 143,187 39,706 California 1........................................... 16.67% 212,401 35,407 New Mexico 6-II........................................ 12.50% 123,267 15,408 Illinois 3............................................. 11.77% 204,375 24,055 Virginia 6............................................. 10.00% 213,307 21,331 Minnesota 1............................................ 6.60% 51,014 3,367 Minnesota 2............................................ 6.60% 62,994 4,158 Minnesota 3............................................ 6.60% 57,315 3,783 Minnesota 5............................................ 6.60% 203,906 13,458 Minnesota 6............................................ 6.60% 244,817 16,158 Virginia 10............................................ 1.00% 231,404 2,314 Pennsylvania 3......................................... 0.10% 95,755 96 Pennsylvania 4......................................... 0.10% 97,172 97 -------------- ----------- 18 TOTAL NON-CONTROLLED RSAs............................. 3,041,346 633,988 =========== ========= 52 TOTAL RSAs............................................ 8,447,485 4,440,904 =========== ========= 111 TOTAL MSAs and RSAs.................................. 64,197,876 23,897,087 =========== =========
- --------------- (1) Population figures are derived from the 1994 Donnelly marketing population estimates for counties comprising FCC defined MSAs and RSAs. POP figures discussed in "SPECIAL FACTORS -- Opinion of Financial Advisor to the Special Committee" and "SPECIAL FACTORS -- Opinions of Financial Advisors to GTE" are based on 1993 population estimates which differ, although not materially in the aggregate, from the figures set forth in the table above. THE CELLULAR TELEPHONE INDUSTRY Background. In 1983, the FCC issued the first license to provide cellular telephone service in the United States. Since that time, cellular telephone service has become available to all 305 MSAs and 428 RSAs and is available to most of the population of the United States. Cellular telephone service was developed as a response to the shortcomings of conventional mobile telephone systems. By providing high quality, high capacity communication to and from vehicle-mounted telephones ("mobiles") and hand-held radio telephones ("portables"), the cellular telephone industry has grown at a very rapid pace and, as of year-end 1994, exceeded 22 million subscribers. In 1994, the cellular telephone industry recorded an overall growth rate of approximately 37%. Technology. Cellular telephone service achieves its high quality and capacity capability by dividing the radio spectrum allocated to it by the FCC into smaller groups or "sets" of frequencies and re-using those frequencies many times in geographically distant parts of the network. Each set of frequencies is allocated to a specific geographic area called a "cell." Adjacent cells must use a different set of frequencies to avoid cell-to-cell frequency interference. Cells which are sufficiently distant from one another may use the same frequencies because the radio signals naturally decay over distance until they reach a low enough level that does not cause interference. Therefore, by use of frequency planning techniques, the radio spectrum allocated to a cellular 44 46 provider can be re-used many times in various parts of the system to achieve high overall call capacities and very low call interference rates. The cells in a system are connected to a computer-controlled switch called a mobile telephone switching office ("MTSO"). The MTSO monitors all calls to all cell sites within the system and routes them to their intended destinations. Once a call request is received, it is directed to the cell site where the signal strength is greatest, and is then continuously monitored for quality signal strength. If the signal strength begins to decline as a vehicle travels through the radio coverage area of one cell, the MTSO recognizes the cell which is getting weaker in signal strength and which is the next cell in the path of the vehicle where signal strength is increasing. At the appropriate point in time, the MTSO instructs the new cell to take over the call and the original cell to release the call. This allows an in-process call to achieve a cell-to-cell handoff with no interruption in the conversation. The MTSO is capable of achieving this handoff as many times as necessary for each call. Today's cellular systems utilize digital switching equipment, digital connections between the switch and the cells, and analog radio frequency ("RF") technology between the cells and the mobile units. The analog RF technology is limited because a finite number of channels can be used at any one cell within a system without causing system problems. The capacity of the system can be increased in areas with heavy call traffic by either cell splitting or cell sectoring. Cell splitting involves constructing numerous cells to serve the coverage area of the original cell. If a large cell is split into four smaller cells, the total channels available within the original coverage area is increased up to four times. Cell sectoring is accomplished by replacing a cell's omni-directional antennas with either three or six directional antennas. This allows for different sets of channels to be used in each sector. The advantage of this method is that capacity can be increased in the cell without increasing system interference and that the same frequency sets can be reused at closer spacing. The cellular telephone industry is moving toward implementing digital RF technology in existing cellular systems. Two technologies are currently under consideration by major cellular providers -- Time Division Multiple Access ("TDMA") and Code Division Multiple Access ("CDMA"). Either technology will offer a considerable capacity increase over today's technology. Market Structure. Historically, FCC regulations provided that licenses would be granted to two cellular service providers in each MSA and RSA; a wireline licensee and a non-wireline licensee. Each of the two licensees has 25 MHz of radio spectrum allocated to it, and each further subdivides this spectrum into 415 two-way channels. Each license is granted for a period of ten years and is subject to renewal at the end of that period. FCC rules require all cellular system operators to provide, on a nondiscriminatory basis, cellular service to resellers who may purchase blocks of numbers at a wholesale rate and resell such service to the public. The FCC is in the process of auctioning additional licenses for the provision of personal communications services in the 1.8 GHz to 1.99 GHz frequency band. These auctions will not be completed until later this year and will result in new licensees in each of the Company's service areas. The first part of the auction was completed on March 13 and resulted in the purchase of 99 licenses by 18 entities. A GTE subsidiary, GTE Macro Communications Corporation, purchased four licenses (Atlanta, Seattle, Cincinnati and Denver). THE COMPANY'S CELLULAR OPERATIONS General. The Company, or partnerships which the Company controls or manages, provides cellular service in 32 MSAs and 34 RSAs ("Company Controlled Systems" or "Company Controlled Markets"). Company Controlled Systems represent approximately 72% of the Company's total POPs. The information provided below with respect to the Company's cellular operations applies only to the Company Controlled Systems because these are the only systems whose operations the Company controls. The Company's non-controlled cellular interests are described below in "BUSINESS OF THE COMPANY -- Non-Controlled Systems". The Company obtained the right to provide cellular service in the Company Controlled Markets either (i) as the result of the FCC's licensing process, or (ii) through an acquisition program. Since the Company 45 47 was an affiliate of a wireline telephone company, it had the right to apply for the wireline cellular license in any area served by its landline affiliate. As a result of this licensing process, the Company is the wireline licensee in 43 Company Controlled Markets (approximately 8.7 million POPs). As a result of its acquisition program, the Company is the non-wireline licensee in 23 Company Controlled Markets (approximately 8.6 million POPs). In acquiring and developing these cellular telephone systems, the Company has utilized a strategy of focusing on coastal and sun belt areas where the Company believes the demographics and business climate are favorable to the development of cellular systems. In addition, the Company has attempted to develop cellular systems in regional clusters of significant size. The cellular telephone systems originally licensed to the Company as part of the FCC licensing process for MSAs and RSAs are generally located in 5 geographic areas: Virginia, California, the Midwest, Texas/New Mexico, and the Gulf of Mexico. The cellular telephone systems acquired by the Company are located in Tennessee, Alabama and Kentucky. Acquisitions and Divestitures. To further its strategy of acquiring and developing large regional clusters in economically strong areas, the Company has developed and followed a program of selling certain properties which are not strategically located and purchasing certain other properties which are strategic. For a description of certain acquisitions and divestitures by the Company in 1994 see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Acquisitions and Dispositions of Interests in Cellular Systems." After such acquisitions and dispositions described above, the Company will provide or participate in the provision of cellular services in 56 MSA markets and 49 RSA markets with total combined POPS of approximately 23.3 million. Cellular Exchange Transaction. The Company, GTE Mobilnet Incorporated, GTE Mobilnet of Oregon Limited Partnership, GTE Mobilnet of Northwest Oregon Limited Partnership and GTE Mobile Communications Service Corporation (the "GTE Parties") have entered into an Asset Exchange Agreement dated February 3, 1995 (the "Asset Exchange Agreement") with US WEST NewVector Group, Inc. ("NewVector"). Pursuant to the Asset Exchange Agreement, the GTE Parties will exchange certain cellular assets currently owned by them for 100% of the assets, including the non-wireline cellular license, currently owned by NewVector in San Diego, California. The Company's assets included in the exchange are its 49% interest in the cellular assets, including the wireline cellular license, in Albuquerque, New Mexico, and its 30% interest in the cellular assets, including the wireline cellular license, in Minneapolis, Minnesota. The assets of the other GTE Parties consist of (i) 91.4% of the assets of the cellular system serving the MSAs of Portland and Salem, Oregon, (ii) 100% of the assets of the cellular system serving Oregon RSA 1, and (iii) either a 10% partnership interest in the partnership providing cellular service in Seattle, Bremerton and Tacoma, Washington or a 10% interest in the assets of that system. The Company will acquire a 28% interest, as a tenant-in-common, in the San Diego assets received from NewVector, representing the equivalent market value of assets exchanged, and will operate the system pursuant to a management agreement with the other GTE Parties. Operations Partnerships. A substantial number of the Company's cellular systems in MSAs are owned by limited partnerships in which the Company is a general partner ("MSA Partnerships"). Most of these partnerships are governed by partnership agreements with similar terms, including, among other things, customary provisions concerning capital contributions, sharing of profits and losses, and dissolution and termination of the partnership. Most of these partnership agreements vest complete operational control of the partnership with the general partner. The general partner typically has the power to manage, supervise and conduct the affairs of the partnership, make all decisions appropriate in connection with the business purposes of the partnership, and incur obligations and execute agreements on behalf of the partnership. The general partner also may make decisions regarding the timing and amount of cash contributions and distributions, and the nature, timing and extent of construction, without the consent of the other partners. The Company owns more than fifty percent (50%) of almost all of the MSA Partnerships. 46 48 A substantial number of the Company's cellular systems in RSAs are also owned by limited or general partnerships in which the Company is either the general or managing partner (the "RSA Partnerships"). These partnerships are governed by partnership agreements with varying terms and provisions. In many of these partnerships, the noncontrolling partners have the right to vote on major issues such as the annual budget and system design. In addition, in certain of these partnerships, the partners have the right to build, under certain circumstances, independent cells in areas of the RSA not served by the partnership. Finally, in a few of these partnerships, the Company's management position is for a limited term (similar to a management contract) and the other partners in the partnership have the right to change managers, with or without cause. The Company owns less than fifty percent (50%) of many of the RSA Partnerships. The partnership agreements for both the MSA Partnerships and RSA Partnerships generally contain provisions granting all partners a right of first refusal in the event a partner desires to transfer a partnership interest. This restriction on transfer can make these partnership interests difficult to sell to a third party. Provision of Services by GTE Personal Communications Services. During 1993, the Company maintained a headquarters staff and two regional staffs which provided strategic as well as day-to-day operational support to the Company's operations in its 66 Company Controlled Markets. In 1994, the Company implemented a new organizational structure pursuant to which the two regional staffs were replaced with eight area staffs which are located in the Company's eight clusters of MSAs and RSAs. These eight areas are Virginia, Tennessee, Kentucky, Alabama, the Midwest, Texas/New Mexico, the Gulf of Mexico and California. The purpose of this reorganization was to move essential, customer impacting resources closer to the marketplace to enhance the Company's competitive advantage and position the Company for future growth. The Company also receives general and administrative as well as functional support from GTE Personal Communications Services ("GTE PCS"), a division of GTE. Pursuant to the Services Agreement, GTE PCS provides finance, accounting, tax, human resources, legal, regulatory and information management services to the Company. The Services Agreement provides that the Company is allocated a portion of GTE PCS expenses based on a two-step process. The first step is the designation of GTE PCS expenses as cellular or non-cellular. The second step is the allocation of cellular expenses between the Company and GTE Mobilnet (a GTE subsidiary also engaged in the cellular communications business) based on a cost-causative allocation methodology. Under this methodology, pools of costs are allocated to operating units based on one of several factors. The factors were developed and applied to cost categories in an effort to allocate the cost to areas in proportion to the use and benefit of the cost. Under this Services Agreement, the Company was allocated approximately 34% of GTE PCS's cellular expenses for the twelve months ended December 31, 1994. See "RELATED PARTY TRANSACTIONS -- Arrangements and Transactions with Contel and GTE". Construction and Maintenance. The construction and maintenance of cellular systems is capital intensive. Although all of the Company's MSA and RSA systems were operational in 1994, the Company continually adds cells to increase coverage, provide additional capacity and improve the quality of these systems. In 1994, the Company completed construction of 153 new cells in Company Controlled Systems. In addition the Company completed a replacement program for most of its older technology cell site equipment. The newer technology equipment provides higher quality and increased flexibility in providing analog services, as well as positions a platform that supports deployment of future digital technologies. Total capital expenditures related to Company Controlled Systems were approximately $253 million in 1994 and are anticipated to be approximately $315 million in 1995. Marketing General. The Company markets its cellular telephone services through several distribution channels, including independent agents, its direct sales force and retail outlets. Agents are independent contractors who solicit customers on a commission basis exclusively for the Company. The Company's agents are diverse in size and type of business. Most are agents for the Company within a limited geographic area, while a few agents sell the Company's cellular service regionally or nationally. Some of the Company's agents sell cellular products and services exclusively, while others sell a variety of products (such as radio and electronics 47 49 equipment). Finally, some of the Company's agents are small shops, while others are large retail stores. The Company's agents generally receive a commission payment for each cellular subscriber they add to the Company's systems. The Company's direct sales force is made up of sales people who are employees of the Company and are compensated on an incentive basis. These employees earn a portion of their compensation as a guaranteed salary and receive additional payments for each subscriber added. These employees are required to meet certain quotas set by the Company. Another distribution channel utilized by the Company is retail outlets, including kiosks and retail stores. The retail outlets are staffed by salaried employees, part-time employees and temporary employees who receive a base salary and incentive compensation for each unit sold. Finally, the Company is constantly attempting to develop new distribution channels, including telemarketing, co-promotions with various other industry leaders and door-to-door sales. National Industry Alliance. During the past several years, cellular providers have been forming industry alliances to market cellular service nationwide. Many cellular providers holding non-wireline licenses have become Cellular One(R) franchisees. Many cellular providers holding wireline licenses have joined a consortium to market under the brand name, MobiLink(R), a registered mark of B-Side Carriers L.P. Because the Company holds both wireline and non-wireline licenses, it participates in both of these alliances. GTE Mobile is an equity owner in B-Side Carriers L.P. See "RELATED PARTY TRANSACTIONS". Subscribers Total Number. The Company had 789,580 subscribers at December 31, 1994, an increase of 51.5% over its subscribers at December 31, 1993. The Company's subscribers at December 31, 1994 were distributed as follows: 33% in Tennessee, 21% in Virginia and 46% in all other markets combined. Cost of Acquisition. The sales and marketing costs of obtaining new subscribers are substantial. The Company not only has to pay for advertising, but also incurs a direct expense for most new subscribers, either in the form of a commission payment to an agent or a salary/incentive payment to a direct sales person. In addition, the Company periodically runs promotions which discount the cost of cellular telephone equipment, or provide some amount of initial access or airtime free to new subscribers. Each of these promotions results in costs to the Company. Although the Company has continued to lower the cost of acquisition per subscriber, it remains one of the Company's single largest expenses. Churn. A factor common throughout the cellular industry is that many subscribers either completely discontinue cellular service or switch from one cellular provider to another. In 1994, this monthly turnover or "churn" in the Company's subscribers averaged 2.7% of all subscribers per month. Subscriber Revenue. The Company charges its subscribers for access to its systems, for minutes of use and for enhanced services, such as voice mail and Mr. RescueSM. A subscriber may purchase each of these services separately for a set price or may purchase any number of rate plans which bundle these services in different ways. For example, a high usage subscriber may purchase a pre-determined number of minutes of use per month for a set fee rather than pay a fixed amount per minute. Similarly, a user who purchases cellular service for security reasons may choose a plan with a low monthly access fee but higher per minute usage fees. Rates charged by the Company and the number and type of rate plans vary from market to market. The average monthly revenue the Company receives per subscriber has been declining over the last several years. The Company believes that this industry trend is caused in part by an increase in the number of casual and security cellular users. The Company expects this trend to continue in 1995 and future years. Roaming Roamers. The Company also provides cellular service to cellular users who are customers of other carriers but who are visiting and wish to use their cellular phone in the Company's service area ("roamers"). When roamers enter the Company's service area and attempt to use their cellular phones, the Company, through participation in an industry clearinghouse, establishes the identity and validity of the roamer and 48 50 provides cellular service. The Company then bills the roamer's home cellular carrier for the service. Likewise, subscribers of the Company use their cellular phones in areas outside the Company's service areas. Roaming Revenue. The charges applicable to roamers are determined by agreements between the Company and other carriers in the industry and vary among markets and carriers. Roaming revenue has increased over the last several years and for the year ending December 31, 1994 represented approximately 18.6% of the Company's total service revenues. This increase is a result of the higher number of cellular subscribers nationwide and the Company's larger service areas due to an increasing number of cell sites. The Company believes that roaming will become more frequent in future years due to advances in intelligent networking which will simplify roaming procedures and make roaming transparent to the roamer. Roamer Fraud. Roamer fraud remains a cellular industry problem. Roamer fraud occurs when cellular telephone equipment is programmed to conceal the true identity and location of the user. While the Company and the industry have implemented an extensive fraud control process, they have not been able to eliminate fraud altogether. Employees At December 31, 1994, the Company had 2,387 employees. Of these, 230 were employed in the Company's headquarters offices in Atlanta and the remaining 2,157 were employed throughout the Company's Controlled Markets. NON-CONTROLLED SYSTEMS The Company participates as a non-controlling general or limited partner in 27 MSAs and 18 RSAs. These interests represent approximately 28% of the Company's total POPs and are typically limited partnership interests in partnerships providing cellular service to the larger MSAs, such as Los Angeles, San Francisco, Washington D.C., Minneapolis and Houston. The partnership agreements which govern these partnerships are similar to those described under the heading, "BUSINESS OF THE COMPANY -- Operations -- Partnerships". Since these partnership agreements vest the power to manage, supervise and conduct the affairs of the partnership with someone other than the Company, there can be no assurance that decisions made by these partnerships would be the same as those made by the Company under similar circumstances. INTERNATIONAL INTERESTS The Company owns a 10% interest in a corporation which provides cellular service in the Sonora and Sinaloa regions of Mexico. The Company currently receives services related to international ventures from GTE PCS. COMPETITION The cellular telephone industry is part of the much broader telecommunications industry. Direct competition is in the form of the other cellular licensee in any given market. Competition between the two cellular licensees is principally on the basis of service quality, price and coverage area. In addition to the direct cellular competitor in each market, there will also be competition from newly emerging Enhanced Specialized Mobile Radio ("ESMR") operators who generally provide dispatch and other private radio systems. With new digital technology it may be possible for ESMR operators to provide services in the future that may be difficult to distinguish from traditional cellular service. In 1993 the FCC announced that it would license additional frequencies in the 1.8 GHz to 1.99 GHz frequency band to enable up to six additional wireless competitors to enter each market. These new licenses consist of two licenses in each of 51 large, often multi-state, geographical areas known as Major Trading Areas ("MTAs") and four licenses in each of 492 smaller geographical areas known as Basic Trading Areas ("BTAs"). Auctions for such licenses began in 1994 and will continue in 1995. The first part of the auction was completed on March 13 and resulted in the purchase of 99 licenses by 18 entities. A GTE subsidiary, 49 51 GTE Macro Communications Corporation, purchased four licenses (Atlanta, Seattle, Cincinnati and Denver). REGULATION General. The FCC regulates the licensing, construction, operation, sale and acquisition of cellular carriers as well as interconnection arrangements between cellular carriers. In addition, certain aspects of cellular system operation, also may be subject to public utility regulation in the state in which service is provided. Changes in federal or state regulation of the Company's and its competitors' activities, such as increased rate regulation or deregulation of interconnection arrangements, could adversely affect the Company's results. A brief summary of federal and applicable state regulation of cellular service is set forth below. Federal Regulation. The FCC initially authorized cellular telephone service in 1981 by allocating 40 MHz of spectrum for two competing cellular systems in each market. A 20 MHz block of spectrum was given to each carrier. Due to cellular's rapid growth, the FCC allocated to each carrier an additional 5 MHz of spectrum in 1986. The initial cellular licenses granted by the FCC expire ten years from their date of issuance and are renewable upon application to, and approval by, the FCC. The FCC has established the criteria under which existing licensees may have their cellular licenses renewed. Basically, a comparative preference will be given to any current cellular licensee who can prove that it substantially used its spectrum for its intended purpose, complied with applicable FCC rules, and did not engage in substantial relevant misconduct. This preference will be the most important factor to be considered by the FCC during its hearing on each license renewal request in comparing the current licensee's application with any competing applications. Failure to comply with FCC rules can be raised as an issue during the license renewal proceedings and could result in termination of the license. The first of the Company's cellular licenses came up for renewal in October 1994. The Company filed renewal applications for its licenses in Mobile, Alabama, El Paso, Texas and Richmond and Norfork, Virginia in August 1994. No entity filed competing applications or oppositions to any of those renewal applications. The remainder of the Company's licenses will expire over the next several years, including two which expire in 1995, seven which expire in 1996 and eleven which expire in 1997. All of the licenses expiring between 1995 and 1997 are MSA licenses. The Company expects to file renewal applications for such licenses upon their expiration. The FCC is currently in the process of auctioning additional licenses in the 1.8 GHz to 1.99 GHz range for the provision of personal communications services. Existing cellular companies are eligible to bid at auction for new licenses. Existing cellular companies may bid for an MTA license where they have no current substantial cellular holdings and one BTA license in all BTA's, including areas where they are currently the cellular provider. The first part of the auction was completed on March 13 and resulted in the purchase of 99 licenses by 18 entities. A GTE subsidiary, GTE Macro Communications Corporation, purchased four licenses (Atlanta, Seattle, Cincinnati and Denver). In addition to regulating cellular service, the FCC also regulates point-to-point microwave facilities which are often utilized by cellular providers to link base stations to each other and to the MTSO. The Company holds certain microwave licenses for these purposes. Such licenses, which are issued for a ten year period, were all renewed by the Company in 1991 for an additional ten year period. The FCC has issued regulations pursuant to which a significant portion of the Company's microwave licenses may have to be relocated to a higher spectrum at the request of a party receiving a license to use such spectrum for a new technology. The regulations currently provide that incumbent microwave licensees will be reimbursed for expenses associated with this relocation by the new licensee. State Regulation. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of cellular technical standards and market structure. Under the Communications Act of 1934, as amended, however, certain aspects of the economic regulation of common carriers were reserved to the states. The states 50 52 had exclusive jurisdiction with respect to charges, classifications, practices and service or facilities for or in connection with intrastate communications. Although many states have deregulated cellular service, some still require the filing of tariffs and operational reports pursuant to statutes governing public utilities. In August 1994, certain provisions of the Omnibus Budget Reconciliation Act of 1993 (the "Omnibus Act") became effective. These provisions prohibited the states from continuing to exercise jurisdiction over rates and entry into the wireless telecommunications business. The Omnibus Act did, however, provide that states could file a petition with the FCC to continue rate jurisdiction. Only two states in which the Company provides service, California and New York, filed to continue such regulation. All states may continue to regulate other aspects of cellular service not preempted by federal law, although it is unclear at this time the extent to which the other states will continue to do so. RELATED PARTY TRANSACTIONS ARRANGEMENTS AND TRANSACTIONS WITH CONTEL AND GTE The Company, Contel and GTE have a number of financial, operating and other arrangements and have engaged in certain transactions believed to be of mutual benefit. The terms of these arrangements have been established by Contel and GTE in consultation with the Company but are not the result of arms-length negotiations. The following is a summary of the principal arrangements and transactions among the Company, Contel and GTE. Taxes. The Company and GTE have a tax sharing arrangement under which the Company and its subsidiaries are included in the consolidated federal income tax returns and in certain state income and franchise tax returns of GTE. Tax payments, if applicable, are made by the Company to GTE on a quarterly basis using methods prescribed by GTE. When the Company and its subsidiaries generate a federal tax loss or excess credits (credits exceeding tax liability), the Company is reimbursed by GTE on a quarterly basis based on the actual loss or credit which may be utilized in the consolidated GTE federal tax returns. With respect to states permitting unitary or combined tax filings, GTE includes the Company and its subsidiaries in its unitary or combined tax filing. The Company pays to GTE an amount equal to the state income or franchise tax that would have been payable by the Company or its subsidiaries if a separate tax return had been filed. Financing and Cash Management. During 1994, the Company relied on GTE for its short term and long term cash needs. The Company's long term cash needs are mainly the result of its acquisition in February 1990 of the cellular telephone properties previously owned by McCaw Cellular Communications, Inc. in Kentucky, Alabama and Tennessee (the "Southeast Properties") for approximately $1.3 billion and subsequent borrowings to pay interest on such amount. The $1.3 billion was originally funded by a loan from Contel Capital Corporation, which at that time was a wholly owned subsidiary of Contel, which became due in July 1991. This original loan was replaced in 1991 with (i) a $700 million loan from GTE to the Company bearing interest at 10.47% and maturing on March 1, 1998, (ii) a $150 million loan from GTE Finance Corporation ("GTE Finance"), a wholly owned subsidiary of GTE, bearing interest at 9.22% and maturing on February 15, 1993 (subsequently refinanced as set forth below), and (iii) a variable rate note from GTE bearing interest at one and one-half percentage points above GTE's external cost of borrowing these funds. The interest rate on the notes described in (i) and (ii) above include an additional one and one-half percentage point of interest in excess of the interest paid by GTE for these funds. During 1992, the Company began a program of converting a portion of its variable rate debt, including a portion of the debt incurred in connection with the acquisition of the Southeast Properties, to fixed rate debt. As a result of this program, the Company entered into the following loans in 1992, 1993 and 1994: (i) a $150 million loan from GTE Finance to the Company bearing interest at 8.38% and maturing on September 25, 1997, (ii) a $150 million loan from GTE Finance to the Company bearing interest at 8.97% and maturing on September 27, 1999, (iii) a $200 million loan from GTE to the Company bearing interest at 8.56% and maturing on December 31, 1996, (iv) a $200 million loan from GTE to the Company bearing interest at 51 53 8.08% and maturing on December 31, 1995, (v) a $150 million loan from GTE Finance to the Company bearing interest at 7.71% and maturing on February 25, 1997 and (vi) a $75 million loan from GTE Finance to the Company bearing interest at 9.90% and maturing on August 17, 2000. The interest rates on these loans were comparable to rates for United States Treasury securities of similar maturity plus 3% per annum at the time such loans were entered into and are the rates which GTE believes approximate the interest rates the Company could have obtained in the marketplace from nonaffiliated lenders. These rates exceed the interest paid by GTE for these funds. As of December 31, 1994, the Company has borrowed approximately $1.63 billion from GTE and GTE Finance in fixed rate debt. The Company fulfills its immediate cash needs with an intercompany note from GTE (the "ICN"). The amount borrowed and the rate of interest on the ICN fluctuate daily. As of December 31, 1994 the amount of the ICN was approximately $495 million. During 1994, the interest rate on the ICN was the daily Prime Rate quoted in The Wall Street Journal plus .75%, which is the interest rate which GTE believes approximates the interest rate the Company could have obtained in the marketplace from nonaffiliated lenders and exceeds the interest paid by GTE for these funds. During 1994, the Company also received cash management services from GTE. Trademark License Agreement. The Company and Contel have entered into an agreement under which the Company has been granted a non-exclusive, non-transferrable license and right to use the trademark, service mark and design "CONTEL CELLULAR". This grant may be terminated at the sole discretion of Contel and will automatically terminate if Contel no longer owns a majority of the outstanding common stock of the Company. General Services. During 1994, the Company received numerous services, both primary and supplemental, from GTE PCS pursuant to the Services Agreement between the Company and GTE Mobile. These services were also provided to GTE's wholly owned cellular subsidiary, GTE Mobilnet, and included accounting, finance, marketing, human resources, legal, regulatory, governmental relations, international, engineering, network design and maintenance services. In exchange for these services, the Company reimbursed GTE PCS for its expenses in accordance with a cost causative allocation formula which allocated pools of costs to operating units based on one of several factors. These factors were developed and applied to cost categories in an effort to allocate expenses to operating units in proportion to the use and benefit of the underlying cost. Under this Services Agreement, the Company paid GTE PCS approximately $49.8 million in 1994, which was approximately 34% of all of the expenses of GTE PCS. Insurance. The Company and its officers, directors and employees are insured under a master contract negotiated by GTE with a private insurance carrier. The premium due the insurance carrier under this master policy is allocated among all GTE subsidiaries based on the loss history, total payroll and total number of vehicles owned by each subsidiary. The premium is paid directly to the private insurance carrier by each subsidiary. Competition. The Company, Contel and GTE have entered into the Competition Agreement pursuant to which Contel and GTE have agreed that they will not engage in the cellular business except in accordance with the terms of the Competition Agreement. Under the Competition Agreement, GTE Mobilnet may continue to engage in the cellular business. However, the Company has a right of first refusal with respect to future acquisitions by GTE of cellular businesses except for (i) acquisitions of minority interests in cellular properties held by GTE Mobilnet and (ii) acquisitions contemplated at the time of the Contel Merger which were specifically listed in the Competition Agreement. After the Merger is effective, the Competition Agreement will be terminated. Equity Ownership in B-Side Carriers L.P. GTE Mobile, an affiliate of GTE, is an equity owner in B-Side Carriers L.P., a consortium of cellular providers who market under the brand name MobiLink(R). The Company has an agreement with B-Side Carriers L.P. to market its wireline properties as MobiLink providers. See "BUSINESS OF THE COMPANY -- The Company's Cellular Operations -- Marketing". Government Systems Contract. In 1994 the Company entered into an agreement with GTE Government Systems Corporation ("GTE Systems") pursuant to which GTE Systems will construct not less than 40 52 54 cell sites for the Company in 1994 and 50 cell sites in 1995. The cost to be charged the Company in 1994 will consist of (i) an administrative fixed fee of $3.1 million, (ii) reimbursement of materials and equipment estimated to be $7.8 million and (iii) reimbursement of external labor costs estimated to be $3.0 million. Contract pricing in 1995 will be agreed upon by the parties. Cellular Exchange Transaction. The Company and the GTE Parties entered into an Asset Exchange Agreement dated February 3, 1995. Under the terms of the Asset Exchange Agreement the Company will receive a 28% interest in the San Diego MSA in exchange for certain cellular assets in Albuquerque, New Mexico and Minneapolis, Minnesota. The Company will operate the San Diego system pursuant to a management agreement with the other GTE Parties. See "BUSINESS OF THE COMPANY -- The Company's Cellular Operations". PAYMENTS TO OPTIONHOLDERS Certain officers and employees of the Company are participants under the 1987 Key Employee Stock Plan of the Company (the "Option Plan"). Options were granted under the Option Plan at prices ranging from $15.00 to $22.81. In connection with the Merger, the Company has offered to make cash payments to those holders of options to purchase Class A Shares issued pursuant to the Option Plan who agree to surrender all of their options. Each optionholder who agrees to surrender all of his or her options will receive a cash payment for each option cancelled, whether or not currently vested (so long as the exercise period has not lapsed), equal to $25.50 multiplied by the number of Class A Shares subject to such options, less the exercise price for such option. If the vesting of the options is accelerated and if all of the options are surrendered as described above, the largest payment any single optionholder will receive is $168,388. TRANSITION ARRANGEMENTS In order to provide a degree of continuity during the merger transition process GTE has entered into a Transition Bonus Agreement with two executives, Dennis L. Whipple, President and Chief Executive Officer of the Company, and Theodore J. Carrier, Treasurer and Chief Financial Officer of the Company. If Mr. Whipple agrees to remain with GTE from the date of the Merger until December 31, 1995 or such earlier date as the parties may determine, he will be eligible for a transition bonus equal to 100% of the sum of his final GTE annual base rate of pay and the average of his GTE Executive Incentive Plan ("EIP") awards for the 1993 and 1994 plan years. If Mr. Carrier agrees to remain with GTE through December 31, 1995, he will be eligible for a transition bonus equal to 100% of the sum of his final GTE annual base rate of pay and the average of his EIP awards for the 1992, 1993, and 1994 plan years. In addition, Mr. Whipple will receive an initial bonus of $20,000. In 1995, Mr. Whipple will participate in the 1994-1995 and 1994-1996 GTE Long-Term Incentive Plan performance bonus award cycles and the 1995-1997 cycle. If Mr. Whipple remains on the payroll to the end of the agreed upon period then, in lieu of an award for the 1995-1997 bonus award cycle, he will receive an equivalent bonus award prorated to December 31, 1995. Any executive officer whose employment is involuntarily terminated will receive an enhanced retirement benefit paid out of GTE's qualified pension assets pursuant to the terms of the GTE's Involuntary Separation Plan ("ISEP"). ISEP provides for a benefit based on length of service and/or grade level and the benefit will not exceed 120% of one year's salary. Mr. Whipple's and Mr. Carrier's ISEP benefits also include a non-qualified benefit attributable to their EIP award for the three previous years. 53 55 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT CERTAIN BENEFICIAL OWNERS The following table contains certain information regarding the only persons known to the Company as of the date of this Information Statement to be beneficial owners of more than 5% of any class of the Company's voting securities:
AMOUNT OF NAME AND ADDRESS OF BENEFICIAL PERCENTAGE TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS ----------------------------- ----------------------------- ---------- ---------- Class A Common Stock......... CS First Boston, Inc. 551,480(2) 5.54% Park Avenue Plaza 55 East 52nd Street New York, NY 10055(1) Class B Common Stock......... GTE Corporation 90,000,000(4) 100% One Stamford Forum Stamford, CT 06904(3)
- --------------- (1) This information was obtained from a Schedule 13G filed with the SEC on February 13, 1995 by CS First Boston, Inc. (2) The Schedule 13G filed by CS First Boston, Inc. discloses that CS First Boston, Inc. exercises sole voting power and sole dispositive power over these shares. (3) GTE acquired beneficial ownership of these shares as a result of the merger of a subsidiary of GTE into Contel. Contel remains the holder of record of these shares. The address of Contel is One Stamford Forum, Stamford, Connecticut 06904. (4) GTE, through Contel, exercises sole voting power and sole dispositive power over these shares. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The number of Class A Shares and shares of GTE Common Stock owned by each director and executive officer of the Company as of January 31, 1995 is set forth in the table below. Unless otherwise indicated, all persons shown in the table have sole voting and investment power with respect to the shares shown.
NUMBER OF SHARES OF CLASS A COMMON STOCK NUMBER OF SHARES OF BENEFICIALLY GTE COMMON STOCK NAME OF DIRECTOR OWNED(1) BENEFICIALLY OWNED(2) ------------------------------------------------ ----------------- --------------------- Leo Jaffe....................................... 2,000 0 James L. Johnson................................ 0 722,085(3)(4) Robert E. LaBlanc............................... 4,000 0 Charles R. Lee.................................. 0 634,148(3)(4) Michael T. Masin................................ 0 75,291(3)(5) Russell E. Palmer............................... 0 2,000(6) Irwin Schneiderman.............................. 0 0 Nicholas L. Trivisonno.......................... 0 181,956(3)(4) James W. Walter................................. 0 12,000(7) Dennis L. Whipple............................... 18,650(8) 9,724(3)(4) Charles Wohlstetter............................. 0 232,655
54 56
NUMBER OF SHARES OF CLASS A COMMON STOCK NUMBER OF SHARES OF BENEFICIALLY GTE COMMON STOCK NAME OF EXECUTIVE OFFICER OWNED(1) BENEFICIALLY OWNED(2) ---------------------------------------------- -------------------- --------------------- Dennis L. Whipple............................. 18,650(8) 9,724(3)(4) Randall L. Crouse............................. 3,100(8) 5,505(4) Pamela F. Lopez............................... 1,700(8) 2,585(4) Laura E. Binion............................... 1,700(8) 1,905(3)(4) Theodore J. Carrier........................... 15,000(8) 216(4) John P.Z. Kent................................ 0 22,610(3) Jay M. Rosen.................................. 0 47,995(3) All directors and officers as a group (the "Executive Group").......................... 46,150 1,950,675(3)(4)
- --------------- (1) Each of these amounts, and all of them in the aggregate, represented less than 1% of the outstanding Class A Shares as of January 31, 1995. Each director and executive officer is expected to accept the Merger Consideration and not exercise appraisal rights. (2) Each of these amounts, and all of them in the aggregate, represented less than 1% of the outstanding shares of GTE Common Stock as of January 31, 1995. (3) Included in the number of shares beneficially owned by Messrs. Johnson, Lee, Masin, Trivisonno, Whipple, Kent and Rosen and Ms. Binion and the Executive Group are: 633,300; 553,399; 72,599; 170,233; 5,300; 18,099; 25,632; 816; and 1,479,378 shares, respectively, which such persons have the right to acquire within 60 days pursuant to stock options. (4) This amount includes shares acquired through participation in GTE's Consolidated Employee Stock Ownership Plan and/or Savings Plan. (5) In addition to the shares of GTE Common Stock shown above, Mr. Masin owns 10,088 GTE Common Stock Units, which are payable in cash under the Deferred Compensation Plan and Phantom Stock Plan for Nonemployee Members of the Board of Directors of GTE Corporation (the "Deferred Compensation Plan"). Mr. Masin was a non-employee director of GTE prior to joining GTE as Vice Chairman in 1993. (6) In addition to the shares of GTE Common Stock shown above, Mr. Palmer owns 1,294 GTE Common Stock Units, which are payable in cash under the Deferred Compensation Plan. (7) In addition to the shares of GTE Common Stock shown above, Mr. Walter owns 121,116 GTE Common Stock Units, which are payable in cash under the Deferred Compensation Plan. (8) Included in the number of shares beneficially owned by Messrs. Whipple, Crouse and Carrier and Ms. Lopez and Ms. Binion and the Executive Group are 18,650, 3,100, 15,000, 1,700, 1,700 and 40,150 shares, respectively, which such persons have the right to acquire upon the exercise of certain stock options. Pursuant to an offer made by the Company in connection with the Merger, such options, whether or not currently vested, may be surrendered for a cash payment equal to $25.50 times the number of shares issuable upon exercise thereof, less the exercise price applicable thereto. See "RELATED PARTY TRANSACTIONS -- Payments to Optionholders". If Messrs. Whipple, Crouse and Carrier and Ms. Lopez and Ms. Binion and the Executive Group agree to surrender the options they hold, the maximum amount payable to those individuals and the Executive Group is $168,388, $30,425, $59,760, $15,725, $16,600 and $290,898, respectively. DIRECTORS AND EXECUTIVE OFFICERS OF GTE, CONTEL AND CCI ACQUISITION As set forth in Exhibit E, certain directors and executive officers of the Company are also directors or executive officers of GTE, Contel or CCI Acquisition. With the exception of the ownership of Class A Shares by certain of such persons set forth in "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -- Directors and Executive Officers of the Company", no director or executive officer of GTE, Contel or CCI Acquisition owns any Class A Shares. 55 57 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents which have been filed by the Company with the Securities and Exchange Commission, as noted below, are incorporated by reference into this Information Statement: (a) Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (as amended by Form 10-K/A-1 filed January 25, 1995 and Form 10-K/A-2 filed March , 1995) and (b) Proxy Statement dated April 29, 1994. The File Number for all of the above referenced documents is Commission File No. 0-16714. All documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, and prior to the date the written consent is used to effect the Merger, shall be deemed to be incorporated by reference into this Information Statement. Any statement contained herein or in any document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purposes of this Information Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part of this Information Statement, except as so modified or superseded. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Information Statement is delivered, upon written or oral request of such person and by first class mail or other equally prompt means within one business day of receipt of such request, a copy of any and all of the information that has been incorporated by reference in this Information Statement (not including exhibits to such information unless such exhibits are specifically incorporated by reference into such information), including information contained in documents filed subsequent to March , 1995. Such requests for information should be directed to Contel Cellular Inc., 245 Perimeter Parkway, Atlanta, Georgia 30346, Attention: General Counsel. The telephone number of the General Counsel is (404) 804-3400. By Order of the Board of Directors /s/ JAY M. ROSEN Secretary Atlanta, Georgia March , 1995 56 58 INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants -- Consolidated Financial Statements................................................................... F-2 Consolidated Statements of Operations.......................................... F-3 Consolidated Statements of Cash Flows.......................................... F-4 Consolidated Balance Sheets.................................................... F-5 Consolidated Statements of Changes in Stockholders' Deficit.................... F-7 Notes to Consolidated Financial Statements..................................... F-8 Schedule II -- Valuation and Qualifying Accounts............................... F-25 Report of Independent Public Accountants -- Compilation of Combined Financial Statements................................................................... F-26 Combined Statements of Operations.............................................. F-27 Combined Statements of Cash Flows.............................................. F-28 Combined Balance Sheets........................................................ F-29 Combined Statements of Changes in Partners' Capital............................ F-30 Notes to Combined Financial Statements......................................... F-31 Report of Independent Accountants -- Los Angeles SMSA Limited Partnership...... F-36 Report of Independent Accountants -- Washington D.C. SMSA Limited Partnership.................................................................. F-37 Report of Independent Public Accountants -- GTE Mobilnet of California Ltd. Partnership.................................................................. F-38 Report of Independent Public Accountants -- GTE Mobilnet of South Texas Ltd. Partnership.................................................................. F-39 Report of Independent Auditors -- San Antonio SMSA Limited Partnership......... F-40 Report of Independent Public Accountants -- Albucell Limited Partnership....... F-41
F-1 59 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Contel Cellular Inc.: We have audited the consolidated balance sheets of CONTEL CELLULAR INC. (a Delaware corporation and majority owned subsidiary of GTE Corporation) AND SUBSIDIARIES as of December 31, 1994 and 1993 and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain unconsolidated partnerships as described in Note 4 to the financial statements. The investment in these partnerships is reflected in the accompanying balance sheets using the equity method of accounting and represented $102,618,000 and $82,140,000 (or 4%) of total consolidated assets at December 31, 1994 and 1993, respectively. The equity in their earnings is included in the statements of operations and represented $39,806,000, $28,024,000, and $20,070,000 for the years ended December 31, 1994, 1993, and 1992, respectively. The summarized financial information contained in Note 4 to the consolidated financial statements includes financial information for the aforementioned partnerships. The financial statements of these unconsolidated partnerships were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for these unconsolidated partnerships, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the financial statements (pages F-3 to F-24) referred to above present fairly, in all material respects, the financial position of Contel Cellular Inc., and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. A report of other auditors referred to above indicates that the Los Angeles SMSA Limited Partnership is involved in litigation with several agents as discussed in Note 4 and with cellular subscribers as discussed in Notes 4 and 8, the outcome of which cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. As discussed in Note 4, the cellular partnership in San Francisco, California, of which the Company holds a non-controlling interest, is involved in litigation with a class of cellular subscribers, the outcome of which cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. As discussed in Note 3 to the financial statements, effective January 1, 1992, the Company changed its method of accounting for postretirement benefits other than pensions. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Atlanta, Georgia March 13, 1995 F-2 60 CONTEL CELLULAR INC. CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1994 1993 1992 --------- --------- --------- REVENUES AND SALES: Service revenues...................................... $ 524,772 $ 346,460 $ 262,479 Equipment sales....................................... 38,183 27,554 24,520 --------- --------- --------- 562,955 374,014 286,999 --------- --------- --------- COSTS AND EXPENSES: Cost of services...................................... 85,095 47,942 41,686 Cost of equipment sales............................... 78,634 49,449 37,678 Selling, general and administrative................... 242,840 196,738 162,093 Depreciation.......................................... 77,865 66,573 54,401 Amortization of FCC licenses, goodwill and other intangibles........................................ 37,510 41,617 41,254 --------- --------- --------- 521,944 402,319 337,112 --------- --------- --------- OPERATING INCOME (LOSS)................................. 41,011 (28,305) (50,113) Interest expense, net................................... 179,183 162,907 148,092 Other expense (income), net............................. 840 (2,360) 516 --------- --------- --------- LOSS BEFORE MINORITY INTERESTS.......................... (139,012) (188,852) (198,721) Minority interests...................................... (4,320) 841 2,374 --------- --------- --------- LOSS FROM CONSOLIDATED OPERATIONS....................... (143,332) (188,011) (196,347) Equity in earnings of unconsolidated partnerships....... 62,792 37,351 29,027 Gains on sales of cellular interests.................... 96,607 48,023 60,806 --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES....................... 16,067 (102,637) (106,514) Provision for (Benefit from) income taxes............... 14,196 (27,719) (33,453) --------- --------- --------- NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES................................. 1,871 (74,918) (73,061) Cumulative Effect of Change in Accounting Principles.... -- (241) (2,080) --------- --------- --------- NET INCOME (LOSS)....................................... $ 1,871 $ (75,159) $ (75,141) ========= ========= ========= NET INCOME (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES....................... $ 0.02 $ (0.75) $ (0.73) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES PER SHARE................................................. -- -- (0.02) --------- --------- --------- NET INCOME (LOSS) PER SHARE............................. $ 0.02 $ (0.75) $ (0.75) ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.............. 99,953 99,948 99,943 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-3 61 CONTEL CELLULAR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1994 1993 1992 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 1,871 $ (75,159) $ (75,141) Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Depreciation........................................... 77,865 66,573 54,401 Amortization of FCC licenses, goodwill and other intangibles.......................................... 37,510 41,617 41,254 Gains on sales of cellular interests................... (96,607) (48,023) (60,806) Deferred income tax provision.......................... 38,313 37,397 39,523 Provision for losses on accounts receivable............ 14,704 6,298 7,528 Undistributed earnings of unconsolidated partnerships......................................... (35,309) (17,548) (12,258) Other, net............................................. 618 (12,198) (1,174) Changes in current assets and current liabilities excluding the effects of acquisitions and dispositions Increase in accounts receivable...................... (35,890) (24,318) (2,275) Change in taxes receivable/payable -- affiliates..... (19,635) 9,774 36,936 Increase in other current assets..................... (5,594) (5,559) (134) Increase (Decrease) in accrued interest -- affiliates............................ 21,380 (2,392) 6,245 Increase in other current liabilities................ 22,553 28,154 4,108 --------- --------- --------- Net Cash Provided...................................... 21,779 4,616 38,207 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (255,174) (130,042) (183,504) Acquisitions, net of cash acquired........................ (112,793) (25,887) -- Proceeds from sales of cellular interests................. 113,682 60,795 71,252 Change in advances to unconsolidated partnerships, net.... 12,352 6,866 (609) Contributions to unconsolidated partnerships.............. (15,082) (13,831) (12,631) Other, net................................................ 4,763 71 (659) --------- --------- --------- Net Cash Used.......................................... (252,252) (102,028) (126,151) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable -- affiliates, net............ 234,912 85,468 79,293 Proceeds from other long-term obligations................. -- 6,512 -- Payment of other long-term obligations.................... (6,000) (6,000) -- Contributions from minority partners...................... 6,372 10,047 1,731 Other, net................................................ 431 22 142 --------- --------- --------- Net Cash Provided...................................... 235,715 96,049 81,166 --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents........ 5,242 (1,363) (6,778) Cash and Cash Equivalents at Beginning of Period............ 278 1,641 8,419 --------- --------- --------- Cash and Cash Equivalents at End of Period.................. $ 5,520 $ 278 $ 1,641 ========= ========= ========= SUPPLEMENTAL DISCLOSURES: Income tax benefits received.............................. $ (5,500) $ (70,960) $(108,966) ========= ========= ========= Interest paid............................................. $ 162,485 $ 168,977 $ 143,791 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-4 62 CONTEL CELLULAR INC. CONSOLIDATED BALANCE SHEETS (THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31, ----------------------- 1994 1993 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................................... $ 5,520 $ 278 Accounts receivable -- trade, net of allowance for doubtful accounts of $8,556 and $4,674.................................... 77,816 53,673 Advances to unconsolidated partnerships............................. -- 8,039 Inventories......................................................... 6,012 6,765 Other............................................................... 13,605 4,616 ---------- ---------- 102,953 73,371 ---------- ---------- INVESTMENTS AND OTHER ASSETS: FCC licenses, goodwill and other intangibles, net of accumulated amortization of $195,316 and $157,806................ 1,354,677 1,287,437 Investments in and advances to unconsolidated partnerships.......... 204,771 163,755 Long-term notes receivable.......................................... 21,430 3,565 Deferred charges and other.......................................... 913 2,065 ---------- ---------- 1,581,791 1,456,822 ---------- ---------- PROPERTY AND EQUIPMENT, AT COST: Land................................................................ 22,388 20,001 Buildings and towers................................................ 154,828 121,993 Equipment........................................................... 618,157 477,589 Furniture and fixtures.............................................. 4,881 4,299 Assets under construction........................................... 95,212 82,660 ---------- ---------- 895,466 706,542 Accumulated depreciation............................................ (233,744) (183,751) ---------- ---------- 661,722 522,791 ---------- ---------- $2,346,466 $2,052,984 ========= =========
The accompanying notes are an integral part of these financial statements. F-5 63 CONTEL CELLULAR INC. CONSOLIDATED BALANCE SHEETS (THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31, ------------------------- 1994 1993 ---------- ---------- LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of other long-term obligations.................... $ 6,000 $ 6,000 Accounts payable -- construction and trade........................ 53,548 60,407 Accounts payable -- affiliates.................................... 4,728 23,552 Advance billings and customer deposits............................ 4,015 3,638 Accrued interest -- affiliates.................................... 58,971 37,591 Accrued taxes -- other............................................ 23,702 18,536 Accrued expenses and other current liabilities.................... 30,960 25,054 ---------- ---------- 181,924 174,778 ---------- ---------- LONG-TERM OBLIGATIONS: Notes payable -- affiliates....................................... 2,136,263 1,901,726 Other............................................................. 30,792 36,792 ---------- ---------- 2,167,055 1,938,518 ---------- ---------- DEFERRED INCOME TAXES............................................... 191,694 151,881 OTHER DEFERRED CREDITS.............................................. 26,102 14,333 MINORITY INTERESTS.................................................. 18,611 14,695 STOCKHOLDERS' DEFICIT: Class A common stock, $1 par value; authorized 100,000,000 shares, issued 10,000,000 shares....................................... 10,000 10,000 Class B common stock, $1 par value; authorized 100,000,000 shares, issued 90,000,000 shares....................................... 90,000 90,000 Paid-in capital................................................... 33,331 33,358 Accumulated deficit............................................... (371,434) (373,305) Cost of 33,047 and 51,347 shares of Class A common stock in treasury....................................................... (817) (1,274) ---------- ---------- (238,920) (241,221) ---------- ---------- $2,346,466 $2,052,984 ========= =========
The accompanying notes are an integral part of these financial statements. F-6 64 CONTEL CELLULAR INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (THOUSANDS)
CLASS A CLASS B COMMON COMMON TOTAL STOCK, STOCK, PAID-IN ACCUMULATED TREASURY STOCKHOLDERS' $1 PAR VALUE $1 PAR VALUE CAPITAL DEFICIT STOCK DEFICIT ------------- ------------- -------- ----------- -------- ----------- Balance at December 31, 1991........... $10,000 $90,000 $33,424 $(223,005) $(1,504 ) $ (91,085) Net Loss............. -- -- -- (75,141) -- (75,141) Issuance of restricted stock and stock under employee stock option plans....... -- -- (57 ) -- 199 142 ------------- ------------- -------- ----------- -------- ----------- Balance at December 31, 1992........... 10,000 90,000 33,367 (298,146) (1,305 ) (166,084) Net Loss............. -- -- -- (75,159) -- (75,159) Issuance of restricted stock and stock under employee stock option plans....... -- -- (9 ) -- 31 22 ------------- ------------- -------- ----------- -------- ----------- Balance at December 31, 1993........... 10,000 90,000 33,358 (373,305) (1,274 ) (241,221) Net Income........... -- -- -- 1,871 -- 1,871 Issuance of restricted stock and stock under employee stock option plans....... -- -- (27 ) -- 457 430 ------------- ------------- -------- ----------- -------- ----------- Balance at December 31, 1994........... $10,000 $90,000 $33,331 $(371,434) $ (817 ) $(238,920) ============ ============ ======= ============ ======== ==========
The accompanying notes are an integral part of these financial statements. F-7 65 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF BUSINESS The Company, a 90-percent-owned subsidiary of Contel, was incorporated in Delaware on September 24, 1980. Contel is a wholly owned subsidiary of GTE. The Company, through its subsidiaries or through partnerships, provides or participates in providing cellular telephone services in various metropolitan statistical areas ("MSAs") and rural service areas ("RSAs") throughout the United States. Refer to the "Interests in MSAs and RSAs" following the Notes to Consolidated Financial Statements for additional information. A definitive agreement dated as of December 27, 1994 was executed between the Company and GTE based on the approval by the Company's Board of Directors to accept the proposal by GTE to acquire the remaining 10 percent ownership of the Company. Under the terms of the agreement, a GTE subsidiary will merge into the Company and the holders of the approximately 10 million Class A common shares will receive $25.50 per share in cash. The Company's Class B common shares owned by GTE will be converted into shares of the merged entity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all wholly owned subsidiaries and partnerships in which the Company holds a controlling interest. Investments in partnerships in which the Company does not hold a controlling interest are accounted for using the equity method of accounting. Significant intercompany transactions are eliminated in consolidation. REVENUE RECOGNITION The Company earns service revenues by providing access to its cellular systems ("access revenue") and usage of its cellular systems ("airtime revenue"). Access and airtime revenue, including roaming and long-distance, is recognized when the service is rendered. Other service revenues are recognized after services are performed and include connection and installation revenues. Equipment sales are recognized upon delivery of the equipment to the customer. PROPERTY, EQUIPMENT AND DEPRECIATION The Company records depreciation using the straight-line method over the estimated useful life of the asset, which is 20 years for buildings, 15 years for towers, 7 to 10 years for cell and switching equipment, and 3 to 5 years for furniture and fixtures. The Company removes the cost and accumulated depreciation of retirements from the accounts and recognizes the related gain or loss upon the disposition or disposal of assets. INTEREST EXPENSE Interest expense related to construction activity is capitalized as a cost of construction. Interest capitalized amounted to $4.1 million, $2.5 million and $2.6 million for 1994, 1993 and 1992, respectively. INCOME TAXES Income tax expense (benefit) is based on reported income (loss) before income taxes. Deferred taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. In 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). In accordance with FAS 109, deferred income taxes have been established for all temporary differences between the book and tax basis of assets and liabilities, including those which had not been F-8 66 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED previously recognized. In addition, deferred tax balances are adjusted to reflect tax rates, based on currently enacted tax laws, that will be in effect in the years in which the temporary differences are expected to reverse. NET INCOME (LOSS) PER SHARE Net income (loss) per share for all years presented was computed using the weighted average number of Class A and Class B Common Stock outstanding in accordance with Accounting Principles Board Opinion No. 15. CASH EQUIVALENTS The Company considers all highly liquid unrestricted cash investments with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories include cellular telephone equipment held for sale and are valued at the lower of cost or market. Cost is determined using the specific identification method. Accessories are expensed when purchased and are not material in amount. LONG-TERM NOTES RECEIVABLE Long-term notes receivable consist primarily of amounts and accrued interest due from partnerships disposed of between 1992 and 1994. The notes bear interest at rates ranging from a fixed-rate of 8% to a variable-rate of prime plus 3% (the prime rate at December 31, 1994 was 8.5%) and mature in varying amounts between the years 1997 and 2002. FCC LICENSES, GOODWILL AND OTHER INTANGIBLES Costs incurred in connection with the acquisition of partnership interests in excess of the net tangible assets acquired are capitalized as Federal Communications Commission ("FCC") license costs, customer base or goodwill and are amortized on a straight-line basis. FCC license costs and goodwill are amortized over 40 years based on the high probability that the licenses will be renewed upon expiration of their initial terms. Customer base is amortized over 4 years. ASSETS UNDER CONSTRUCTION The Company's network construction expenditures are recorded as assets under construction until the system or assets are placed in service. When the assets are placed in service, they are transferred to the appropriate property and equipment category and depreciation begins. The Company's construction employees' salaries, benefits and travel expenses, as well as other related departmental expenses, are capitalized to assets under construction during the construction period. FINANCIAL INSTRUMENTS The fair values of financial instruments, other than long-term obligations, closely approximate their carrying value. The estimated market value of long-term obligations, based on either reference to quoted market prices or an option pricing model, was approximately $54 million below the carrying value at December 31, 1994, and exceeded the carrying value by approximately $74 million at December 31, 1993. The change in the market value between years was caused by rising interest rates during 1994. F-9 67 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED PRESENTATION Certain prior year amounts have been reclassified to conform to the current year presentation. 3. ACCOUNTING CHANGES During the fourth quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112"). FAS 112 requires the expected cost of postemployment benefits to be recognized during the years that employees render service. Prior to adoption, the cost of these benefits was charged to expense on a pay-as-you-go basis. As a result of adoption, a one-time, non-cash charge of $241 thousand (net of deferred tax benefits) was recorded to recognize the annual effect of this change in accounting principle. During the fourth quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106") and FAS 109, retroactive to January 1, 1992. FAS 106 requires the expected cost of postretirement health care and life insurance benefits to be recognized during the years that employees render service. Prior to adoption, the cost of these benefits was charged to expense on a pay-as-you-go basis. The Company elected to adopt FAS 106 on the immediate recognition basis. As a result, a one-time, non-cash charge of $2.1 million (net of deferred tax benefits of $1.1 million), or $.02 per share, was recorded to give effect to past service costs. 4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS The Company holds non-controlling interests in various MSA and RSA partnerships (referred to as "Unconsolidated Partnerships") which were formed to provide cellular telephone services. Unconsolidated Partnerships are accounted for using the equity method of accounting. Refer to Note 5 for information regarding acquisitions and dispositions of cellular interests. Combined condensed results of operations and net assets of the Company's Unconsolidated Partnerships are as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1994 1993 1992 ----------- ---------- --------- (THOUSANDS) Results of Operations: Revenues............................................ $ 1,594,349 $1,201,815 $ 949,903 Costs and Expenses.................................. (1,141,987) (866,504) (694,139) Other Income (Expense).............................. 1,764 (12,698) 11,546 ----------- ---------- --------- Net Income............................................ 454,126 322,613 267,310 Other Partners' Share of MSA Net Income............... 394,528 283,494 234,921 ----------- ---------- --------- Company's Share of MSA Net Income..................... 59,598 39,119 32,389 Company's Share of RSA Net Income (Loss).............. 3,194 (1,768) (3,362) ----------- ---------- --------- $ 62,792 $ 37,351 $ 29,027 ========== ========= =========
F-10 68 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, ------------------------- 1994 1993 ---------- ---------- (THOUSANDS) Net Assets: Current Assets.................................................... $ 336,564 $ 265,060 Noncurrent Assets................................................. 1,203,044 977,475 Current Liabilities............................................... (274,255) (184,265) Noncurrent Liabilities............................................ (12,134) (12,278) ---------- ---------- Net Assets.......................................................... 1,253,219 1,045,992 Other Partners' Share of MSA Net Assets............................. 1,068,991 898,967 ---------- ---------- Company's Share of MSA Net Assets................................... 184,228 147,025 Company's Share of RSA Net Assets................................... 20,543 16,730 ---------- ---------- $ 204,771 $ 163,755 ========= =========
The managing partner of each of the Unconsolidated Partnerships generally has the authority to manage, supervise and conduct the affairs of the partnership, make all decisions appropriate in connection with the business purposes of the partnership and incur obligations and execute agreements on behalf of the partnership. Under the terms of the partnership agreements, the Company is entitled to review and audit the records of the partnership in those Unconsolidated Partnerships it does not manage. In certain of the Unconsolidated RSA Partnerships, the Company serves as the managing partner. In such cases, the Company retains all other rights and responsibilities of a non-controlling partner. As managing partner, the Company may provide the initial capital, through cash advances, required to meet the financial obligations of the partnerships. Alternatively, the Company may request capital contributions to be invested by the partnerships in advance of expenditures. At December 31, 1994, the Company had a payable to limited partners of approximately $1.5 million, of which approximately $0.7 million represents the Company's proportionate share. The remainder represents a current payable to other partners and is included in Accounts payable -- affiliates in the accompanying consolidated balance sheets. At December 31, 1993, the Company had provided cash advances of $12.7 million, of which approximately $4.7 million, represents the Company's proportionate share. The remainder represents a current receivable from the other partners or the partnerships and is included in Advances to unconsolidated partnerships in the accompanying consolidated balance sheets. The amount of undistributed earnings of Unconsolidated Partnerships included in Accumulated deficit in the accompanying consolidated statements of changes in stockholders' deficit was approximately $84.1 million, $48.7 million and $31.2 million at December 31, 1994, 1993 and 1992, respectively. There were no restricted earnings of Unconsolidated Partnerships at December 31, 1994, 1993 or 1992. In January 1992, the California Public Utilities Commission ("CPUC") commenced an investigation of all cellular companies operating in the state of California to determine their compliance with General Order number 159 ("G.O. 159"). The investigation will address whether cellular utilities have complied with local, state or federal regulations governing the approval and construction of cellular sites in the state. The CPUC may advise other agencies of violations in their jurisdictions. Presently, the Los Angeles SMSA Limited Partnership (the "L.A. Partnership") and the GTE Mobilnet of California Limited Partnership (the "California Partnership") have prepared and filed the information requested by the CPUC. The CPUC will review the information and, if violations of G.O. 159 are found, it may assess penalties against these partnerships. On October 7, 1993, and February 15, 1994, two agents of the competing carrier have named the L.A. Partnership in several complaints against the carrier. The general allegations include violations of California Unfair Practices Act and price fixing. F-11 69 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED On November 24, 1993, October 17, 1994 and November 30, 1994, three separate class action (not yet certified) suits were filed against the L.A. Partnership alleging conspiracy with a competing carrier to fix the price of cellular service in violation of state and federal antitrust laws. The plaintiffs are seeking injunctive relief and substantial monetary damages in excess of $100 million before trebling. In May 1994, several former and current agents of the competing carrier have named the L.A. Partnership in only one cause of action. This cause of action alleges a conspiracy with the competing carrier to fix the prices of cellular service in violation of state antitrust laws. The plaintiffs are seeking damages in excess of $100,000 for each of the plaintiff agents. On July 18, 1994, AirTouch Cellular was served with a class action (not yet certified) suit on behalf of the L.A. Partnership's authorized agents. The complaint alleges "predatory practices" and seeks damages in excess of $1.6 million per agent, plus statutory treble damages. On October 10, 1994, the California Partnership in which the Company holds an 11.3% limited interest was served a complaint on behalf of users of cellular service in the San Francisco, California area. The Complaint alleges that the California Partnership has violated the California Business and Profession Code by taking various actions to restrain trade, prevent competition and fix prices. The Company's potential financial liability in connection with all of the lawsuits discussed above is uncertain at this time because the Company is involved in these lawsuits only as a limited partner. As a limited partner, the Company is not involved in the strategic analysis of these cases with litigation counsel and does not direct the litigation decisions made by these partnerships. In addition, it is unclear whether any portion of an adverse judgment would be passed to the Company, as a limited partner. For these reasons, no provision for any liability that may result has been made in the accompanying financial statements. 5. ACQUISITIONS AND DISPOSITIONS OF CELLULAR INTERESTS The Company regularly evaluates its properties to assess their strategic attributes in terms of meeting its financial goals and objectives. The Company will purchase properties where the demographics and business climates are favorable to the development of core and contiguous cellular systems and will pursue the sale of properties deemed to be non-strategic. On February 3, 1995, the Company signed a definitive agreement to exchange its cellular assets (the "Exchange") in the Minneapolis, Minnesota MSA and the Albuquerque, New Mexico MSA for a portion of US WEST NewVector Group, Inc.'s cellular assets in the San Diego, California MSA ("San Diego MSA"). The Exchange will give the Company a 28 percent interest, as a tenant-in-common, in the assets of the cellular system serving the San Diego MSA. The Exchange will reduce the Company's POPs by approximately 290,000. The transaction is subject to regulatory approvals and is expected to close during 1995. In December 1993, the Company signed a definitive agreement whereby NYNEX Mobile Communications Company ("NYNEX") agreed to purchase the Company's interest in the MSA systems serving Orange County, Poughkeepsie, Binghamton and Elmira, New York; Manchester, New Hampshire; and Burlington, Vermont. Also included are New Hampshire RSA 2; Vermont RSAs 1 and 2A; New York RSAs 2 and 3; and Pennsylvania RSAs 3A and 4A. The Orange County and Poughkeepsie MSAs were sold in 1993. During 1994, the Company sold its interests in the Manchester, New Hampshire and Burlington, Vermont MSAs, New Hampshire RSA 2 , Vermont RSAs 1 and 2A and New York RSA 2. Additionally, as part of the agreement, NYNEX will purchase the Company's interest in the Binghamton and Elmira, New York MSAs, Pennsylvania RSAs 3A and 4A, and New York RSA 3 pending the receipt of certain regulatory approvals. In addition to the acquisitions and dispositions that occurred between 1992 and 1994, the Company purchased 13 MSAs located in Tennessee, Kentucky and Alabama (the "Southeast Properties") from McCaw Cellular Communications Inc. ("McCaw") for approximately $1.32 billion during 1990. The F-12 70 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED acquisition was financed through an interim intercompany loan from Contel Capital Corporation ("Contel Capital"), a wholly owned subsidiary of Contel. Refer to Note 10 for additional information regarding this loan. Acquisition and disposition transactions completed as of December 31, 1994, by the Company are included in the table below.
MSA RSA PERCENTAGE COMPANY COMPANY ESTIMATED PURCHASED/ POPULATION POPULATION 1994 MARKET POPULATION(1) SOLD EQUIVALENTS EQUIVALENTS - --------------------- --------------------- ------------- ---------- ----------- ----------- Acquisitions: Tennessee 2 155.8 100.00% 155.8 Tennessee 3 323.0 51.00% 164.8 Indiana 7,8,9 608.9 3.09% 18.8 Alabama 1B 164.7 8.33% 13.7 Alabama 2 125.8 100.00% 125.8 Huntsville, AL 384.9 100.00% 384.9 Tuscaloosa, AL 158.0 .35% .6 ----------- ----------- Total Acquisitions.......................................................... 385.5 478.9 ======== ======== Dispositions: Manchester, NH 336.3 60.00% 201.8 Oregon 5 247.1 100.00% 247.1 Iowa 8 54.6 16.67% 9.1 Iowa 14 108.4 5.56% 6.0 South Dakota 5 B1 12.9 33.33% 4.3 North Carolina 1 174.1 50.00% 87.0 South Dakota 6 B1 35.5 14.29% 5.1 New Hampshire 2 205.8 36.59% 75.3 Burlington, VT 139.9 100.00% 139.9 Vermont 1 & 2A 310.0 83.27% 258.2 Kentucky 11 168.6 100.00% 168.6 California 7 124.2 100.00% 124.2 New York 2 234.3 25.00% 58.6 Alabama 1B 164.7 33.33% 54.9 Iowa 1 61.6 7.07% 4.4 ----------- ----------- Total Dispositions.......................................................... 341.7 1,102.8 ======== ========
Total Company Population Equivalents at December 31, 1994...... 23,897.1 Total Gains on Sales of Cellular Interests for the year ended December 31, 1994 ...............................................................$ 96,607 - --------------- (1) Population figures are reported by the Donnelly marketing population estimates each year for counties comprising FCC defined MSAs and RSAs. Note: Population figures and dollar amounts are in thousands. F-13 71 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
MSA RSA PERCENTAGE COMPANY COMPANY ESTIMATED PURCHASED/ POPULATION POPULATION MARKET POPULATION(1) SOLD EQUIVALENTS EQUIVALENTS ------------------------------ ------------- ---------- ----------- ----------- 1993 Acquisitions: San Francisco, San Jose, Vallejo, Santa Rosa, Salinas & Santa Cruz, CA 6,800.2 0.06% 4.3 Tuscaloosa, AL 154.7 2.80% 4.3 New York 3 476.4 2.50% 11.9 Tennessee 6 & 9 202.4 100.00% 202.4 ----------- ----------- Total Acquisitions......................................................... 8.6 214.3 ======== ======== Dispositions: Orange County & Poughkeepsie, NY 581.5 25.00% 145.4 Rapid City, SD 106.6 100.00% 106.6 Marion & Winston Co. - AL 1 52.1 100.00% 52.1 Arizona 2, 3, 4 & 6 649.4 Various 191.1 Idaho 2 & 3 75.8 Various 17.0 Iowa 2, 7 10 286.3 Various 29.8 Minnesota 4, 7, 8, 9, 10 & 11 803.9 Various 61.5 North Dakota 3 92.0 7.69% 7.1 South Dakota 5-B2 & 6-B2 15.4 Various 4.5 Washington 1, 2, 3 & 4 505.5 Various 122.8 ----------- ----------- Total Dispositions......................................................... 252.0 485.9 ======== ========
Total Company Population Equivalents at December 31, 1993 ......24,089.0 Total Gains on Sales of Cellular Interests for the year ended December 31, 1993 ...............................................................$ 48,023 1992 Acquisitions: Arkansas 1 & 8 94.4 6.22% 5.9 Idaho 2 59.9 3.04% 1.8 Minnesota 11 200.8 0.20% 0.4 ----------- ----------- Total Acquisitions......................................................... 0.0 8.1 ======== ======== Dispositions: Fayetteville & Fort Smith, AR 431.9 Various 322.3 Arkansas 1 & 8 94.4 57.22% 54.0 Idaho 4 & 5 266.1 Various 51.0 Oklahoma 4 183.5 66.67% 122.3 ----------- ----------- Total Dispositions......................................................... 322.3 227.3 ======== ========
Total Company Population Equivalents at December 31, 1992 ......24,181.8 Total Gains on Sales of Cellular Interests for the year ended December 31, 1992 ...............................................................$ 60,806 - --------------- (1) Population figures are reported by the Donnelly marketing population estimates each year for counties comprising FCC defined MSAs and RSAs. Note: Population figures and dollar amounts are in thousands. 6. INCOME TAXES In 1994, 1993 and 1992, the Company was included in the consolidated federal income tax return of GTE. In accordance with GTE's tax sharing policy, the Company computes its federal income taxes on a F-14 72 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED separate company return basis without regard to separate company utilization of operating losses. GTE reimburses its subsidiaries for utilization of taxable losses on a quarterly basis. Refer to Note 10 for further information regarding income taxes payable to affiliates. The net expense (benefit) from income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 1994 1993 1992 -------- -------- -------- (THOUSANDS) Current: Federal...................... $(33,093) $(65,823) $(74,176) State........................ 8,976 707 1,200 -------- -------- -------- (24,117) (65,116) (72,976) Deferred: Federal...................... 39,092 36,228 39,499 State........................ (779) 1,169 24 -------- -------- -------- 38,313 37,397 39,523 -------- -------- -------- $ 14,196 $(27,719) $(33,453) ======== ======== ========
The following is a summary of the items which caused recorded income taxes to differ from taxes computed using the statutory federal income tax rate:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1994 1993 1992 ------- -------- -------- (THOUSANDS) Income tax expense (benefit) at statutory rate.......... $ 5,623 $(35,923) $(36,215) Increase in tax expense/decrease in tax benefit resulting from: State income taxes, net of federal tax benefit........ 5,327 1,219 808 Amortization of goodwill.............................. 2,695 1,755 1,462 Retroactive impact of change in statutory federal tax rate............................................... -- 3,329 -- Other, net............................................ 551 1,901 492 ------- -------- -------- Actual income tax expense (benefit)..................... $14,196 $(27,719) $(33,453) ======= ======== ========
The Omnibus Budget Reconciliation Act of 1993 was enacted on August 10, 1993 and includes a provision for an increase in the corporate federal income tax rate by 1% to 35%, retroactive to January 1, 1993. As a result, $3.3 million of additional deferred tax expense was recorded in September, 1993. Gains on sales of cellular interests during 1994 attributed approximately $4.9 million of state income taxes, net of federal tax benefit. A summary of the components of the deferred income tax provision is as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1994 1993 1992 ------- ------- ------- (THOUSANDS) Depreciation and amortization................................. $43,344 $37,902 $36,671 Limited partnership losses.................................... (1,817) 1,990 3,380 Merger integration costs...................................... -- -- 2,408 Other, net.................................................... (3,214) (2,495) (2,936) ------- ------- ------- $38,313 $37,397 $39,523 ======= ======= =======
F-15 73 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Deferred tax assets and liabilities are comprised of the following:
DECEMBER 31, --------------------- 1994 1993 -------- -------- (THOUSANDS) Deferred Tax Liabilities: Depreciation and amortization........................................ $188,035 $144,691 Limited partnership losses........................................... 8,995 10,812 Other, net........................................................... 1,596 1,998 -------- -------- Total Deferred Tax Liabilities.................................... 198,626 157,501 -------- -------- Deferred Tax Assets: Gains on sale of partnership interests............................... 3,425 2,439 Other postretirement benefits........................................ 2,163 2,704 Self-constructed assets.............................................. 1,248 792 Bad debt reserve..................................................... 2,550 1,339 Other, net........................................................... 797 -- -------- -------- Total Deferred Tax Assets......................................... 10,183 7,274 -------- -------- Net Deferred Taxes..................................................... 188,443 150,227 Total Net Deferred Tax Asset (classified as other current assets)...... 3,251 1,654 -------- -------- Total Net Deferred Tax Liability..................................... $191,694 $151,881 ======== ========
7. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS As of January 1, 1992, all of the Company's employees began participating in GTE Service Corporation's defined benefit pension plan. The benefits to be paid under this plan are generally based on years of credited service and average final earnings. GTE's funding policy, subject to the minimum funding requirements of employee benefit and tax laws, is to contribute such amounts as are determined on an actuarial basis to provide the plan with assets sufficient to meet the benefit obligations of the plan. The assets of the plan consist primarily of corporate equities, government securities and corporate debt securities. The net pension cost included in consolidated operations for the years ended December 31, 1994, 1993 and 1992 included the following components:
1994 1993 1992 ------ ------ ------ (THOUSANDS) Benefits earned during the period................................ $2,111 $1,509 $1,618 Interest cost on projected benefit obligations................... 620 254 15 Actual return on plan assets..................................... 53 (11) (8) Other, net....................................................... (372) (53) (9) ------ ------ ------ Net pension cost................................................. $2,412 $1,699 $1,616 ====== ====== ======
The expected long-term rate of return on plan assets was 8.5% for 1994 and 8.25% for each of 1993 and 1992. F-16 74 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The funded status of the plan at December 31, 1994 and 1993 was as follows:
1994 1993 ------- ------- (THOUSANDS) Plan assets at fair value................................................ $ 3,742 $ 912 Projected benefit obligation............................................. (9,621) (4,860) ------- ------- Excess of projected obligation over assets............................... (5,879) (3,948) Other, net............................................................... 147 628 ------- ------- Accrued pension cost..................................................... $(5,732) $(3,320) ======= =======
The projected benefit obligations at December 31, 1994 and 1993 include accumulated benefit obligations of $4.7 million and $2.1 million, respectively and vested benefit obligations of $2.5 million and $0.8 million, respectively. Assumptions used to develop the projected benefit obligations for 1994 and 1993 were as follows:
DECEMBER 31, --------------- 1994 1993 ----- ----- Discount rate....................................... 8.25% 7.50% Rate of salary progression.......................... 5.50% 5.25%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Substantially all of the Company's employees are covered under postretirement health care and life insurance benefit plans. The health care benefits paid under the Company plans are generally based on comprehensive hospital, medical and surgical benefit provisions. The postretirement benefit cost for the years ended December 31, 1994, 1993 and 1992 included the following components:
1994 1993 1992 ----- ---- ------ (THOUSANDS) Benefits earned during the year.................................. $ 256 $693 $ 781 Interest on accumulated postretirement benefit obligations....... 155 291 315 Other, net....................................................... (153) (36) -- ----- ---- ------ Postretirement benefit cost...................................... $ 258 $948 $1,096 ===== ==== ======
The following table sets forth the funded status and accrued obligation as of December 31, 1994 and 1993:
1994 1993 ------- ------ (THOUSANDS) Accumulated postretirement benefit obligations attributable to: Retirees................................................................ $ 482 $ 182 Fully eligible plan participants........................................ 12 -- Other active plan participants.......................................... 1,594 1,814 ------- ------ Total accumulated postretirement benefit obligation....................... 2,088 1,996 Unrecognized prior service benefit........................................ 4,286 2,547 Unrecognized net gain (loss).............................................. (1,170) 415 ------- ------ Accrued postretirement benefit obligation................................. $ 5,204 $4,958 ======= ======
F-17 75 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The assumed discount rates used to measure the accumulated postretirement benefit obligation were 8.25% and 7.5% at December 31, 1994 and 1993, respectively. The assumed health care cost trend rates in 1994 and 1993 were 12% and 13%, respectively for pre-65 participants and 9.0% and 9.5%, respectively for post-65 retirees, each rate declining on a graduated basis to an ultimate rate in the year 2004 of 6%. A one-percentage point increase in the assumed health care cost trend rates for each future year would have increased 1994 postretirement benefit cost by approximately $7 thousand and the accumulated postretirement benefit obligation as of December 31, 1994 by approximately $47 thousand. During 1993, the Company made certain changes to its postretirement health care and life insurance benefits for non-union employees retiring on or after January 1, 1995. These changes include, among others, newly established limits to the Company's annual contribution to postretirement medical costs and a revised sharing schedule based on a retiree's years of service. The net effect of these changes reduced the accumulated benefit obligation at December 31, 1993 by $3.9 million. The resulting unrecognized prior year service benefit is being amortized over the average remaining lives of the employees. 8. COMMITMENTS AND CONTINGENCIES LEASES Lease expense relates to the lease of office space, tower facilities, real estate, office equipment and vehicles. Rents charged to expense were $11.9 million, $8.8 million and $6.9 million for 1994, 1993 and 1992, respectively. At December 31, 1994, future minimum lease payments under noncancelable operating leases are as follows (thousands): 1995...................................................... $11,196 1996...................................................... 9,517 1997...................................................... 6,398 1998...................................................... 3,722 1999...................................................... 1,880 Subsequent Years.......................................... 3,605 -------- $36,318 ========
CONSTRUCTION AND CAPITAL COMMITMENTS Capital expenditures for markets controlled and managed by the Company are expected to be funded with additional borrowings from affiliates, internally generated funds, contributions from minority partners and net distributions from Unconsolidated Partnerships. The Company also intends to fund its share of future capital requirements of the Unconsolidated Partnerships. The timing and amounts of such contributions are subject to the future capital requirements as determined by the managing partner, and therefore cannot be accurately estimated by the Company. LEGAL AND REGULATORY MATTERS On November 24, 1993, Arthur Garabedian d.b.a. Western Mobile Telephone Company brought a class action lawsuit on behalf of himself and on behalf of all persons or entities who have subscribed to cellular radio service in the Los Angeles area against the L.A. Partnership, Pacific Telesis Group, Pactel Cellular, Pactel Corporation, GTE Mobilnet Incorporated, Contel Cellular Inc. and U.S. Cellular Corporation. The complaint alleges retail and wholesale price fixing of cellular radio service. The plaintiff is seeking in excess of $100 million in damages. The ultimate outcome of this suit is unclear at this time because no class has been F-18 76 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED certified and discovery has not been completed. In addition, it is unclear whether the Company will remain as a named party in this lawsuit or will be involved only because of its limited ownership in the L.A. Partnership. The Company is subject to legal and regulatory matters in the normal course of business. No provision for any liability that may result has been made in the accompanying financial statements. LINE OF CREDIT Refer to Note 10 for information regarding the Company's line of credit arrangements with GTE. 9. OTHER LONG-TERM OBLIGATIONS Other long-term obligations are as follows:
DECEMBER 31, ------------------- 1994 1993 ------- ------- (THOUSANDS) 9% Promissory Notes due January 1999..................................... $ 6,512 $ 6,512 8% Promissory Notes payable in annual installments through 1996.......... 16,000 22,000 Industrial Development Revenue Bonds: Due 2004, interest rate of 5.6% at December 31, 1994................... 8,400 8,400 Due 2005, interest rate of 5.6% at December 31, 1994................... 2,000 2,000 Due 2006, interest rate of 6.1% at December 31, 1994................... 3,880 3,880 ------- ------- Total Other Long-Term Obligations........................................ $36,792 $42,792 ------- ------- Less Current Portion of Other Long-Term Obligations.................... (6,000) (6,000) ------- ------- $30,792 $36,792 ======= =======
On December 28, 1993, the Company issued long-term promissory notes in the amount of approximately $6.5 million at a fixed interest rate of 9% in connection with the acquisition of 100% interest in Tennessee RSA 9. Accrued interest on the outstanding principal amount of this note shall be paid quarterly on the first day of January, April, July and October of each year. In July 1991, the Company issued $28.0 million of 8% long-term promissory notes in connection with the acquisition of 100% interests in Tennessee RSAs 5 and 7. The notes are guaranteed by GTE and include various covenants, none of which are expected to restrict future operations. Aggregate annual repayments of this debt are $6.0 million in 1995 and $10.0 million in 1996. The Industrial Development Revenue Bonds are floating/fixed-rate bonds secured by irrevocable letters of credit issued by the Bank of Nova Scotia which begin to expire December 1, 1996, unless otherwise extended. The letters of credit carry a commitment fee of 1/2 of 1% per annum. The Company may, upon written notice to the bond trustee, convert the interest rate to a fixed market rate. Until converted to a fixed rate, the bonds bear interest, payable quarterly, at a rate equal to a variable percentage (ranging from 65% to 71% at December 31, 1994) of the Trust Company Bank of Atlanta's prime interest rate. Refer to Note 10 for information regarding the Notes Payable to Affiliates. F-19 77 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 10. RELATED PARTY TRANSACTIONS GENERAL SERVICES Prior to the 1991 merger of GTE and Contel, the Company operated under a general services agreement with Contel. Subsequent to the merger, a new management structure was put in place. The Company's field operations, properties and corporate officers continue to remain separate from those of GTE Mobilnet Incorporated ("Mobilnet"), GTE's wholly owned cellular subsidiary. GTE Mobile Communications Service Corporation ("GTEMC") consolidated many of the staff and support functions previously performed separately by the Company and Mobilnet. On May 1, 1991, the Company entered into a services agreement with GTEMC whereby support for major functions such as accounting, information management, human resources, legal, marketing, network and technology planning were provided to the Company. A new management structure was implemented in January 1993, under which the GTEMC headquarters structure was functionally eliminated. Marketing and network functions, previously provided by GTEMC, are now provided directly by the Company, while the remaining functions are provided by GTE Personal Communication Services ("GTE PCS"), a division of GTE. During 1994 and 1993, costs for these services were allocated from GTE PCS to the Company. The costs allocated under the 1994 and 1993 structure do not differ significantly from the costs allocated to the Company under the 1992 methodology. Amounts expensed by the Company for these services were approximately $50 million, $45 million and $44 million for the years 1994, 1993 and 1992, respectively. In management's opinion, the cost allocation methodology for all periods is reasonable. CASH MANAGEMENT AND FINANCING The following table summarizes the Company's Notes Payable -- Affiliates:
DECEMBER 31, --------------------- 1994 1993 -------- -------- (IN MILLIONS) Line of Credit with GTE......................................... $ 511.3 $ 351.7 Note Payable at 9.90% interest; due 8/17/00..................... 75.0 -- Note Payable at 10.47% interest; due 3/01/98.................... 700.0 700.0 Note Payable at 7.71% interest; due 2/25/97..................... 150.0 150.0 Note Payable at 8.97% interest; due 9/27/99..................... 150.0 150.0 Note Payable at 8.38% interest; due 9/25/97..................... 150.0 150.0 Note Payable at 8.08% interest; due 12/31/95.................... 200.0 200.0 Note Payable at 8.56% interest; due 12/31/96.................... 200.0 200.0 -------- -------- Total Notes Payable -- Affiliates............................... $2,136.3 $1,901.7 ======= =======
As of January 1, 1992, the Company began using cash management services provided by GTE. The notes payable to GTE are due on demand. The line of credit with GTE may be renegotiated at any time based on the Company's working capital and construction requirements. Based on the expressed intent and ability of GTE to make funds available to the Company on a long-term basis, the accompanying consolidated balance sheets reflect the Notes payable-affiliates as long-term obligations. As of December 31, 1994, outstanding borrowings from GTE under this line of credit were $511.3 million. The interest rate on the borrowings was approximately 9.25% on December 31, 1994. This rate represents the prime rate at December 31, 1994, as quoted in the Wall Street Journal, plus a .75% per annum fee on the outstanding balance. Prior to January 1993, the rate was calculated based on GTE's cost of borrowing the funds, plus 1.5% per annum. Interest expense relating to the line of credit, which is payable monthly in arrears, was $30.8 million, $19.4 million and $23.5 million for the years 1994, 1993 and 1992, respectively. F-20 78 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED During 1991, the Company's $1.3 billion loan previously provided by Contel Capital was replaced with a combination of fixed- and variable-rate intercompany notes as follows: (i) $700 million at 10.47% payable to GTE, due March 1, 1998; (ii) $150 million at 9.22% payable to GTE Finance Corporation, a wholly owned subsidiary of GTE, due February 25, 1997; and (iii) $450 million due to GTE under the same terms and provisions as borrowings under GTE's line of credit facility. Included in the interest rates above was an additional 1.5% per annum, which the Company agreed to pay GTE and GTE Finance Corporation, for GTE's agreement to become obligated under these financings. On September 25, 1992, the Company refinanced $300 million variable-rate debt with two $150 million fixed-rate notes, at 8.97% and 8.38% payable to GTE Finance Corporation, due on September 27, 1999 and September 25, 1997, respectively. Additionally, on December 31, 1992, the Company refinanced the variable-rate $450 million note mentioned in (iii) above with a $200 million fixed-rate note at 8.08% payable to GTE, due December 31, 1995 (as evidenced by a letter dated January 25, 1995, GTE intends to refinance this note at maturity), and a $200 million fixed-rate note at 8.56% payable to GTE, due December 31, 1996. The remaining $50 million is included in the line of credit facility previously discussed. On February 25, 1993, the Company refinanced the $150 million fixed-rate note mentioned in (ii) above with a $150 million fixed-rate note bearing interest at 7.71% payable to GTE Finance Corporation, due on February 25, 1997. On August 17, 1994, the Company refinanced $75 million of variable-rate debt with a $75 million fixed-rate note bearing interest at 9.90% payable to GTE Finance Corporation, due on August 17, 2000. Effective June 1992, the Company is charged the comparable Treasury Rate plus 3.0% per annum upon conversion of variable-rate debt to fixed-rate debt. This rate closely approximates rates that would be charged by non-affiliated commercial lenders to corporations of similar credit quality for fixed-rate debt. Interest expense for these notes payable to affiliates is payable to GTE semi-annually and amounted to $148.0 million, $145.4 million, and $121.0 million in 1994, 1993 and 1992, respectively. The effective interest rate under these borrowings was approximately 9.3% for the year ended December 31, 1994. PURCHASES The Company purchased cellular telephone equipment and accessories during 1994 and 1993 from GTE PCS, and during 1992 from GTEMC, totaling $56.9 million, $45.7 million and $29.6 million, respectively, which approximates cost. TRANSFER OF INTERESTS IN RSA MARKETS During 1988 and 1989, the Company participated in the FCC's license award process to provide cellular service in 428 RSAs throughout the country. At that time, the Company and Contel entered into an agreement whereby other subsidiaries of Contel were given the right to control or hold interests in RSA markets where the Company chose not to participate. In 1990, Contel decided to maintain all cellular interests within one company. Accordingly, in the third quarter of 1990, Contel transferred, at book value, its interests in 49 RSAs to the Company. None of the RSAs were operational. The Company agreed that if any of these RSA interests were sold within a three-year period expiring August 1, 1993, the Company would remit the proceeds of such sales, net of the Company's investment, to Contel. Accordingly, no gain or loss would be recognized by the Company in connection with the sale of any such interest. The Company did not sell any interests in the transferred RSA markets from January 1, 1993 to August 1, 1993. In 1992, the Company sold interests in two such RSA markets and remitted to Contel $2.5 million in net proceeds in 1993. F-21 79 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED ACCOUNTS PAYABLE -- AFFILIATES In addition to the affiliated financing agreements disclosed above, the Company has affiliated accounts payable of $3.9 million for accrued income taxes and $0.8 million for accounts payable to limited partners at December 31, 1994, and $23.6 million for accrued income taxes at December 31, 1993. 11. COMMON STOCK The Company's Class A and Class B Common Stock are identical in all respects except for the following: 1) The Class A common stockholders are entitled to one vote per share and the Class B common stockholders are entitled to five votes per share; 2) the holders of each class of stock will be entitled to receive stock dividends only of the same class of stock; and, 3) shares of Class B Common Stock are convertible into Class A Common Stock at the option of the holder at any time. Both classes of the common stock have non-cumulative voting rights. Dividends may be declared and paid to one class only if an equal per share dividend is declared and paid to the other class. Both classes share equally on a pro rata basis in the event of liquidation or dissolution. GTE, through Contel, owns all shares of Class B Common Stock, or 90% of the total number of shares outstanding and approximately 98% of the combined voting power of both classes of stock. The Company also has 3 million authorized shares of preferred stock (the "Preferred Stock") which may be issued in one or more series at the discretion of the Board of Directors. The Board of Directors is authorized to determine the terms, rights, privileges, preferences and restrictions of any unissued series of Preferred Stock prior to issuance. The Company presently has no plans to issue any shares of Preferred Stock. 12. STOCK OPTIONS AND RESTRICTED STOCK UNITS In accordance with the 1987 Key Employee Stock Plan (the "Stock Plan"), the Company may grant stock options, stock appreciation rights and restricted stock units related to Class A Common Stock to key employees. The maximum number of shares of Class A Common Stock reserved for issuance under the Stock Plan is 1,000,000 of which 916,900 shares were available for future grants as of December 31, 1994. F-22 80 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The following schedule summarizes stock option transactions under the Stock Plan:
NUMBER OF OPTION PRICE SHARES PER SHARE --------- ------------ Outstanding at January 1, 1992............................... 97,700 15.31-22.81 (20,465 exercisable) Granted................................................. 8,250 17.25 Exercised............................................... (8,000) 15.31 Forfeited............................................... (5,100) 15.31-22.81 --------- Outstanding at December 31, 1992............................. 92,850 15.31-22.81 (53,700 exercisable) Granted................................................. 11,400 15.00 Exercised............................................... (1,000) 15.31 Forfeited............................................... (23,900) 15.31-22.81 --------- Outstanding at December 31, 1993............................. 79,350 15.00-22.81 (56,550 exercisable) Granted................................................. 34,300 16.25 Exercised............................................... (18,300) 15.31-22.81 Forfeited............................................... (12,250) 15.31-22.81 --------- Outstanding at December 31, 1994............................. 83,100 15.00-22.81 ========
Of the 83,100 stock options outstanding at December 31, 1994, 43,850 were exercisable. Included in the total number of options outstanding at December 31, 1994, are 51,950 shares which include 2/3 tandem stock appreciation rights. Stock appreciation rights provide the right to surrender all or a portion of a stock option for cash or additional shares of stock equal to the excess of fair market value on the date of exercise over the option price. The 2/3 tandem provision requires that for every two shares of stock surrendered for the appreciation right attached, one share of stock be purchased at the option price. F-23 81 CONTEL CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 13. QUARTERLY INFORMATION (UNAUDITED)
1994 QUARTERS ----------------------------------------------- FOURTH THIRD SECOND FIRST -------- -------- -------- -------- (THOUSANDS, EXCEPT PER SHARE DATA) Revenues and Sales.............................. $157,886 $149,373 $136,479 $119,217 Operating Income (Loss)......................... 5,749 25,903 11,841 (2,482) Loss from Consolidated Operations............... (41,538) (21,960) (32,615) (47,219) Equity in Earnings of Unconsolidated Partnerships.................................. 14,282 21,682 16,405 10,423 Gains on Sales of Cellular Interests............ 20,259 43,220 3,941 29,187 Net Income (Loss)............................... (4,489) 24,438 (9,475) (8,603) Net Income (Loss) Per Share..................... (0.04) 0.24 (0.09) (0.09) Common Stock Market Price: High....................................... $ 25.25 $ 24.00 $ 17.25 $ 18.75 Low........................................ 23.50 16.00 13.00 14.00 Close...................................... 24.94 23.63 16.50 14.25
1993 QUARTERS ----------------------------------------------- FOURTH THIRD SECOND FIRST -------- -------- -------- -------- (THOUSANDS, EXCEPT PER SHARE DATA) Revenues and Sales.............................. $108,752 $ 98,176 $ 89,390 $ 77,696 Operating Loss.................................. (15,769) (1,018) (1,966) (9,552) Loss from Consolidated Operations............... (51,758) (43,459) (40,524) (52,270) Equity in Earnings of Unconsolidated Partnerships.................................. 9,487 12,236 11,153 4,475 Gains on Sales of Cellular Interests............ 39,697 8,326 -- -- Net Loss Before Cumulative Effect of Change in Accounting Principle.......................... (4,536) (17,061) (19,834) (33,487) Cumulative Effect of Change in Accounting Principle..................................... (241) -- -- -- Net Loss........................................ (4,777) (17,061) (19,834) (33,487) Net Loss Per Share.............................. (0.05) (0.17) (0.20) (0.33) Common Stock Market Price: High....................................... $ 22.00 $ 18.75 $ 16.25 $ 18.63 Low........................................ 15.00 15.50 13.50 13.25 Close...................................... 16.38 17.00 15.50 14.75
F-24 82 CONTEL CELLULAR INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN B COLUMN C COLUMN D COLUMN E ------------ ---------- ----------- ---------- COLUMN A BALANCE AT ADDITIONS WRITE-OFFS, BALANCE AT - ---------------------------------------------- BEGINNING OF CHARGED TO NET OF END OF CLASSIFICATION PERIOD INCOME RECOVERIES PERIOD - ---------------------------------------------- ------------ ---------- ----------- ---------- FOR THE YEAR ENDED DECEMBER 31, 1994 Allowance for Doubtful Accounts............. $4,674 $ 14,704 $ (10,822) $8,556 ========= ======== ======== ======== FOR THE YEAR ENDED DECEMBER 31, 1993 Allowance for Doubtful Accounts............. $4,356 $ 6,298 $ (5,980) $4,674 ========= ======== ======== ======== FOR THE YEAR ENDED DECEMBER 31, 1992 Allowance for Doubtful Accounts............. $4,306 $ 7,528 $ (7,478) $4,356 ========= ======== ======== ========
F-25 83 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON COMPILATION OF COMBINED FINANCIAL STATEMENTS To the Board of Directors and Stockholders of Contel Cellular Inc.: The accompanying combined financial statements as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, have been prepared from the separate financial statements of the Los Angeles SMSA Limited Partnership, the Washington D.C. SMSA Limited Partnership, the GTE Mobilnet of California Limited Partnership, the GTE Mobilnet of South Texas Limited Partnership, the San Antonio SMSA Limited Partnership, and the Albucell Limited Partnership as described in Note 1 to the combined financial statements. We have audited the financial statements (not presented separately herein) of the GTE Mobilnet of California Limited Partnership, the GTE Mobilnet of South Texas Limited Partnership, and the Albucell Limited Partnership as of December 31, 1994 and 1993, and for the years then ended, as set forth in our reports included elsewhere in this document. Our report on the financial statements of the GTE Mobilnet of California Limited Partnership contains an explanatory paragraph with respect to the matter discussed in Note 8 to the combined financial statements. We did not audit the financial statements (also not presented separately herein) of the Los Angeles SMSA Limited Partnership, the Washington D.C. SMSA Limited Partnership, and the San Antonio SMSA Limited Partnership as of December 31, 1994 and 1993 and for the years then ended, which statements reflect assets and revenues of 55% and 63%, respectively, of the related combined 1994 totals. These statements were audited by other auditors, as set forth in their reports also included elsewhere in this document. The report of other auditors of the Los Angeles SMSA Limited Partnership contains an explanatory paragraph with respect to the matters discussed in Note 8 to the accompanying combined financial statements. Because of the significance of the amounts of the combined assets and revenues that have been audited by other auditors, we are unable to express, and we do not express, any opinion with respect to the fairness of the presentation of the accompanying combined financial statements. However, we have checked, for compilation only, the accompanying combined financial statements and, in our opinion, those statements have been properly compiled from the separate financial statements of the Los Angeles SMSA Limited Partnership, the Washington D.C. SMSA Limited Partnership, the GTE Mobilnet of California Limited Partnership, the GTE Mobilnet of South Texas Limited Partnership, the San Antonio SMSA Limited Partnership, and the Albucell Limited Partnership on the basis described in Note 1 to the combined financial statements. /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Atlanta, Georgia March 13, 1995 F-26 84 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP COMBINED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) UNAUDITED
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1994 1993 1992 ---------- -------- -------- Service and Sales Revenues................................ $1,296,208 $987,371 $783,009 Costs and Expenses: Cost of services and sales........................... 343,993 250,947 192,250 Selling, general and administrative.................. 413,301 335,686 265,863 Depreciation and amortization........................ 126,941 97,507 85,339 ---------- -------- -------- Operating Income.......................................... 411,973 303,231 239,557 Interest Income, net...................................... 378 779 263 Other Income, net......................................... 923 2,966 13,943 ---------- -------- -------- Net Income................................................ $ 413,274 $306,976 $253,763 ========= ======== ========
The accompanying notes to the combined financial statements are an integral part of these statements. F-27 85 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) UNAUDITED
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1994 1993 1992 --------- --------- --------- Cash Flows from Operating Activities: Net income................................................ $ 413,274 $ 306,976 $ 253,763 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 126,941 97,507 85,339 Provision for losses on accounts receivable............ 19,987 15,221 9,839 Other, net............................................. 4,703 6,369 8,353 Changes in current assets and liabilities: Increase in receivables.............................. (57,928) (72,067) (26,328) Increase in other current assets..................... (15,011) (2,287) (3,602) Increase in current liabilities...................... 65,273 20,960 40,851 --------- --------- --------- Net cash provided by operating activities......... 557,239 372,679 368,215 Cash Flows from Investing Activities: Capital expenditures...................................... (315,604) (205,919) (205,802) Other, net................................................ 668 1,861 84 --------- --------- --------- Net cash used in investing activities............. (314,936) (204,058) (205,718) Cash Flows from Financing Activities: Contributions from partners............................... 2,103 10,868 3,513 Distributions to partners................................. (239,922) (178,659) (164,031) Other, net................................................ (800) (612) (442) --------- --------- --------- Net cash used in financing activities............. (238,619) (168,403) (160,960) --------- --------- --------- Increase in Cash and Cash Equivalents....................... 3,684 218 1,537 Beginning Cash and Cash Equivalents......................... 1,988 1,770 233 --------- --------- --------- Ending Cash and Cash Equivalents............................ $ 5,672 $ 1,988 $ 1,770 ========= ========= =========
The accompanying notes to the combined financial statements are an integral part of these statements. F-28 86 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS) UNAUDITED
DECEMBER 31, ------------------------- 1994 1993 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents........................................ $ 5,672 $ 1,988 Accounts receivable, net of allowance for doubtful accounts of $14,041 in 1994 and $11,069 in 1993........................ 189,649 147,643 Due from general partners........................................ 56,998 61,063 Other current assets............................................. 31,064 16,053 ---------- ---------- Total current assets..................................... 283,383 226,747 Other Assets, net of accumulated amortization of $6,121 in 1994 and $5,177 in 1993............................................... 2,236 2,797 Property, Plant and Equipment, at cost............................. 1,354,968 1,047,515 Less accumulated depreciation.................................... (411,949 ) (296,641 ) ---------- ---------- 943,019 750,874 ---------- ---------- Total assets............................................. $1,228,638 $ 980,418 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current Liabilities: Accounts payable-trade........................................... $ 100,226 $ 69,458 Accounts payable-affiliates...................................... 23,173 11,191 Advance billings and customer deposits........................... 18,642 17,000 Accrued expenses and other current liabilities................... 75,192 47,286 ---------- ---------- Total current liabilities................................ 217,233 144,935 Other Noncurrent Liabilities....................................... 9,709 9,242 Partners' Capital: Contel Cellular Inc.............................................. 147,376 116,832 Other partners................................................... 854,320 709,409 ---------- ---------- Total partners' capital.................................. 1,001,696 826,241 ---------- ---------- Total liabilities and partners' capital.................. $1,228,638 $ 980,418 ========== ==========
The accompanying notes to the combined financial statements are an integral part of these statements. F-29 87 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (AMOUNTS IN THOUSANDS) UNAUDITED
OTHER GENERAL CONTEL LIMITED PARTNER CELLULAR INC. PARTNERS TOTAL -------- ------------- -------- ---------- Balance at January 1, 1992................... $476,776 $ 77,851 $ 39,184 $593,811 1992 Net income............................ 204,401 29,933 19,429 253,763 Contributions.............................. 2,459 1,054 0 3,513 Distributions.............................. (133,915) (16,012) (14,104) (164,031) -------- ------------- -------- ---------- Balance at December 31, 1992................. 549,721 92,826 44,509 687,056 1993 Net income............................ 245,413 38,920 22,643 306,976 Sale of partnership interest............... 869 114 (983) 0 Contributions.............................. 7,608 3,260 0 10,868 Distributions.............................. (147,445) (18,288) (12,926) (178,659) -------- ------------- -------- ---------- Balance at December 31, 1993................. 656,166 116,832 53,243 826,241 1994 Net income............................ 327,427 55,143 30,704 413,274 Contributions.............................. 1,640 163 300 2,103 Distributions.............................. (194,580) (24,762) (20,580) (239,922) -------- ------------- -------- ---------- Balance at December 31, 1994................. $790,653 $ 147,376 $ 63,667 $1,001,696 ======== ========= ======== =========
The accompanying notes to the combined financial statements are an integral part of these statements. F-30 88 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF COMBINATION The accompanying combined financial statements represent a combination of the financial statements of the Los Angeles SMSA Limited Partnership (the "Los Angeles Partnership"), the Washington D.C. SMSA Limited Partnership (the "Washington D.C. Partnership"), the GTE Mobilnet of California Limited Partnership (the "California Partnership"), the GTE Mobilnet of South Texas Limited Partnership (the "South Texas Partnership"), the San Antonio SMSA Limited Partnership (the "San Antonio Partnership") and the Albucell Limited Partnership (the "Albucell Partnership") collectively referred to as the "Partnerships" and individually as a "Partnership." Contel Cellular Inc. (the "Company") is a minority limited partner in each of the Partnerships, and accounts for its investment in the Partnerships using the equity method of accounting. These combined financial statements have been prepared to present the combined financial position, results of operations and cash flows of the Partnerships and the Company's interest in the Partnerships to comply with certain disclosure requirements of the Securities and Exchange Commission (the "SEC"). Under these SEC rules, each Partnership qualified as a significant equity investee of the Company in 1994. Each Partnership was formed to provide cellular telephone service in its respective standard metropolitan statistical area ("MSA"). The California, South Texas and Albucell Partnerships provide cellular service in the San Francisco, Houston and Albuquerque MSAs, respectively. The partners' ownership interests in the Partnerships are as follows (the general partners' interests include the limited partnership interests if the general partner also participates as a limited partner):
LOS ANGELES WASHINGTON D.C. CALIFORNIA SOUTH TEXAS SAN ANTONIO ALBUCELL ----------- --------------- ---------- ----------- ----------- -------- General Partners.............. 82% 65% 86% 79% 70% 51% Limited Partners: Contel Cellular Inc...... 11 35 11 4 30 49 Other Partners........... 7 -- 3 17 -- -- --- --- --- --- --- --- 100% 100% 100% 100% 100% 100%
The general partners in the Los Angeles, Washington D.C., California, South Texas, San Antonio and Albucell Partnerships are AirTouch Cellular (formerly Pactel Cellular), Bell Atlantic Mobile Systems of Washington, Inc. ("BAMS"), GTE Mobilnet Incorporated, GTE Mobilnet of Houston Inc., Southwestern Bell Mobile Systems, Inc. and US WEST NewVector Group, Inc., respectively. Profits, losses, contributions and distributable cash are allocated to the individual partners based on the respective partnership interests of each of the partners. The Los Angeles Partnership represents the most significant portion of combined total assets and net income for the years presented. 2. SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Generally the Partnerships earn service revenues by providing access to their cellular network ("access revenue") and for usage of their cellular network ("airtime revenue"). Access revenue is billed one month in F-31 89 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED advance and recognized when earned. Airtime (including roaming) revenue is recognized when the service is rendered. Equipment sales are recognized upon delivery of the equipment to the customer. Income Taxes Under the provisions of the Internal Revenue Code and related state statutes, the Partnerships are not taxable entities for income tax purposes. The individual partners include their share of Partnership income or loss in their respective income tax returns. Accordingly, no provision for income taxes has been made in the accompanying combined financial statements. Depreciation and Amortization Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of related assets. Upon sale or retirement of property, plant and equipment, the cost of such assets and related accumulated depreciation or amortization are eliminated from the accounts and any related gain or loss is reflected in the combined statements of operations. Cash Equivalents Cash equivalents include amounts which are readily convertible into cash and which are not subject to significant risk from fluctuations in interest rates. Reclassifications Certain accounts of the Partnerships have been reclassified to conform to a consistent presentation. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31 (in thousands):
1994 1993 ---------- ---------- Land and improvements...................................... $ 13,448 $ 8,442 Buildings.................................................. 205,805 160,835 Equipment.................................................. 950,712 765,606 Furniture and fixtures..................................... 50,434 33,043 Assets under construction.................................. 134,569 79,589 ---------- ---------- 1,354,968 1,047,515 Less -- Accumulated depreciation........................... (411,949) (296,641) ---------- ---------- $ 943,019 $ 750,874 ========== ==========
F-32 90 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED 4. LEASE COMMITMENTS Future minimum rental payments required under operating leases (primarily for real estate) with initial or remaining noncancelable lease terms in excess of one year as of December 31, 1994, are as follows (in thousands): 1995.............................................. $ 24,181 1996.............................................. 22,724 1997.............................................. 20,632 1998.............................................. 19,146 1999.............................................. 15,874 Thereafter........................................ 45,896 -------- Total $148,453 ========
Rent expense was approximately $27.4 million, $29.0 million and $17.3 million for the years ended December 31, 1994, 1993 and 1992, respectively. 5. RELATED PARTY TRANSACTIONS In accordance with the Partnership agreements, the general partners are reimbursed by the Partnerships for costs incurred by the general partners on behalf of the Partnerships. These costs are expensed in the accompanying combined statements of operations and include accounting, information systems, cash management, human resources, legal, operations, marketing and other administrative services. Total charges billed by the general partners to the Partnerships were $149.4 million, $115.7 million and $106.4 million included in the accompanying combined statements of operations as selling, general and administrative expenses, and $66.6 million, $44.3 million and $34.6 million included in the accompanying combined statements of operations as cost of services and sales for the years ended December 31, 1994, 1993 and 1992, respectively. Certain general partners advance funds to the Partnerships as necessary to finance operations. Interest expense is charged to the Partnerships on these advances at rates consistent with the general partners' average borrowing rates. 6. MAJOR CUSTOMERS AND SUPPLIERS The Los Angeles Partnership purchases substantially all its equipment from one supplier. 7. REGULATORY INVESTIGATIONS Los Angeles Partnership On December 21, 1993, the California Public Utilities Commission ("CPUC") adopted a new Order into the regulation of mobile telephone service and wireless communications, Order Number I.93-12-007. The investigation proposes a regulatory program which would encompass all forms of mobile telephone service. On August 22, 1994, the CPUC issued an interim Decision that imposes a methodology in which existing cellular carriers be subject to rate cap regulation and other regulations, and requiring carriers, upon request, to permit resellers to operate reseller switches interconnected to the cellular carrier's facilities, to unbundle cellular access charges to resellers on a market basis and to subsidize resellers' roaming revenues. The F-33 91 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED Decision further authorized the CPUC to file a petition with the Federal Communications Commission to extend the CPUC's jurisdiction over cellular carriers for at least 18 months. Application for Rehearing and Suspension has been filed by various carriers and is pending with the CPUC. Currently, the Los Angeles Partnership is unable to quantify the precise impact of this Order on its future operations, but that impact may be material to the Los Angeles Partnership under certain circumstances. In January 1992, the CPUC commenced a separate investigation of all cellular companies operating in California to determine their compliance with General Order number 159 ("G.O. 159"). The investigation will address whether cellular utilities have complied with local, state or federal regulations governing the approval and construction of cellular sites in California. The CPUC may advise other agencies of violations in their jurisdictions. The Los Angeles Partnership has prepared and filed the information requested by the CPUC. The CPUC will review the information provided by the Los Angeles Partnership and, if violations of G.O. 159 are found, it may assess penalties against the Los Angeles Partnership. The outcome of this investigation is uncertain and, accordingly, no accrual for this matter has been made. California Partnership The California Partnership has also submitted information requested by the CPUC regarding compliance with G.O. 159. The CPUC will review the information provided by the California Partnership, and if violations of G.O. 159 are found, it may assess penalties against the California Partnership. The final outcome of this matter cannot now be determined; however, in management's opinion, the final outcome will not have a material adverse effect on the California Partnership's financial statements. 8. CONTINGENCIES Los Angeles Partnership Two agents of the competing carrier have named the Los Angeles Partnership in several complaints against the carrier. The general allegations include violations of California Unfair Practices Act and price fixing. At a recent mandatory settlement conference, plaintiffs asked for $6 million from all defendants to settle the above claims ($2.5 million from AirTouch Cellular, including the Los Angeles Partnership). The proposed settlement offer has not been accepted. On November 24, 1993, October 17, 1994 and November 30, 1994, three separate class action (not yet certified) suits were filed against the Los Angeles Partnership alleging conspiracy with a competing carrier to fix the price of cellular service in violation of state and federal antitrust laws. The plaintiffs are seeking injunctive relief and substantial monetary damages in excess of $100 million before trebling. In May 1994, several former and current agents of the competing carrier have named the Los Angeles Partnership in only one cause of action. This cause of action alleges a conspiracy with the competing carrier to fix the prices of cellular service in violation of state antitrust laws. The plaintiffs are seeking damages in excess of $100,000 for each of the plaintiff agents. On July 18, 1994, AirTouch Cellular was served with a class action (not yet certified) suit on behalf of the Los Angeles Partnership's authorized agents. The complaint alleges "predatory practices" and seeks damages in excess of $1.6 million per agent, plus statutory treble damages. F-34 92 LOS ANGELES SMSA LIMITED PARTNERSHIP WASHINGTON D.C. SMSA LIMITED PARTNERSHIP GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP SAN ANTONIO SMSA LIMITED PARTNERSHIP ALBUCELL LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED Washington D.C. Partnership During 1992 and 1993, BAMS was involved in litigation with a former sales agent in the Superior Court of Washington D.C. In December 1993, BAMS entered into a settlement agreement with the plaintiff for $11.4 million. As a result of this agreement, the Washington D.C. Partnership was allocated $10.4 million and $0.4 million (included in selling, general and administrative expenses) for their portion of the settlement and interest expense, respectively. Subsequently, in 1994 a dispute arose between BAMS and the Company because of the portion allocated to the Washington D.C. Partnership. On December 30, 1994, BAMS and the Company entered into a settlement agreement wherein BAMS agreed to reduce the allocated settlement of $10.8 million and associated legal fees by fifty percent. This resulted in a reduction to the general and administrative expenses in 1994 of $5.8 million. South Texas Partnership An agent of the South Texas Partnership brought suit against the South Texas Partnership alleging that the South Texas Partnership is in violation of its agency contract. The agent alleges that the South Texas Partnership failed to comply with a provision contained in the agent contract which allegedly requires the South Texas Partnership to offer to the plaintiff commission payments offered to any other South Texas Partnership agents which are substantially and materially better than the commission payments set forth in the plaintiff's contract. In early 1994, a jury trial returned a verdict in favor of the plaintiff in an amount which is to be determined in the judgment. The exposure may be up to $7 million. The general partner believes that the trial court committed several reversible errors which may result on appeal in either a reversal or a new trial. The ultimate outcome of this litigation is unknown at the present time; however, in management's opinion, the final outcome will not have a material adverse effect on the South Texas Partnership's financial statements. California Partnership On October 10, 1994 a class action suit was filed on behalf of the cellular users in the San Francisco market against the two cellular carriers serving the area. The plaintiffs allege unlawful combination and collusion by the carriers resulting in a lack of rate reduction for cellular users which has led to excessive profits for the carriers. The complaint seeks a restraining order concerning basic rates for cellular service, treble damages, plus interest and attorney's fees. At this time the general partner has not discovered any fact which supports the plaintiffs' claims and believes that any prediction of the outcome would be premature. Accordingly, no provision for any liability that might result has been made in the California Partnership's financial statements. F-35 93 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Los Angeles SMSA Limited Partnership We have audited the balance sheets of Los Angeles SMSA Limited Partnership as of December 31, 1994 and 1993, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Los Angeles SMSA Limited Partnership as of December 31, 1994 and 1993, and results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 9 to the financial statements, the Partnership has been named in two separate actions, now consolidated, and a separate complaint served by cellular agents. The outcome of these matters is uncertain and, accordingly, no accrual for these matters has been made in the financial statements. In addition, as discussed in Note 9, four class action suits were filed against the Partnership alleging violations of state and federal antitrust laws. The outcome of these matters is uncertain and, accordingly, no accrual for these matters has been made in the financial statements. /s/ COOPERS AND LYBRAND LLP Coopers and Lybrand LLP Newport Beach, California February 17, 1995 F-36 94 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of the Washington D.C. SMSA Limited Partnership We have audited the balance sheets of the Washington D.C. SMSA Limited Partnership (the Partnership) as of December 31, 1994 and 1993, and the related statements of income, changes in partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As further discussed in Note #6, during 1994 a settlement agreement was entered into amongst the partners of the Partnership. This agreement resulted in a reduction of litigation costs previously charged to the Partnership. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Washington D.C. SMSA Limited Partnership as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ COOPERS AND LYBRAND LLP Coopers and Lybrand LLP New York, New York February 6, 1995 F-37 95 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of GTE Mobilnet of California Limited Partnership We have audited the balance sheets of GTE Mobilnet of California Limited Partnership (a California limited partnership) as of December 31, 1994 and 1993 and the related statements of operations, changes in partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GTE Mobilnet of California Limited Partnership as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As more fully discussed in Note 3 to the financial statements, an uncertainty exists with respect to a lawsuit filed against the Partnership. The outcome of this litigation cannot be determined at this time. Accordingly, no provision for any liability that may result upon adjudication has been made in the financial statements. /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Atlanta, Georgia February 13, 1995 F-38 96 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of GTE Mobilnet of South Texas Limited Partnership We have audited the balance sheets of GTE Mobilnet of South Texas Limited Partnership (a Delaware limited partnership) as of December 31, 1994 and 1993 and the related statements of operations, changes in partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GTE Mobilnet of South Texas Limited Partnership as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Atlanta, Georgia February 13, 1995 F-39 97 REPORT OF INDEPENDENT AUDITORS The Partners San Antonio SMSA Limited Partnership We have audited the balance sheets of San Antonio SMSA Limited Partnership as of December 31, 1994 and 1993, and the related statements of income, changes in partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of San Antonio SMSA Limited Partnership at December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ ERNST AND YOUNG LLP Ernst and Young LLP Dallas, Texas February 10, 1995 F-40 98 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Albucell Limited Partnership We have audited the balance sheets of Albucell Limited Partnership (a Delaware limited partnership) as of December 31, 1994 and 1993, and the related statements of operations, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Albucell Limited Partnership as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As explained in Note 4 to the Partnership financial statements, effective January 1, 1992, the Partnership changed its method of accounting for postretirement benefits other than pensions and postemployment benefits. /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Denver, Colorado February 13, 1995 F-41 99 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE - ---------------- ------------------------------------------------------------------ ------------ EXHIBIT A -- AGREEMENT AND PLAN OF MERGER, AS AMENDED.......................... A-1 EXHIBIT B -- OPINION OF LAZARD FRERES & CO..................................... B-1 EXHIBIT C-1 -- OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED..... C-1-1 EXHIBIT C-2 -- OPINION OF PAINEWEBBER INCORPORATED............................... C-2-1 EXHIBIT D -- DELAWARE GENERAL CORPORATION LAW SECTION 262...................... D-1 EXHIBIT E -- DIRECTORS AND EXECUTIVE OFFICERS OF GTE CORPORATION, CONTEL CORPORATION, CONTEL CELLULAR ACQUISITION CORPORATION AND CONTEL CELLULAR INC...................................................... E-1
100 EXHIBIT A AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER dated as of December 27, 1994 (the "Agreement") among GTE Corporation, a New York corporation ("GTE"), Contel Corporation, a Delaware corporation and a wholly-owned subsidiary of GTE ("Contel"), Contel Cellular Acquisition Corporation, a Delaware corporation ("Purchaser") and a wholly-owned subsidiary of Contel, and Contel Cellular Inc., a Delaware corporation (the "Company"). R E C I T A L S WHEREAS, Contel has adopted a plan of liquidation; WHEREAS, GTE, through its wholly-owned subsidiary, Contel, is presently the beneficial owner of all of the outstanding shares of Class B Common Stock of the Company (as defined below); WHEREAS, Contel desires to acquire beneficial ownership of the remaining equity interest in the Company (the "Acquisition"), and has caused Purchaser to be formed to accomplish such purpose; WHEREAS, Contel and Purchaser intend to accomplish the Acquisition through a merger of Purchaser with and into the Company (the "Merger"), upon the terms and subject to the conditions set forth herein; and WHEREAS, the respective Boards of Directors of Purchaser and the Company and the Special Committee appointed by the Board of Directors of the Company to consider the Acquisition have approved the Merger upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINED TERMS The following terms used in this Agreement shall have the following meanings: "Acquisition" has the meaning set forth in the recitals hereto. "Actions" has the meaning set forth in Section 6.2 hereof. "Certificates" has the meaning set forth in Section 3.2(b) hereof. "Class A Common Stock" means the Class A Common Stock of the Company, par value $1.00 per share. "Class B Common Stock" means the Class B Common Stock of the Company, par value $1.00 per share. "Commission" means the Securities and Exchange Commission and/or any other governmental entity which administers either the Securities Act or the Exchange Act. "Common Stock" means the Class A Common Stock and Class B Common Stock. "Company" has the meaning set forth in the preamble hereto. "Constituent Corporations" has the meaning set forth in Section 2.1 hereof. "Contel" has the meaning set forth in the preamble hereto. "Depositary" has the meaning set forth in Section 3.2 hereof. "DGCL" means the Delaware General Corporation Law. "Dissenting Shares" has the meaning set forth in Section 3.1 hereof. "Effective Time" has the meaning set forth in Section 2.2 hereof. A-1 101 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "GTE" has the meaning set forth in the preamble hereto. "Indemnified Parties" has the meaning set forth in Section 6.2 hereof. "Indemnitor" has the meaning set forth in Section 6.2 hereof. "Information Statement" means the information statement on Form 14C relating to the Merger, as amended or supplemented, to be prepared and circulated as contemplated by Section 6.3 hereof. "Merger" has the meaning set forth in the recitals hereto. "Merger Consideration" has the meaning set forth in Section 2.4 hereof. "Permitted Investments" has the meaning set forth in Section 3.2 hereof. "Purchaser" has the meaning set forth in the preamble hereto. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Stockholder Materials" has the meaning set forth in Section 6.3 hereof. "Surviving Corporation" has the meaning set forth in Section 2.1 hereof. "Transaction Statement" means the transaction statement on Form 13e-3 relating to the Merger, as amended or supplemented, to be prepared and circulated as provided in Section 6.3 hereof. ARTICLE II THE MERGER SECTION 2.1 The Merger. Upon the terms and subject to the conditions hereof, and in accordance with the applicable provisions of the DGCL, Purchaser shall be merged with and into the Company. The Company shall continue as the surviving corporation (the "Surviving Corporation") in the Merger and the separate corporate existence of Purchaser shall cease (Purchaser and the Company are sometimes referred to herein as the "Constituent Corporations"). From and after the Effective Time, the Surviving Corporation shall possess all of the rights, privileges, immunities and franchises, and shall be responsible and liable for all of the liabilities and obligations, of each of the Constituent Corporations, all as set forth in Section 259 of the DGCL. SECTION 2.2 Effective Time. The Merger shall be consummated by filing with the Secretary of State of Delaware a Certificate of Merger executed in accordance with the relevant provisions of the DGCL. The Merger shall become effective at the time of filing with the Secretary of State of Delaware of a Certificate of Merger. The date and time when the Merger shall become effective is herein referred to as the "Effective Time." SECTION 2.3 Closing. Upon the terms and subject to the conditions hereof, as soon as practicable after the execution of the written consents of shareholders contemplated by Sections 6.3(b) and (c) hereof, the Company and Purchaser shall file the Certificate of Merger in accordance with Section 2.2 hereof, and the Company and Purchaser shall take all such other and further actions as may be required by law to make the Merger effective. SECTION 2.4 Conversion of Shares of Common Stock. (a) Each share of Class A Common Stock issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares, if any, and shares of Class A Common Stock held by the Company, Purchaser, Contel or GTE) shall, by virtue of the Merger and without any action on the part of the holder thereof, be cancelled and shall cease to exist and shall be converted into the right to receive cash in the amount of $25.50 in accordance with Section 3.2 hereof. The A-2 102 consideration to be paid in respect of each share of Class A Common Stock in accordance with the foregoing is hereinafter referred to as the "Merger Consideration." (b) Each share of Class A Common Stock held by the Company, Purchaser, Contel or GTE immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be cancelled and cease to exist, without any conversion thereof and without any Merger Consideration being paid with respect thereto. (c) Each share of Class B Common Stock issued and outstanding immediately prior to the Effective Time shall by virtue of the Merger, and without any action on the part of the holder thereof, be converted into one newly issued share of the Class B Common Stock of the Surviving Corporation. SECTION 2.5 Cancellation of Purchaser Capital Stock. Each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger, and without any action on the part of the holder thereof, be cancelled and cease to exist, without any conversion thereof and without any Merger Consideration being paid with respect thereto. SECTION 2.6 Certificate of Incorporation. The Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation, until thereafter amended. SECTION 2.7 By-Laws. The By-Laws of the Company, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation, until thereafter amended. SECTION 2.8 Directors. The directors of the Company at the Effective Time shall be the directors of the Surviving Corporation and shall hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Certificate of Incorporation and By-Laws of the Surviving Corporation, or as otherwise provided by law. SECTION 2.9 Officers. The officers of the Company at the Effective Time shall be the initial officers of the Surviving Corporation, all such officers to hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Certificate of Incorporation and By-Laws of the Surviving Corporation, or as otherwise provided by law. SECTION 2.10 Further Assistance. If at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or thing are necessary, desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, its right, title or interest in, to or under any of the rights, properties or assets of the Constituent Corporations acquired or to be acquired as a result of the Merger, or (ii) otherwise to carry out the purposes of this Agreement, the Surviving Corporation and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of the Constituent Corporations, all such deeds, bills of sale, assignments and assurances and do, in the name and on behalf of the Constituent Corporations, all such other acts and things necessary, desirable or proper to vest, perfect or confirm its right, title or interest in, to or under any of the rights, properties or assets of the Constituent Corporations acquired or to be acquired as a result of the Merger and otherwise to carry out the purposes of this Agreement. ARTICLE III DISSENTING SHARES; EXCHANGE AND PAYMENT FOR SHARES SECTION 3.1 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, shares of Class A Common Stock that are issued and outstanding immediately prior to the Effective Time and that are held by a stockholder who has the right (to the extent such right is available by law) to demand and receive payment of the fair value of such holder's stock pursuant to Section 262 of the DGCL (the "Dissenting Shares") shall not be converted into the right to receive the Merger Consideration provided for in Section 2.4(a) of this Agreement (unless and until such holder shall have failed to perfect or shall have effectively withdrawn or lost such right under the DGCL, as the case may be), but the holder thereof shall A-3 103 only be entitled to such rights as are granted by Delaware law. If such holder shall have so failed to perfect or shall have effectively withdrawn or lost such right, such holder's shares of Class A Common Stock shall thereupon be deemed to have been converted at the Effective Time into the right to receive the Merger Consideration without any interest thereon. If the holder of any shares of Class A Common Stock shall become entitled to receive payment for such shares pursuant to Section 262 of the DGCL, such payment shall be made by the Surviving Corporation. SECTION 3.2 Payment for Shares. Prior to the Effective Time, Purchaser shall or, in the event Purchaser shall fail to do so, GTE shall: (a) designate a bank or trust company to act as Depositary in the Merger (the "Depositary") and Purchaser or GTE shall enter into a mutually acceptable agreement with the Depositary pursuant to which, after the Effective Time, the Depositary will distribute the Merger Consideration on a timely basis and (b) according to the terms of the agreement with Depositary, deposit or cause to be deposited with the Depositary cash in the aggregate amount required with respect to the conversion of shares of Class A Common Stock at the Effective Time pursuant to Section 2.4(a) hereof. Pending distribution of the cash deposited with the Depositary, Purchaser may from time to time direct the Depositary to invest such cash, provided that such investments (i) shall be (A) obligations of (or guaranteed by) the United States of America or its agencies or instrumentalities, (B) commercial paper obligations receiving the highest rating from either Moody's Investors Services, Inc. or Standard & Poor's Corporation, (C) certificates of deposit, bank repurchase agreements or bankers acceptances on interest bearing accounts of commercial banks with capital exceeding $250 million (collectively, "Permitted Investments") or (D) money market funds that are required by their most current prospectus to have at least 80% of their assets invested in Permitted Investments and (ii) shall have maturities that will not prevent or delay payments to be made pursuant to this section. (b) As soon as practicable after the Effective Time, the Depositary shall be instructed to mail to each record holder (other than any holder of Dissenting Shares, the Company, Purchaser, Contel and GTE) of a certificate or certificates that immediately prior to the Effective Time represented shares of Class A Common Stock (the "Certificates") a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss shall pass, only upon proper delivery of the Certificates to the Depositary) and instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender to the Depositary of a Certificate, together with such letter of transmittal duly executed and completed in accordance with the instructions thereon, the holder of such Certificate shall be entitled to receive in exchange therefor consideration equal to the number of shares of Class A Common Stock represented by such Certificate multiplied by the Merger Consideration and such Certificate shall forthwith be cancelled. No interest will be paid or accrued on the Merger Consideration. All distributions to holders of Certificates shall be subject to any applicable income tax withholding. If the Merger Consideration is to be distributed to a person other than the person in whose name the Certificate surrendered is registered, it shall be a condition of such distribution that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer (including signature guarantees if required by Purchaser) and that the person requesting such distribution shall pay any transfer or other taxes required by reason of such distribution to a person other than the registered holder of the Certificate surrendered or, in the alternative, establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. After one hundred and eighty (180) days following the Effective Time, the Surviving Corporation shall be entitled to require the Depositary to deliver to it any cash (including any interest received with respect thereto) that it has made available to the Depositary and that has not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation only as general creditors thereof with respect to the cash payable upon due surrender of their Certificates. The Surviving Corporation shall pay all charges and expenses, including those of the Depositary, in connection with the distribution of the Merger Consideration for shares of Class A Common Stock. Until surrendered in accordance with the provisions of this Section 3.2, each Certificate (other than Certificates representing Dissenting Shares or shares of Class A Stock held by the Company, Purchaser, Contel or GTE) shall represent for all purposes the right to receive consideration equal to the Merger Consideration multiplied by the number of shares of Class A Common Stock evidenced by such A-4 104 Certificate. From and after the Effective Time, holders of Certificates immediately prior to the Merger shall have no right to vote or to receive any dividends or other distributions with respect to any shares of Class A Common Stock that were theretofore represented by such Certificates, other than any dividends or other distributions payable to holders of record as of a date prior to the Effective Time, and shall have no other rights in respect thereof other than as provided herein or by law. (c) From and after the Effective Time, there shall be no transfers on the stock transfer books of the Surviving Corporation of the shares of Class A Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation, other than Certificates in respect of Dissenting Shares, the rights to which have been perfected or not withdrawn or lost under the DGCL, they shall be cancelled and exchanged for Merger Consideration as provided in this Article III. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Purchaser, Contel and GTE as follows: SECTION 4.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has the requisite corporate power to carry on its business as now conducted. SECTION 4.2 Authority Relative to this Agreement. The Company has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by the Board of Directors of the Company, and no other corporate proceeding on the part of the Company is necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby (other than the approval of stockholders of the Company required to consummate the Merger). This Agreement has been duly executed and delivered by the Company and constitutes its valid and binding obligation, enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally or by general equitable principles. ARTICLE V REPRESENTATIONS AND WARRANTIES OF CONTEL, GTE AND PURCHASER SECTION 5.1 Representations and Warranties of Purchaser Purchaser represents and warrants to the Company as follows: (a) Organization and Qualification. It is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the requisite corporate power to carry on its business as now conducted. (b) Authority Relative to this Agreement. It has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement by it and the consummation by it of the transactions contemplated hereby have been duly authorized by its Board of Directors, and no other corporate proceeding on its part is necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby (other than the approval of its stockholders required to consummate the Merger). This Agreement has been duly executed and delivered by it and constitutes its valid and binding obligation, enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally or by general equitable principles. A-5 105 (c) No Prior Activities. It has not incurred, nor will it incur, directly or through any subsidiary, any liabilities or obligations, except those incurred in connection with its organization or with the negotiation of this Agreement and the consummation of the transactions contemplated hereby, including the Merger. Except as set forth in the previous sentence, it has not engaged, directly or through any subsidiary, in any business activities of any type or kind whatsoever, or entered into any agreements or arrangements with any person or entity. SECTION 5.2 Representations and Warranties of GTE and Contel. Contel and GTE each represents and warrants to the Company as follows: (a) Organization and Qualification. It is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the requisite corporate power to carry on its business as now conducted. (b) Authority Relative to this Agreement. It has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement by it and the consummation by it of the transactions contemplated hereby have been duly authorized by its Board of Directors, and no other corporate proceeding on its part is necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by it and constitutes its valid and binding obligation, enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally or by general equitable principles. ARTICLE VI COVENANTS SECTION 6.1 Conduct of Business of the Company. Except as otherwise expressly provided in this Agreement, from the date of this Agreement to the Effective Time, the Company will conduct its business in the ordinary course. SECTION 6.2 Indemnification, Etc. The Company shall indemnify and hold harmless, and, after the Effective Time, the Surviving Corporation and GTE (the Company, the Surviving Corporation and GTE, for the purpose of this Section 6.2 being the "Indemnitor") will indemnify and hold harmless, each present and former director and officer of the Company (the "Indemnified Parties") against any losses, claims, damages, liabilities, costs, expenses, judgments and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation (collectively, "Actions") arising out of or pertaining to any action or omission occurring prior to the Effective Time (including without limitation, any Actions which arise out of or relate to the transactions contemplated by this Agreement) to the full extent permitted under the DGCL (and the Indemnitor will advance reasonable expenses to each such person to the full extent so permitted); provided, however, that any determination required to be made with respect to whether an Indemnified Party's conduct complied with the standards set forth in the DGCL shall be made in accordance with the DGCL, and the Indemnitor shall pay the reasonable fees and expenses incurred in connection with such determination. If any such Action is brought against any Indemnified Party (whether arising before or after the Effective Time), (a) the Indemnified Parties may retain counsel reasonably satisfactory to them and the Indemnitor, (b) the Indemnitor shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received, and (c) the Indemnitor and the Indemnified Parties will cooperate in the vigorous defense of any such matter, provided, that the Indemnitor shall not be liable for any such settlement effected without its written consent, which consent, however, shall not be unreasonably withheld. Any Indemnified Party wishing to claim indemnification under this Section 6.2, upon learning of any such Action shall notify the Indemnitor thereof and shall deliver to the Indemnitor an undertaking to repay any amounts advanced pursuant hereto when and if a court of competent jurisdiction shall ultimately determine, after exhaustion of all avenues of appeal, that such Indemnified Party was not entitled to indemnification under this Section. The Indemnified Parties as a group may retain only one law firm in each jurisdiction to represent A-6 106 them with respect to any such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. GTE and Purchaser agree to cause to be maintained in effect the present policy of directors' and officers' liability insurance (or an equivalent policy) covering those persons who are currently covered by such policy for three years from the Effective Time. This Section 6.2 shall survive consummation of the Merger. SECTION 6.3 Stockholders' Approval; SEC Filings. (a) Subject to the terms and conditions contained herein, this Agreement and the transactions contemplated hereby shall be submitted by the Company and Purchaser to their respective stockholders for approval. Promptly after the execution of this Agreement, the Company and Purchaser shall together, or pursuant to an allocation of responsibility to be agreed upon between them, (i) use their best efforts to obtain all information required to be included in the Information Statement, the Transaction Statement and related materials (the "Stockholder Materials"), (ii) prepare and file with the Commission the Stockholder Materials, (iii) use all reasonable efforts to have the Stockholder Materials cleared by the Commission as promptly as practicable, and (iv) promptly following clearance by the Commission, mail the Stockholders Materials to shareholders of the Company. Purchaser and the Company also shall take any action required to be taken under state blue sky or securities laws or the rules and regulations of any securities exchanges or markets on which their securities are listed for trading in connection with transactions contemplated hereby including the Merger. The Information Statement and the Transaction Statement shall, when first mailed to the stockholders of the Company and as amended or supplemented thereafter, comply as to form in all material respects with all applicable requirements of federal securities laws. Purchaser and the Company shall each furnish to the other and their counsel all such information as may be required to prepare the Stockholders Materials. All such information provided and to be provided by Purchaser and the Company respectively, for use in the Stockholder Materials shall, on the date the Information Statement or Transaction Statement is first mailed to the Company's stockholders and as amended or supplemented thereafter, be true and correct in all material respects and shall not omit to state any material fact necessary in order to make such information in light of the circumstances in which it was given not misleading, and the Company and the Purchaser each agree to correct any information provided by it for use in the Information Statement or Transaction Statement which shall have become false or misleading in any material respect. (b) Subject to the terms and conditions set forth in the next sentence, GTE, the Company and Contel agree that Contel shall execute a written consent as majority shareholder of the Company approving this Agreement and the Merger. Such consent shall be executed by Contel only after the passage of any waiting periods, following the mailing of the Stockholders' Materials to the stockholders of the Company, required for compliance with the Securities Act, the Exchange Act, the DGCL and any other laws, rules or regulations applicable to Company. (c) Contel shall also execute a written consent as majority shareholder of Purchaser approving this Agreement and the Merger. Such consent shall be executed concurrently with the execution of the consent referred to in paragraph (b). Section 6.4 Consents. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, and to cooperate with each other in connection with the foregoing, including using commercially reasonable efforts to (i) obtain all necessary waivers, consents and approvals from other parties to loan agreements, leases and other contracts, (ii) obtain all necessary consents, approvals and authorizations as are required to be obtained under any federal, state or foreign law or regulations, (iii) defend all lawsuits or other legal proceedings challenging this Agreement or the consummation of the transactions contemplated hereby, (iv) lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby, and (v) effect all registrations and filings necessary to consummate the transactions contemplated hereby. A-7 107 ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER The respective obligations of each party to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) This Agreement and the transactions contemplated hereby shall have been approved by any necessary vote of the stockholders of the Company and Purchaser in accordance with applicable law and Sections 6.3(b) and (c); (b) No statute, rule, regulation, executive order, decree or injunction (preliminary or permanent) shall have been enacted, entered, promulgated or enforced by any federal or state court of competent jurisdiction in the United States or other governmental authority which prohibits the consummation of the Merger and remains in effect after GTE, the Company and Purchaser shall have used all commercially reasonable efforts to lift any injunction; (c) No consents of or filings with any governmental entity shall be required for consummation of the Merger which have not been obtained or filed; and (d) The Special Committee of the Board of Directors of the Company shall not have modified or rescinded its recommendation with respect to the Merger. ARTICLE VIII TERMINATION; AMENDMENT; WAIVER SECTION 8.1 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time notwithstanding approval thereof by the stockholders of the Company, but prior to the Effective Time: (a) by mutual written consent of each of Purchaser and the Company; or (b) by Purchaser or the Company if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and non-appealable; or (c) by Purchaser or the Company if the Merger does not occur within 120 days of the date of this Agreement unless the Merger shall not have occurred primarily as the result of a delay occasioned by review of filings by regulatory agencies. SECTION 8.2 Effect of Termination. In the event of the termination and abandonment of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void and have no effect, without liability on the part of any party or its directors, officers, stockholders or partners. SECTION 8.3 Amendment. This Agreement may be amended by action taken by Purchaser and the Company at any time, provided that following approval of this agreement by the shareholders of Company or Purchaser any amendment of this Agreement shall be subject to compliance with Section 251(d) of the DGCL. The prior approval of a majority of the members of the Special Committee shall be required in connection with any amendment or modification by or on behalf of the Company. This Agreement may not be amended, modified or supplemented except by an instrument in writing signed on behalf of the party against whom enforcement is sought. SECTION 8.4 Extension; Waiver. At any time prior to the Effective Time, the parties may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions contained herein, except as otherwise provided by law and except that the provisions of Section 6.2 hereof shall not be waived. A-8 108 Any agreement on the part of any party to any such extension or waiver shall be valid only if set forth in an instrument in writing on behalf of such party, and, in the case of an extension or waiver by the Company, if such extension or waiver has been approved by a majority of the members of the Special Committee. ARTICLE IX MISCELLANEOUS SECTION 9.1 Survival of Representations, Warranties and Agreements. The representations, warranties and agreements made herein shall not survive beyond the Effective Time, except for the agreements set forth in Sections 2.10, 3.1, 3.2 and 6.2. SECTION 9.2 Entire Agreement; Assignment. This Agreement (a) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties or any of them with respect to the subject matter hereof, and (b) shall not be assigned by operation of law or otherwise; provided that Purchaser may assign its rights and obligations to any wholly owned, direct or indirect subsidiary, but no such assignment shall relieve Purchaser of its obligations hereunder if such assignor does not perform such obligations. SECTION 9.3 Validity. The validity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. SECTION 9.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by cable, telegram or telex, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses or at such other addresses as shall be specified by the parties by like notice. (i) if to the Purchaser, to: Marianne Drost, Secretary CCI Acquisition Corporation One Stamford Forum Stamford, CT 06904 with a copy to: Jeffrey Rosen O'Melveny & Myers 555 Thirteenth Street, N.W. Suite 500 West Washington, DC 20004 (ii) if to the Company, to: Marianne Drost Contel Cellular Inc. c/o GTE Corporation One Stamford Forum Stamford, CT 06904 with a copy to: W. Leslie Duffy Cahill Gordon & Reindel 80 Pine Street New York, NY 10005 A-9 109 (iii) if to Contel, to: Marianne Drost, Secretary Contel Corporation One Stamford Forum Stamford, CT 06904 (iv) if to GTE, to: Marianne Drost, Secretary GTE Corporation One Stamford Forum Stamford, CT 06904 SECTION 9.5 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflict of laws thereof. SECTION 9.6 Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. SECTION 9.7 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement, except as expressly provided in Section 6.2 (which is intended to be for the benefit of the persons referred to therein and may be enforced by such persons). SECTION 9.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. SECTION 9.9 Expenses. All costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses. SECTION 9.10 Specific Performance. The parties hereto agree that if for any reason any party hereto shall have failed to perform its obligations under this Agreement, then any other party hereto seeking to enforce this Agreement against such non-performing party shall be entitled to specific performance and injunctive and other equitable relief, and the parties hereto further agree to waive any requirement for the securing or posting of any bond in connection with the obtaining of any such injunctive or other equitable relief. This provision is without prejudice to any other rights that any party hereto may have against any other party hereto for any failure to perform its obligations under this Agreement. A-10 110 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written. CONTEL CELLULAR INC. By: /s/ DENNIS WHIPPLE -------------------------------------- Title: President CONTEL CELLULAR ACQUISITION CORPORATION By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary CONTEL CORPORATION By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary GTE CORPORATION By: /s/ JAMES MURPHY -------------------------------------- Title: Vice President and Treasurer A-11 111 FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER First Amendment to the Agreement and Plan of Merger dated as of January 27, 1995 (the "First Amendment") among GTE Corporation, a New York corporation ("GTE"), Contel Corporation, a Delaware corporation and a wholly-owned subsidiary of GTE ("Contel"), Contel Cellular Acquisition Corporation, a Delaware corporation ("Purchaser") and a wholly-owned subsidiary of Contel, and Contel Cellular Inc., a Delaware corporation (the "Company"). RECITALS WHEREAS, GTE, Contel, Purchaser and the Company have entered into an Agreement and Plan of Merger dated as of December 27, 1994 (the "Agreement"); WHEREAS, GTE, Contel, Purchaser and the Company desire to amend the Agreement as set forth herein. NOW, THEREFORE, the parties hereto agree as follows: Section 1. Definitions. All capitalized terms used herein shall have the meaning ascribed to them in the Agreement. Section 2. Amendment of Section 2.3. Section 2.3 of the Agreement is hereby amended in its entirety to read as follows: Upon the terms and subject to the conditions hereof, as soon as practicable after the execution of the written consents of shareholders contemplated by Sections 6.3(b) and (c) hereof and after the passage of waiting periods required for compliance with the Securities Act, the Exchange Act, the DGCL and any other rules or regulations applicable to the Company, the Company and Purchaser shall file the Certificate of Merger in accordance with Section 2.2 hereof, and the Company and Purchaser shall take all such other and further actions as may be required by law to make the Merger effective. Section 3. Amendment of Section 6.3(b). Section 6.3(b) of the Agreement is hereby amended in its entirety to read as follows: (b) GTE, the Company and Contel agree that Contel shall execute a written consent as majority shareholder of the Company approving this Agreement and the Merger as soon as practicable after the execution of this Agreement. The Agreement, as amended hereby, shall remain in full force and effect and shall constitute the agreement of the parties. A-12 112 IN WITNESS WHEREOF, each of the parties has caused this First Amendment to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written. CONTEL CELLULAR INC. By: /s/ DENNIS WHIPPLE -------------------------------------- Title: President CONTEL CELLULAR ACQUISITION CORPORATION By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary CONTEL CORPORATION By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary GTE CORPORATION By: /s/ JAMES MURPHY -------------------------------------- Title: Vice President and Treasurer By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary A-13 113 SECOND AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER Second Amendment to the Agreement and Plan of Merger dated as of March 10, 1995 (the "Second Amendment") among GTE Corporation, a New York corporation ("GTE"), Contel Corporation, a Delaware Corporation and a wholly-owned subsidiary of GTE ("Contel"), Contel Cellular Acquisition Corporation, a Delaware Corporation ("Purchaser") and a wholly-owned subsidiary of Contel, and Contel Cellular Inc., a Delaware Corporation (the "Company"). RECITALS WHEREAS, GTE, Contel, Purchaser and the Company have entered into an Agreement and Plan of Merger dated as of December 27, 1994, which Agreement was amended pursuant to the First Amendment to the Agreement and Plan of Merger dated as of January 27, 1995 (as amended, the "Agreement"); and WHEREAS, GTE, Contel, Purchaser and the Company desire further to amend the Agreement as set forth herein. NOW, THEREFORE, the parties hereto agree as follows: Section 1. Definitions. All capitalized terms used herein shall have the meanings ascribed to them in the Agreement. Section 2. Amendment of Section 2.4. Section 2.4 of the Agreement is hereby amended in its entirety to read as follows: SECTION 2.4 CONVERSION OF SHARES OF COMMON STOCK. (a) Each share of Class A common Stock issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares, if any, and shares of Class A Common Stock held by the company, Purchaser, Contel or GTE) shall, by virtue of the Merger and without any action on the part of the holder thereof, be cancelled and retired and shall cease to exist as issued and outstanding shares and shall be converted into the right to receive cash in the amount of $25.50 in accordance with Section 3.2 hereof. The consideration to be paid in respect of each share of Class A Common Stock in accordance with the foregoing is hereinafter referred to as the "Merger Consideration." (b) Each share of Class A Common Stock held by the Company, Purchaser, Contel or GTE immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be cancelled and retired and cease to exist as an issued and outstanding share, without any conversion thereof and without any Merger Consideration being paid with respect thereto. (c) The shares of Class B Common Stock shall not be changed or converted in the Merger, and each share of Class B Common Stock issued and outstanding immediately prior to the Effective Time shall continue to be outstanding subsequent to the Effective Time as one share of Class B Common Stock of the Surviving Corporation. The Agreement, as amended hereby, shall remain in full force and effect and shall constitute the agreement of the parties. A-14 114 IN WITNESS WHEREOF, each of the parties has caused this Second Amendment to be executed on its behalf by its officers therunto duly authorized, all as of the day and year first above written. CONTEL CELLULAR INC. By: /s/ DENNIS WHIPPLE -------------------------------------- Title: President CONTEL CELLULAR ACQUISITION CORPORATION By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary CONTEL CORPORATION By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary GTE CORPORATION By: /s/ JAMES MURPHY -------------------------------------- Title: Vice President and Treasurer By: /s/ MARIANNE DROST -------------------------------------- Title: Secretary A-15 115 EXHIBIT B OPINION OF LAZARD FRERES & CO. [LAZARD FRERES & CO. LETTERHEAD] December 30, 1994 Special Committee of the Board of Directors Contel Cellular Inc. c/o Contel Corporation 375 Park Avenue, 24th Floor New York, NY 10152 Dear Members of the Special Committee: You have requested our opinion as to the fairness, from a financial point of view, to the holders of the Class A Common Stock, par value $1.00 per share (the "Common Stock") of Contel Cellular Inc. ("CCI"), other than GTE Corporation ("GTE"), Contel Corporation ("Contel") and their affiliates, of the consideration to be received by such holders in the proposed merger (the "Merger") of CCI and a subsidiary of Contel. We understand that the Merger is to be effected pursuant to an Agreement and Plan of Merger, to be entered into among GTE, Contel, a subsidiary of Contel, and CCI, a draft of which, dated December 29, 1994, has been furnished to us (the "Merger Agreement"). The terms of the Merger Agreement provide, among other things, that each share of Common Stock (other than any shares of Common Stock held by stockholders who properly exercise and perfect stockholder appraisal rights, if any, under the General Corporation Law of the State of Delaware, and any shares held by CCI, GTE, Contel or such subsidiary of Contel all of which shall be canceled), will be converted into the right to receive cash in the amount of $25.50. We understand that GTE beneficially owns all of the issued and outstanding shares of Class B Common Stock, par value $1.00 per share, of CCI, which represents approximately ninety percent (90%) of the issued and outstanding equity of CCI. In connection with this opinion, we have, among other things: (i) reviewed the terms and conditions of the Merger Agreement; (ii) analyzed certain historical business and financial information relating to CCI, including the Annual Reports to Stockholders and Annual Reports on Form 10-K of CCI for each of the fiscal years ended December 31, 1991 through 1993, and Quarterly Reports on Form 10-Q of CCI for the quarters ended March 31, June 30, and September 30, 1994; (iii) reviewed certain financial forecasts and other data provided to us by CCI relating to CCI; (iv) held discussions with members of the senior managements of CCI and GTE with respect to the businesses and prospects of CCI and its strategic objectives; (v) reviewed public information with respect to certain other companies in lines of businesses we believe to be generally comparable to the businesses of CCI; (vi) reviewed the financial terms of certain recent business combinations involving companies in lines of businesses we believe to be generally comparable to CCI, and in other industries generally; (vii) reviewed the financial terms of certain recent business combinations we believe to be comparable in certain respects to the proposed Merger; (viii) reviewed the historical stock prices and trading volumes of the Common Stock; and (ix) conducted such other financial studies, analyses and investigations as we deemed appropriate. B-1 116 We understand that CCI and an affiliate of GTE propose to exchange certain cellular assets owned by each of them for certain cellular assets owned by a publicly-held company (the "Cellular Exchange"). We have received a copy of a letter dated December 19, 1994 from GTE's Senior Vice President -- Finance addressed to GTE's financial advisors, Merrill Lynch & Co. and PaineWebber Incorporated, regarding the Cellular Exchange to the effect that it is an exchange of equivalent assets and, accordingly, is value neutral to CCI. We have neither received nor reviewed any other information regarding the Cellular Exchange, including any financial projections or any other non-public financial information prepared by GTE or CCI. With your consent, we have assumed that the Cellular Exchange involves the exchange of assets with substantially equivalent value and, accordingly, will have an immaterial effect, if any, on CCI. For purposes of this opinion, with your concurrence, we have ascribed no value to CCI's rights under either (i) that certain Third Restated Competition Agreement dated March 14, 1991, among Contel, GTE and CCI, or (ii) that certain Services Agreement dated May 1, 1991, as amended, by and between GTE Mobile Communications Service Corporation and CCI. We have not reviewed any proxy or information statement or similar document that may be prepared for use in connection with the proposed Merger. In addition, we were not asked by the Special Committee (the "Special Committee") of the Board of Directors of CCI to solicit third party indications of interest in acquiring all or any part of CCI, nor did we seek any such offers. We have relied upon the accuracy and completeness of the foregoing financial and other information and have not assumed any responsibility for any independent verification of such information or any independent valuation or appraisal of any of the assets of CCI. With respect to financial forecasts, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of management of CCI as to the future financial performance of CCI. We assume no responsibility and express no view as to such forecasts or the assumptions on which they are based. Further, our opinion is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to us as of, the date hereof. In rendering our opinion, we have assumed that the actual Agreement and Plan of Merger entered into among the parties thereto will be identical in all material respects to the Merger Agreement, that the Merger will be consummated on the terms described in the Merger Agreement, without any waiver of any material terms or conditions by CCI and that obtaining the necessary regulatory approvals for the Merger will not have an adverse effect on CCI. Lazard Freres & Co. has acted as financial advisor to the Special Committee in connection with the proposed Merger and will receive a fee for our services, a substantial portion of which is payable upon rendering this opinion. Our engagement and the opinion expressed herein is solely for the benefit of the Special Committee and is not on behalf of, and is not intended to confer rights or remedies upon, GTE, any stockholders of CCI or GTE, or any other person. It is understood that this letter may not be disclosed or otherwise referred to without our prior consent, except as may otherwise be required by law or a court of competent jurisdiction. Based on and subject to the foregoing, we are of the opinion that the consideration to be received by the holders of the Common Stock (other than GTE, Contel or any of their affiliates) is fair to such holders from a financial point of view. Very truly yours, LAZARD FRERES & CO. B-2 117 EXHIBIT C-1 OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED [MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED LETTERHEAD] December 27, 1994 Board of Directors GTE Corporation One Stamford Forum Stamford, CT 06904 Attention: J. Michael Kelly Gentlemen: Contel Corporation, a Delaware corporation ("Contel") and a wholly-owned subsidiary of GTE Corporation (the "Company"), CCI Acquisition Company, a Delaware corporation (the "Purchaser") and a wholly-owned subsidiary of Contel, and Contel Cellular Inc., a Delaware corporation (the "Subject Company"), propose to enter into an Agreement and Plan of Merger (the "Agreement") pursuant to which the Purchaser will be merged into the Subject Company in a transaction (the "Merger") in which each share of the Subject Company's Class A Common Stock, par value $1.00 per share (the "Shares"), will be converted into the right to receive $25.50 in cash per Share. You have asked us whether, in our opinion, the proposed cash consideration to be paid for the Shares pursuant to the Merger is fair to the Company from a financial point of view. In arriving at the opinion set forth below, we have, among other things: (1) Reviewed the Subject Company's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 31, 1993 and the Subject Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ending March 31, 1994, June 30, 1994 and September 30, 1994; (2) Reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of the Subject Company, furnished to us by the Subject Company; (3) Conducted discussions with members of senior management of the Subject Company concerning its businesses and prospects; (4) Reviewed the historical market prices and trading activity for the Shares and compared them with that of certain publicly traded companies which we deemed to be reasonably similar to the Subject Company; (5) Compared the results of operations of the Subject Company with that of certain companies which we deemed to be reasonably similar to the Subject Company; (6) Compared the proposed financial terms of the transactions contemplated by the Agreement with the financial terms of certain other mergers and acquisitions which we deemed to be relevant; (7) Considered the pro forma effect of the Merger on the Company's capitalization ratios, earnings and cash flow; (8) Considered a discounted cash flow analysis based on future cash flows that management of the Subject Company expects the Subject Company to generate; (9) Reviewed a draft of the Agreement dated December 20, 1994; and C-1-1 118 (10) Reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed necessary, including our assessment of general economic, market and monetary conditions. In preparing our opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Subject Company, and we have not assumed any responsibility to independently verify such information or undertaken an independent appraisal of the assets of the Subject Company. With respect to the financial forecasts furnished by the Subject Company, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Subject Company's management as to the expected future financial performance of the Subject Company. This opinion does not address the relative merits of the Merger and any other transactions or business strategies discussed by the Board of Directors of the Company as alternatives to the Merger or the decision of the Board of Directors of the Company to proceed with the Merger. In rendering this opinion, we have not been engaged to act as an agent or fiduciary of the Company's equity holders or any other third party. We have, in the past, provided financial advisory services to the Subject Company and have received fees for the meeting of such services. On the basis of, and subject to the foregoing, we are of the opinion that the proposed cash consideration to be paid pursuant to the Merger is fair to the Company from a financial point of view. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ ALAIN LEBEC Managing Director Investment Banking Group C-1-2 119 EXHIBIT C-2 OPINION OF PAINEWEBBER INCORPORATED [PAINEWEBBER LETTERHEAD] December 27, 1994 [PAINEWEBBER LOGO] Board of Directors GTE Corporation One Stamford Forum Stamford, CT 06904 Attention: J. Michael Kelly Gentlemen: Contel Corporation, a Delaware corporation ("Contel") and a wholly-owned subsidiary of GTE Corporation (the "Company"), CCI Acquisition Company, a Delaware corporation (the "Purchaser") and a wholly-owned subsidiary of Contel, and Contel Cellular Inc,. a Delaware corporation (the "Subject Company"), propose to enter into an Agreement and Plan of Merger (the "Agreement") pursuant to which the Purchaser will be merged into the Subject Company in a transaction (the "Merger") in which each share of the Subject Company's Class A Common Stock, par value $1.00 per share (the "Shares"), will be converted into the right to receive $25.50 in cash per Share. You have asked us whether, in our opinion, the proposed cash consideration to be paid for the Shares pursuant to the Merger is fair to the Company from a financial point of view. In arriving at the opinion set forth below, we have, among other things: (1) Reviewed the Subject Company's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 31, 1993 and the Subject Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ending March 31, 1994, June 30, 1994, and September 30, 1994; (2) Reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of the Subject Company; (3) Conducted discussions with members of senior management of the Subject Company concerning its businesses and prospects; (4) Reviewed the historical market prices and trading activity for the Shares and compared them with that of certain publicly traded companies which we deemed to be reasonably similar to the Subject Company; (5) Compared the results of operations of the Subject Company with that of certain companies which we deemed to be reasonably similar to the Subject Company; (6) Compared the proposed financial terms of the transactions contemplated by the Agreement with the financial terms of certain other mergers and acquisitions which we deemed to be relevant; (7) Considered the pro forma effect of the Merger on the Company's capitalization ratios, earnings and cash flow; (8) Considered a discounted cash flow analysis based on future cash flows that management of the Subject Company expects the Subject Company to generate; (9) Reviewed a draft of the Agreement dated December 20, 1994; and C-2-1 120 (10) Reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed necessary, including our assessment of general economic, market and monetary conditions. In preparing our opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Subject Company, and we have not assumed any responsibility to independently verify such information or undertaken an independent appraisal of the assets of the Subject Company. With respect to the financial forecasts furnished by the Subject Company, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Subject Company's management as to the expected future performance of the Subject Company. This opinion does not address the relative merits of the Merger and any other transactions or business strategies discussed by the Board of Directors of the Company as alternatives to the Merger or the decision of the Board of Directors of the Company to proceed with the Merger. In rendering this opinion, we have not been engaged to act as an agent or fiduciary of the Company's equity holders or any other third party. We have, in the past, provided financial advisory services to the Company and have received fees for the rendering of such services. On the basis of, and subject to the foregoing, we are of the opinion that the proposed cash consideration to be paid pursuant to the Merger is fair to the Company from a financial point of view. Very truly yours, PAINEWEBBER INCORPORATED C-2-2 121 EXHIBIT D DELAWARE GENERAL CORPORATION LAW SECTION 262 SEC. 262. APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to sec.228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to sec.251, 252, 254, 257, 258 or 263 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the holders of the surviving corporation as provided in subsection (f) of sec.251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a National Market System security on an inter-dealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under sec.253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section shall apply as nearly as is practicable. D-1 122 (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his share. Such demand will be sufficient if it reasonably informs the corporations of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to sec.228 or 253 of this title, the surviving or resulting corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the stockholders entitled to appraisal rights of the effective date of the merger or consolidation and that appraisal rights are available for any or all of the shares of the constituent corporation, and shall include in such notice a copy of this section. The notice shall be sent by certified or registered mail, return receipt requested, addressed to the stockholder at his address as it appears on the records of the corporation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of the notice, demand in writing from the surviving or resulting corporation the appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by D-2 123 publications shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing of such petition, the Court shall determine the stockholders how have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such directions, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders, entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of the Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. D-3 124 EXHIBIT E DIRECTORS AND EXECUTIVE OFFICERS OF GTE CORPORATION, CONTEL CORPORATION, CONTEL CELLULAR ACQUISITION CORPORATION AND CONTEL CELLULAR INC. 1. Directors and Executive Officers of GTE Corporation. The following table sets forth the name, business address, present principal occupation and the other material occupations, positions, offices or employments for the past five years (if applicable) of each director and executive officer of GTE Corporation, a New York corporation ("GTE"). Each director and executive officer of GTE is a citizen of the United States. GTE, through its subsidiaries, provides local telephone service, cellular mobile telephone service, directories, and other telecommunications related products and services. GTE also has subsidiaries which offer financial and related services primarily to GTE operating companies. The address of GTE's principal executive offices is One Stamford Forum, Stamford, Connecticut 06904.
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- GTE -- DIRECTORS Edwin L. Artzt..................... Chairman of the Board and Not applicable The Procter & Gamble Company Chief Executive Officer of The One Procter & Gamble Plaza Procter & Gamble Company Cincinnati, OH 45202-3315
James R. Barker.................... Chairman of the Interlake Not applicable Mormac Marine Group, Inc. Steamship Co.; Vice Chairman Three Landmark Square of Mormac Marine Group, Inc.; Stamford, CT 06901 Vice Chairman of Moran Towing Company Edward H. Budd..................... Chairman of the Board of the Chairman of Travelers The Travelers Insurance Companies Executive Committee and Insurance Group, Inc. One Tower Square Director of The Travelers from January 1994 to Hartford, CT 06138-1100 Insurance Group, Inc. September 1994. Chairman of The Travelers, Inc. since 1982 Kent B. Foster..................... Vice Chairman of GTE and Not applicable GTE President of GTE Telephone 600 Hidden Ridge, HQE04J17 Operations Group Irving, TX 75308 James L. Johnson................... Chairman Emeritus of GTE since Chairman and Chief 600 Hidden Ridge 1992 Executive of GTE since Irving, TX 75038 1988 Richard W. Jones................... Business Consultant, Not applicable Business Consultant PaineWebber Incorporated PaineWebber Incorporated 725 S. Figueroa Street Suite 4100 Los Angeles, CA 90017 James L. Ketelsen.................. Retired Chairman of Tenneco Chairman and Chief Tenneco Inc. Inc. since 1992 Executive Officer of Tenneco Building Tenneco Inc. since 1978 1010 Milam Street Houston, TX 77002 Charles R. Lee..................... Chairman and Chief Executive President and Chief GTE Officer of GTE since 1992 Operating Officer of GTE One Stamford Forum since 1989 Stamford, CT 06904
E-1 125
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- Michael T. Masin................... Vice Chairman of GTE since Managing Partner of the GTE 1993 New York office of the One Stamford Forum law firm of O'Melveny & Stamford, CT 06904 Myers and a partner with that firm since 1977
Sandra O. Moose.................... Senior Vice President and Not applicable The Boston Consulting Group, Inc. Chair of the East Coast as 135 E. 57th Street well as New York Office New York, NY 10022 Administrator and Director of The Boston Consulting Group, Inc. Russell E. Palmer.................. Chairman and Chief Executive Dean, The Wharton School, The Palmer Group Officer of The Palmer Group University of 3600 Market Street since 1990 Pennsylvania from 1983 Philadelphia, PA 19104 until 1990 Howard Sloan....................... Private Investor Not applicable 375 Park Avenue New York, NY 10152 Robert D. Storey................... Partner with the Cleveland law Partner with the Thompson, Hine & Flory firm of Thompson, Hine & Flory Cleveland law firm of 1100 National City Bank Bldg. since 1993 McDonald, Hopkins, Burke 629 Euclid Avenue & Haber Co., L.P.A. since Cleveland, OH 44114 1971 James W. Walter.................... Chairman of Walter Industries, Not applicable Walter Industries, Inc. Inc. 1500 N. Dale Mabry Highway Tampa, FL 33607 Charles Wohlstetter................ Vice Chairman of GTE since Chairman of the Board of 375 Park Avenue 1991 Contel Corporation since New York, NY 10152 1960
GTE -- EXECUTIVE OFFICERS Charles R. Lee..................... See prior entry See prior entry GTE One Stamford Forum Stanford, CT 06904 Charles Wohlstetter................ See prior entry See prior entry GTE 375 Park Avenue New York, NY 10152 Kent B. Foster..................... See prior entry See prior entry GTE 600 Hidden Ridge Irving, TX 75308 Michael T. Masin................... See prior entry See prior entry GTE One Stamford Forum Stanford, CT 06904 Nicholas L. Trivisonno............. Executive Vice President - Senior Vice President - GTE Strategic Planning and Group Finance since 1989 One Stamford Forum President of GTE since 1993 Stamford, CT 06904
E-2 126
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- William P. Barr.................... Senior Vice President and Partner in the Washington GTE General Counsel of GTE since D.C. office of the law One Stamford Forum 1994 firm of Shaw, Pittman, Stamford, CT 06904 Potts & Trowbridge since 1993; Attorney General of the United States from 1991 to 1993; previously Deputy Attorney General of the United States
Bruce Carswell..................... Senior Vice President - Human Not applicable GTE Resources and Administration One Stamford Forum of GTE Stamford, CT 06904 J. Michael Kelly................... Senior Vice Vice President and GTE President - Finance of GTE Controller of GTE since One Stamford Forum since 1994 December 1991; Vice Stamford, CT 06904 President - Finance and Business Development for GTE Telecommunications Products and Services Group since 1991; Vice President and Controller for Contel Corporation since 1990 John P.Z. Kent..................... Vice President - Taxes of GTE Not applicable GTE One Stamford Forum Stamford, CT 06904 James Murphy....................... Vice President and Treasurer Not applicable GTE of GTE One Stamford Forum Stamford, CT 06904 G. Bruce Redditt................... Vice President - Public Vice President - Public GTE Affairs and Communications of Affairs for the Telephone One Stamford Forum GTE since 1994 Operations Group of GTE Stamford, CT 06904 Service Corporation since 1991, previously Vice President - Corporate Communications for Contel Corporation Samuel F. Shawhan, Jr.............. Vice President - Government Not applicable GTE Affairs of GTE 1850 M Street, N.W. Washington, D.C. 20036 William D. Wilson.................. Vice President and Controller Area Vice President - GTE of GTE since 1994 General Manager for the One Stamford Forum East Area of the Stamford, CT 06904 Telephone Operations Group of GTE Service Corporation since 1993; previously Vice President - Business Planning for the Telephone Operations Group of GTE Service Corporation Marianne Drost..................... Secretary of GTE Not applicable GTE One Stamford Forum Stamford, CT 06904
E-3 127 2. Directors and Executive Officers of Contel Corporation. The following table sets forth the name, business address, present principal occupation and the other material occupations, positions, offices or employments for the past five years (if applicable) of each director and executive officer of Contel Corporation, a Delaware corporation ("Contel"). Each director and executive officer of Contel is a citizen of the United States. Contel, through its subsidiaries, provides telecommunications products and services. The address of Contel's principal executive offices is One Stamford Forum, Stamford, Connecticut 06904. CONTEL CORPORATION -- DIRECTORS Bruce Carswell..................... See prior entry See prior entry Contel Corporation One Stamford Forum Stamford, CT 06904 Charles R. Lee..................... See prior entry See prior entry Contel Corporation One Stamford Forum Stamford, CT 06904 Nicholas L. Trivisonno............. See prior entry See prior entry Contel Corporation One Stamford Forum Stamford, CT 06904
CONTEL CORPORATION -- EXECUTIVE OFFICERS J. Michael Kelly................... See prior entry See prior entry President Contel Corporation One Stamford Forum Stamford, CT 06904 James Murphy....................... See prior entry See prior entry Vice President and Treasurer Contel Corporation One Stamford Forum Stamford, CT 06904 Marianne Drost..................... See prior entry See prior entry Secretary Contel Corporation One Stamford Forum Stamford, CT 06904
3. Directors and Executive Officers of Contel Cellular Acquisition Corporation. The following table sets forth the name, business address, present principal occupation and the other material occupations, positions, offices or employments for the past five years (if applicable) of each director and executive officer of Contel Cellular Acquisition Corporation, a Delaware corporation ("CCI Acquisition"). Each director and executive officer is a citizen of the United States. CCI Acquisition was incorporated in December 1994 for the purpose of acquiring the Company and has not engaged in any business activities other than those relating to the Merger. The address of CCI Acquisition's principal executive office is One Stamford Forum, Stamford, Connecticut 06904.
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- CCI ACQUISITION -- DIRECTORS J. Michael Kelly................... See prior entry See prior entry CCI Acquisition One Stamford Forum Stamford, CT 06904
E-4 128
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- James Murphy....................... See prior entry See prior entry CCI Acquisition One Stamford Forum Stamford, CT 06904 Marianne Drost..................... See prior entry See prior entry CCI Acquisition One Stamford Forum Stamford, CT 06904
CCI ACQUISITION -- EXECUTIVE OFFICERS J. Michael Kelly................... See prior entry See prior entry President CCI Acquisition One Stamford Forum Stamford, CT 06904 James Murphy....................... See prior entry See prior entry Vice President and Treasurer CCI Acquisition One Stamford Forum Stamford, CT 06904 Marianne Drost..................... See prior entry See prior entry Secretary CCI Acquisition One Stamford Forum Stamford, CT 06904
4. Directors and Executive Officers of Contel Cellular Inc. The following table sets forth the name, business address, present principal occupation and the other material occupations, positions, offices or employments (if applicable) for the past five years of each director and executive officer of Contel Cellular Inc., a Delaware corporation (the "Company"). Each director and executive officer of the Company is a citizen of the United States. The Company, through its subsidiaries and through partnerships, provides or participates in the provision of cellular telephone service in various areas throughout the United States. The address of the Company's principal executive offices is 245 Perimeter Center Parkway, Atlanta, Georgia 30346. COMPANY -- DIRECTORS
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- Leo Jaffe.......................... Chairman Emeritus of Columbia Not applicable 425 East 58th Street Pictures, Inc. New York, NY 10022
James L. Johnson................... See prior entry See prior entry 600 Hidden Ridge Irving, TX 75038 Robert LaBlanc..................... President of Robert E. LaBlanc Not applicable 323 Highland Avenue Associates, Inc. Ridgewood, NJ 07450 Charles R. Lee..................... See prior entry See prior entry GTE One Stamford Forum Stamford, CT 06904 Michael T. Masin................... See prior entry See prior entry GTE One Stamford Forum Stamford, CT 06904
E-5 129
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- Russell E. Palmer.................. See prior entry See prior entry The Palmer Group 3600 Market Street Philadelphia, PA 19104 Irwin Schneiderman................. Senior Counsel of the law firm Not applicable Cahill Gordon & Reindel of Cahill Gordon & Reindel 80 Pine Street New York, NY 10005 Nicholas L. Trivisonno............. See prior entry See prior entry GTE One Stamford Forum Stamford, CT 06904 James W. Walter.................... See prior entry See prior entry Walter Industries Inc. 1500 N. Dale Mabry Highway Tampa, FL 33607 Dennis L. Whipple.................. President and Chief Executive Vice Contel Cellular Inc. Officer of the Company since President - Marketing and 245 Perimeter Center Parkway 1991 Business Planning for GTE Atlanta, GA 30346 Mobile from April 1990 to March 1991; previously General Manager - Florida of GTE Mobilnet Charles Wohlstetter................ See prior entry See prior entry 375 Park Avenue New York, NY 10152-0192 COMPANY -- EXECUTIVE OFFICERS Dennis L. Whipple.................. See prior entry See prior entry President and Chief Executive Officer Contel Cellular Inc. 245 Perimeter Center Parkway Atlanta, GA 30346 Theodore J. Carrier................ Treasurer and Chief Financial Controller of the Company Treasurer and Chief Financial Officer of the Company since Officer 1991 Contel Cellular Inc. 245 Perimeter Center Parkway Atlanta, GA 30346 Pamela F. Lopez.................... Vice President - Marketing of Marketing and Vice President - Marketing the Company since 1993 Distribution Manager of Contel Cellular Inc. the Company's National 245 Perimeter Center Parkway Region since 1991; Atlanta, GA 30346 previously Regional Agent Manager in the Company's Virginia operation Randall L. Crouse.................. Vice President - Network Director - Technology Vice President - Network Operations Operations of the Company Projects for GTE Mobile Contel Cellular Inc. since 1993 from 1991 to 1993; 245 Perimeter Center Parkway previously Director - Atlanta, GA 30346 Advanced Technology Planning for GTE Mobile
E-6 130
PREVIOUS MATERIAL NAME AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OCCUPATIONS - ----------------------------------- ------------------------------ ------------------------- John P.Z. Kent..................... See prior entry See prior entry Vice President - Taxes Contel Cellular Inc. One Stamford Forum Stamford, CT 06904 Jay M. Rosen....................... Vice President, Government Vice President and Secretary Affairs and General Counsel, Associate General Contel Cellular Inc. Telecommunications Products Counsel - GTE Electrical One Stamford Forum and Services Group of GTE Products and Governmental Stamford, CT 06904 Service Corporation since 1991 Systems Group Laura E. Binion.................... General Counsel and Assistant Corporate Counsel of General Counsel and Assistant Secretary of the Company since Contel Secretary 1991 Contel Cellular Inc. 245 Perimeter Center Parkway Atlanta, GA 30346
E-7 -----END PRIVACY-ENHANCED MESSAGE-----