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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8251
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TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C>
IOWA 36-2669023
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(State or other jurisdiction (IRS Employer Identification
of incorporation or No.)
organization)
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30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER: (312) 630-1900
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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Common Shares, $1 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.___X___
As of March 7, 1994, the aggregate market values of the registrant's Common
Shares, Series A Common Shares and Preferred Shares held by nonaffiliates were
approximately $2.026 billion, $16.5 million and $62.2 million, respectively. The
closing price of the Common Shares on March 7, 1994, was $44.625, as reported by
the American Stock Exchange. Because no market exists for the Series A Common
Shares and Preferred Shares, the registrant has assumed for purposes hereof that
(i) each Series A Common Share has a market value equal to one Common Share
because the Series A Common Shares were initially issued by the registrant in
exchange for Common Shares on a one-for-one basis and are convertible on a
share-for-share basis into Common Shares, (ii) each nonconvertible Preferred
Share has a market value of $100 because each of such shares had a stated value
of $100 when issued, and (iii) each convertible Preferred Share has a value of
$44.625 times the number of Common Shares into which it was convertible on March
7, 1994.
The number of shares outstanding of each of the registrant's classes of
common stock, as of March 7, 1994, is 45,669,568 Common Shares, $1 par value,
and 6,881,001 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1993 Annual Report to
Shareholders described in the cross reference sheet and table of contents
attached hereto are incorporated by reference into Part II of this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE NUMBER
OR REFERENCE(1)
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Item 1. Business............................................. 3
Item 2. Properties........................................... 29
Item 3. Legal Proceedings.................................... 29
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 30
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 31 (2)
Item 6. Selected Financial Data.............................. 31 (3)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 31 (4)
Item 8. Financial Statements and Supplementary Data.......... 31 (5)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 31
Item 10. Directors and Executive Officers of the Registrant... 32
Item 11. Executive Compensation............................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 32
Item 13. Certain Relationships and Related Transactions....... 32
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 33
<FN>
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(1) Parenthetical references are to information incorporated by reference from
the registrant's Exhibit 13, which includes portions of its Annual Report
to Shareholders for the year ended December 31, 1993 ("Annual Report").
(2) Annual Report sections entitled "TDS Stock and Dividend Information" and
"Market Price per Common Share by Quarter."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
(5) Annual Report sections entitled "Consolidated Statements of Income,"
"Consolidated Statements of Cash Flows," "Consolidated Balance Sheets,"
"Consolidated Statements of Common Stockholders' Equity," "Notes to
Consolidated Financial Statements," "Consolidated Quarterly Income
Information (Unaudited)" and "Report of Independent Public Accountants."
</TABLE>
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<PAGE>
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TELEPHONE AND DATA SYSTEMS, INC.
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
TELEPHONE (312) 630-1900
[LOGO]
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PART I
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ITEM 1. BUSINESS
Telephone and Data Systems, Inc. (the "Company" or "TDS"), is a diversified
telecommunications service company with local telephone, cellular telephone and
radio paging operations. At December 31, 1993, the Company operated 94 telephone
subsidiaries serving 356,200 access lines in rural and suburban areas; owned or
had the right to acquire cellular interests representing approximately 23.7
million population equivalents and offered cellular telephone service through
116 majority-owned markets with 261,000 cellular telephones in service; and
offered radio paging and related services with 460,900 pagers in service. The
Company's business development strategy is to expand its existing operations
through internal growth and acquisitions and to explore and develop other
telecommunications businesses that management believes will utilize the
Company's expertise in customer-based telecommunications services. For the year
ended December 31, 1993, telephone operations provided 45.4% of the Company's
consolidated revenues and all of its earnings; cellular operations provided
41.9% of the Company's consolidated revenues; and paging operations provided
12.7% of the Company's consolidated revenues.
The Company conducts substantially all of its telephone operations through
its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom").
TDS Telecom is expanding through the selective acquisition of local exchange
telephone companies serving rural and suburban areas and by offering additional
lines of telecommunications products and services to existing customers. TDS
Telecom has acquired 29 telephone companies since the beginning of 1989. These
acquisitions added 59,600 access lines during this five-year period, while
internal growth added 57,000 lines.
The Company conducts substantially all of its cellular operations through
its majority-owned subsidiary, United States Cellular Corporation (AMEX symbol
"USM"), which is engaged through subsidiaries and joint ventures primarily in
the development and operation of and the acquisition of interests in cellular
markets. The Company has had voting control of USM since USM's incorporation.
TDS owned an aggregate of 59,548,450 shares of common stock of USM at December
31, 1993, representing over 85% of the combined total of USM's outstanding
Common and Series A Common Shares and over 97% of their combined voting power.
Assuming USM's Common Shares are issued in all instances in which USM has the
choice to issue its Common Shares or other consideration and assuming all other
issuances of USM's common stock to TDS and third parties for completed and
pending acquisitions and redemptions of USM Preferred Stock and TDS Preferred
Shares had been completed at December 31, 1993, TDS would have owned
approximately 79.5% of the total outstanding common stock of USM and controlled
over 95% of the combined voting power of both classes of its common stock. In
the event TDS's ownership of USM falls below 80% of the total value of all of
the outstanding shares of USM's stock, TDS and USM would be deconsolidated for
federal income tax purposes. TDS and USM have the ability to defer or prevent
deconsolidation, if deferring or preventing deconsolidation would be
advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's
Common Shares in connection with certain acquisitions. USM owns, operates,
invests in and has
3
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the right to acquire interests in cellular telephone systems representing
approximately 23.7 million population equivalents in 205 markets in 37 states.
USM owns a controlling interest in and manages cellular systems serving 116
markets ("consolidated markets") and has the right to acquire a controlling
interest in and manage cellular systems serving 16 additional markets. All but
two of these markets are operational. USM owns or has the right to acquire
minority interests (without the right to acquire a controlling interest) and
manage cellular systems in 12 operational markets and owns non-controlling
interests in and does not manage 61 other operational markets. Since the
beginning of 1989, the number of cellular customers in USM's consolidated
markets has increased from 13,600 to 261,000.
The Company conducts substantially all of its radio paging operations
through its 82.5%-owned subsidiary, American Paging, Inc. (AMEX symbol "APP").
APP offers radio paging and related services through its subsidiaries. Since the
beginning of 1989, the number of pagers in service increased from 127,600 to
460,900 at December 31, 1993, primarily from internal growth.
The Company was incorporated in Iowa in 1968. The Company's executive
offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its
telephone number is 312-630-1900.
Unless the context indicates otherwise: (i) references to "TDS" or the
"Company" refer to Telephone and Data Systems, Inc., and its subsidiaries; (ii)
references to "USM" refer to United States Cellular Corporation and its
subsidiaries; (iii) references to "APP" refer to American Paging, Inc. and its
subsidiaries; (iv) references to "MSA" or to a particular city refer to the
Metropolitan Statistical Area, as designated by the U.S. Office of Management
and Budget and used by the Federal Communications Commission ("FCC") in
designating metropolitan cellular market areas; (v) references to "RSA" refer to
the Rural Service Area, as used by the FCC in designating non-MSA cellular
market areas; (vi) references to cellular "markets" or "systems" refer to MSAs,
RSAs or both; and (vii) references to "population equivalents" mean the
population of a market, based on 1993 Donnelley Marketing Service Estimates,
multiplied by the percentage interests that the Company owns or has the right to
acquire in an entity licensed, designated to receive a license or expected to
receive a construction permit ("licensee") by the FCC to construct or operate a
cellular system in such market.
REGULATORY DEVELOPMENTS
Each of the diversified telecommunications operations of TDS conducted by
its local telephone, cellular telephone and radio paging subsidiaries is subject
to FCC and state regulation. The licenses held by these subsidiaries which are
granted by the FCC for the use of radio frequencies are an important component
of the overall value of the assets of TDS. As discussed here, recent
Congressional legislation and related FCC regulatory proceedings may have
significant impact on some or all of its diversified telecommunications
operations by altering FCC and state regulatory responsibilities for mobile
service, the procedures for the award by the FCC of licenses to conduct existing
and new mobile services, the terms and conditions of business relationships
between mobile service providers and Local Exchange Carriers ("LECs") and the
scope of the competitive opportunities available to mobile service providers.
The Omnibus Reconciliation Act of 1993 (the "Budget Act"), which became
effective in August 1993, amended the Communications Act of 1934 (the
"Communications Act") by eliminating legislatively enacted distinctions
affecting FCC and state regulation of common carrier and private carrier mobile
operations and directed the FCC to classify all mobile services, including
cellular, paging, Specialized Mobile Radio ("SMR") and other services under two
categories: Commercial Mobile Radio Services ("CMRS"), subject to common carrier
regulation; or Private Mobile Radio Services ("PMRS"), not subject to common
carrier regulation. At its February 3, 1994 public meeting, the FCC adopted a
decision classifying mobile service offerings as CMRS operations if they include
a service offering to the public for a fee which is interconnected to the public
switched network. Cellular, SMR and paging, among other services, will be
classified as CMRS if they fit this definition. In addition, the FCC decision
establishes a regulatory precedent for hybrid CMRS/PMRS regulation of mobile
operations which offer both CMRS and PMRS service. The Company anticipates that
a substantial portion of its service offerings will be classified as CMRS. The
FCC decision also states that it would forebear from requiring that CMRS
providers comply with a number of statutory provisions, otherwise applicable to
common carriers, such as the filing of tariffs. It requires LECs to provide
reasonable and fair interconnection to all
4
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CMRS providers, subject to mutual compensation, reasonable charges for
interstate interconnection and reasonable forms of interconnection. Because the
text of the FCC's decision has only recently been released and addresses many
complex and interrelated aspects of regulatory policy, the impact of these
aspects of the FCC proceedings on the Company cannot be predicted with
certainty.
The Budget Act also amended the Communications Act to authorize the FCC to
use a system of competitive bidding to issue initial licenses for the use of
radio frequencies for which there are mutually exclusive applications and where
the principal use of the license will be to offer service in return for
compensation from customers. At its March 8, 1994 public meeting, the FCC
adopted a decision, the text of which has not yet been released, that
establishes generic rules for competitive bidding, defines eligibility criteria
for small businesses, minority-and female-owned businesses and rural telephone
companies which qualify for preferential bidding treatment, as required under
the Budget Act, and describes the bidding mechanisms to be used by businesses
qualifying for preferential treatment in future spectrum auctions. The FCC
deferred adoption of the competitive bidding rules for specific licensing
situations. The Company believes that competitive bidding for licenses in any
market could increase the cost of entry into that market to the extent of
prevailing market prices for such licenses. The Company also believes that it
has the financial resources to be a strong competitor for licensing in those
markets in which it elects to compete, that the competitive bidding process
should not materially increase the Company's aggregate cost of entering new
markets and should result in more efficient granting of licenses than at present
thereby permitting the winning bidder to commence service to customers promptly
pursuant to such licenses.
Under other amendments to the Communications Act included in the Budget Act,
states will generally be prohibited from regulating the entry of, or the rates
charged by, any CMRS provider. The new law does not, however, prohibit a state
from regulating other terms and conditions of CMRS offerings and permits states
to petition the FCC for authority to continue rate regulation. These new
statutory provisions will take effect in August 1994.
On September 23, 1993, the FCC decided to allocate seven Personal
Communications Services ("PCS") frequency blocks for licensing, in the aggregate
120 Megahertz ("MHz") of spectrum for licensed operations, and an additional 40
MHz for unlicensed operations, including uses such as telephone PBX and wireless
local area network operations. Two 30 MHz frequency blocks will be awarded for
each of the 51 Rand McNally Major Trading Areas, while one 20 MHz and four 10
MHz frequency blocks will be awarded for each of the 492 Rand McNally Basic
Trading Areas. Cellular operators will be permitted to participate in the award
of these new PCS licenses, which will be made via a yet-to-be-defined auction
process, except for licenses reserved for rural, small, minority-and female-
owned businesses and licenses for markets in which such cellular operator owns a
20% or greater interest in a cellular licensee which holds a license covering
10% or more of the population of the respective PCS licensed area. In the latter
case, the cellular licensee is limited to one 10 MHz PCS channel block. Numerous
requests for reconsideration of the FCC's decision have been filed and remain
pending before the FCC. In its March 8, 1994 decision referenced above, the FCC
presumptively classified PCS as CMRS. The FCC has not adopted specific
competitive bidding rules for the initial licensing of PCS spectrum or
established a schedule for the commencement of PCS auctions.
PCS technology is currently under development and is expected to be similar
in some respects to cellular technology. When offered commercially, this
technology is expected to offer increased capacity for wireless two-way and
one-way voice, data and multimedia communications services and is expected to
result in increased competition in each area of the Company's diversified
telecommunications operations. The ability of these future PCS licensees to
complement or compete with existing cellular licensees is uncertain, and may be
affected by future FCC rule-making. It is expected that the new wireless
services will be both complementary services and competitive alternatives to
current cellular and landline telephone services. These and other future
technological developments in the wireless telecommunications industry and the
enhancement of current technologies will likely create new products and services
that are competitive with the services currently offered by the Company and its
subsidiaries. There can be no assurance that the Company will not be adversely
affected by such technological developments.
5
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TELEPHONE OPERATIONS
The Company's telephone operations are conducted through TDS Telecom and its
94 telephone subsidiaries. These telephone companies, ranging in size from less
than 500 to more than 40,000 access lines, serve 356,200 access lines in 29
states.
The Company provides modern, high-quality local and long-distance telephone
service. Local service is provided by the Company's operating telephone
subsidiaries. Long-distance or toll service is provided through connections with
long-distance carriers, primarily AT&T Communications, Inc. ("AT&T"), and the
Regional Bell Operating Companies ("RBOCs"). The Company anticipates that it
will need to make arrangements with AT&T, the RBOCs and other large companies in
order to offer certain software-intensive services such as information gateway
services. There is no assurance that the Company will be able to obtain such
arrangements or that such arrangements, if obtained, will be on terms favorable
to the Company.
Future growth in telephone operations is expected to be derived from the
acquisition of additional telephone companies, from providing service to new or
presently unserved establishments, from business expansion in the areas served
by the Company, from upgrading existing customers to higher grades of service,
from increased usage of the network through both local and long-distance calling
and from providing additional services made possible by advances in technology.
The following table summarizes certain information regarding the Company's
telephone operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
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1993 1992 1991 1990 1989
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TELEPHONE OPERATIONS
Access lines*.......................................... 356,200 321,700 304,000 278,700 263,900
% Residential........................................ 82.0 83.1 83.8 84.3 84.9
% Business (nonresidential).......................... 18.0 16.9 16.2 15.7 15.1
% Single-party....................................... 99.5 99.1 98.8 98.3 98.0
Total revenues......................................... $ 268,122 $ 238,095 $ 211,231 $ 194,100 $ 168,046
% Local service...................................... 26.9 27.4 29.0 28.9 29.4
% Network access and long-distance................... 59.3 57.9 57.0 57.2 57.2
Depreciation and amortization expense.................. $ 59,562 $ 51,946 $ 43,425 $ 38,281 $ 34,620
Operating income....................................... 79,110 72,218 65,242 62,707 49,971
Construction expenditures.............................. 82,233 67,357 67,856 70,308 57,614
Total identifiable assets.............................. $ 829,489 $ 723,855 $ 674,712 $ 567,498 $ 512,067
<FN>
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*An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
</TABLE>
TELEPHONE ACQUISITIONS
TDS pursues an active program of acquiring operating telephone companies.
Since January 1, 1989, TDS has acquired 29 telephone companies serving a total
of 59,600 access lines for an aggregate consideration totalling $160.2 million.
The consideration consisted of $61.9 million in cash and notes, 116,000
Preferred Shares and 2.5 million Common Shares of the Company.
At December 31, 1993, the Company had agreements, awaiting regulatory or
other approvals, to acquire two telephone companies which serve 17,600 access
lines and which own minority cellular interests representing approximately
90,000 population equivalents. These acquisitions are expected to be completed
for an aggregate consideration of approximately $53.2 million, consisting of
approximately 1.1 million Common Shares of the Company.
The Company continually evaluates acquisition opportunities. Telephone
holding companies and others actively compete for the acquisition of telephone
companies and such acquisitions are subject to the consent or approval of
regulatory agencies in most states and, in some cases, to federal waivers that
may affect the form of regulation or amount of interstate cost recovery of
acquired telephone exchanges.
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While management believes that it will be successful in making additional
acquisitions, there can be no assurance that the Company will be able to
negotiate additional acquisitions on terms acceptable to it or that regulatory
approvals, where required, will be received.
The Company maintains shelf registration of its Common Shares and Preferred
Shares under the Securities Act of 1933 for issuance specifically in connection
with acquisitions.
It is the Company's policy to preserve, insofar as possible, the local
management of each telephone company it acquires. The Company provides the
telephone subsidiaries with centralized purchasing and general management and
other services, at cost plus a reasonable rate of return on invested capital.
These services afford the subsidiaries expertise in the following areas:
finance, accounting and treasury services; marketing; customer service; traffic;
engineering and construction; accounting and customer billing; rate
administration; credit and collection; and the development of administrative and
procedural practices.
CONSTRUCTION AND DEVELOPMENT PROGRAM
The Company's policy is to upgrade plant and equipment in presently owned
and newly acquired telephone subsidiaries pursuant to an ongoing construction
and development program. The Company makes major plant additions to upgrade
service and replace existing facilities, and provides for routine plant
additions. The program also allows the Company to enhance service and revenues
and reduce costs by taking advantage of technological developments in the
telecommunications industry. During 1993 the Company began replacing older
switches with state-of-the-art 5ESS switches manufactured by AT&T. In 1994 the
Company will continue to bring the advanced calling services of the AT&T 5ESS
and Siemens Stromberg-Carlson EWSD to more of its customers by adding 14
additional host units. The Company's overall plan is to bring advanced calling
services to all customers by the year 2000. The Company has converted facilities
serving 96% of its access lines to digital switching technology and is
installing high-capacity fiber optic cable facilities where appropriate and
cost-effective. At December 31, 1993, the Company had approximately 1,900 route
miles of fiber optic cable in service. Gross additions to plant and equipment
were $82.2 million in 1993, $67.4 million in 1992, $67.9 million in 1991, $70.3
million in 1990 and $57.6 million in 1989. The Company estimates that gross
additions for major construction projects and routine plant additions will total
approximately $110 million in 1994, exclusive of pending acquisitions. The
Company plans to continue financing its telephone construction program using
internally generated cash supplemented by long-term financing from federal
government programs.
FEDERAL FINANCING AND HIGH COST SUPPORT PROGRAMS
The Company's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Electrification Administration
("REA"), the Rural Telephone Bank ("RTB") and the Federal Financing Bank
("FFB"), agencies of the United States of America. The REA has made primarily
35-year loans to telephone companies since 1949, at interest rates of 2% and 5%,
for the purpose of improving telephone service in rural areas. The REA is
authorized to make hardship loans at a 5% interest rate and cost of money loans
at a rate not greater than 7%. The RTB, established in 1971, makes loans at
interest rates based on its average cost of money (6.05% and 6.35% for its
fiscal year ended September 30, 1993), and in some cases makes loans
concurrently with REA loans. In addition, the REA guarantees loans made to
telephone companies by the FFB at the federal cost of money (6.414% for a
35-year note at December 31, 1993).
Substantially all of the Company's telephone plant is pledged or is subject
to mortgages to secure obligations of the operating telephone companies to the
REA, RTB and FFB. The amount of dividends on common stock that may be paid by
the operating telephone companies is limited by certain financial requirements
set forth in the mortgages. Of the $306.2 million of underlying retained
earnings of the telephone subsidiaries at December 31, 1993, $79.1 million was
available for the payment of dividends on the subsidiaries' common stock.
At December 31, 1993, the Company's operating telephone companies had
unadvanced loan commitments under the REA, RTB and FFB loan programs aggregating
approximately $93.9 million, at a weighted average annual interest rate of 6.1%,
to finance specific construction activities in 1994 and future years. These loan
commitments are generally issued for five-year periods and may be extended
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under certain circumstances. The Company's operating telephone companies have
made applications for additional loans from the REA, RTB and FFB, and intend to
make further applications as their needs arise. There is no assurance that these
applications will be accepted or what the terms or interest rates of any future
loan commitments will be. If funds were unavailable through the REA, RTB and FFB
programs in the future and the subsidiaries were to borrow from conventional
lenders at market rates, their cost of new loans might increase significantly.
In that event, the Company would expect to seek higher local service rates to
cover higher interest expense in order to maintain a reasonable balance between
service to customers and local service rates.
A number of the telephone subsidiaries recover a proportion of their costs
via interstate support mechanisms. Reevaluation and probable modification of
those mechanisms is expected. The interstate Universal Service Fund has been
capped and indexed as an interim measure pending regulatory proceedings. Bills
in Congress propose to widen the base of providers contributing to support for
universal service but could involve development of new mechanisms and
eligibility criteria. There is no assurance that cost recovery through direct
and indirect interstate mechanisms will remain at current levels. Some telephone
subsidiaries are in states where support and rate structures are under
reevaluation or have been changed. There is no assurance that the states will
continue to provide for cost recovery from current sources. The Company would
expect to seek higher local service rates to recover costs for which current
interstate or intrastate recovery may become unavailable.
REGULATION
Operating telephone companies are regulated by state regulatory agencies
with respect to local rates, intrastate intra-LATA (Local Access Transport Area)
toll rates, intrastate access charges billed to intrastate interexchange
carriers, service areas, service standards, accounting and related matters. In a
number of states, construction plans and borrowings and certain other financial
transactions are also subject to regulatory approval. The switch replacement
program discussed above will require some regulatory approval. The Company has
sought and will continue to seek appropriate increases in local and other
service rates and changes in rate structures to achieve reasonable rates and
earnings.
The FCC regulates interstate toll rates, interstate access charges paid by
interexchange carriers to local exchange carriers and other matters relating to
interstate telephone service. The FCC also regulates the use of radio
frequencies in telephone operations. The Company's telephone subsidiaries
participate in the National Exchange Carrier Association ("NECA") common line
and traffic sensitive tariffs and participate in the access revenue pools
administered by NECA for interstate services. Where applicable, the Company's
subsidiaries also participate in intrastate access tariffs and toll-pooling
arrangements approved by state regulatory authorities for intrastate intra-and
inter-LATA services. Such interstate and intrastate arrangements are intended to
compensate LECs, such as the Company's operating telephone companies, for the
costs, including a fair rate of return, of facilities furnished in originating
and terminating interstate and intrastate long-distance services.
Various aspects of federal and state telephone regulation have, in recent
years, been subject to re-examination and ongoing modification. In several
states, toll revenue pooling arrangements that are the source of substantial
revenues to local exchange companies are being replaced with access-charge-based
arrangements. Access charges are typically priced to result in revenue flows
similar to those realized in the toll-pooling process. To the extent they are
not, the Company may seek adjustments in other rates.
On September 19, 1990, the FCC approved a mandatory price cap plan on
interstate access rates for the seven RBOCs and GTE, leaving the plan optional
for all other local telephone operating companies. This follows a March 16, 1989
FCC decision allowing price cap regulation for AT&T's interstate services. The
price cap approach differs from traditional rate-of-return regulation by
focusing primarily on the prices of communications services. The intention of
price cap regulation is to focus on productivity and the approved plan for
telephone operating companies allows for the sharing with its customers of
profits achieved by increasing productivity. Alternatives to rate-of-return
regulation have also been adopted or proposed primarily for the RBOCs in some of
the states in which the Company's operating subsidiaries do business.
8
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On May 13, 1993, the FCC approved an alternative regulation plan for small
and mid-sized telephone operating companies not electing price caps. This plan
intends to reduce regulatory filing burdens under a form of modified
rate-of-return. The Company's telephone subsidiaries have not elected the new
FCC plan for 1994 and will remain in the NECA pools for this period. Since
approximately one-third of the Company's telephone subsidiaries serve high-cost
areas, important cost support mechanisms associated with the NECA pooling
process would be lost if the Company elected either of the alternatives to
rate-of-return regulation.
On November 5, 1993, NECA filed with the FCC a Petition for Rulemaking
proposing rule revisions to allow incentive settlement options within the NECA
pools. The settlement options are designed to provide companies wishing to
remain in the NECA pools with incentives similar to those previously adopted by
the FCC but only available to non-NECA participants. Management has been
involved in providing comments on this plan and continues to evaluate
opportunities under all forms of regulation.
COMPETITION
As a result of a series of FCC, court and state regulatory agencies'
decisions, competition has been introduced in certain sectors of the telephone
industry, including interstate and intrastate toll, special access services and
customer premises equipment. Landline facilities-based competition in intrastate
intra-LATA markets is currently prohibited in some of the various states where
the Company provides service. On September 17, 1992, the FCC took a step toward
introducing competition in the local exchange access business by ordering that
competitive access providers, interexchange carriers and others have the right
to directly interconnect facilities in the central offices of tier one telephone
companies for the provision of interstate special access services. A related
proceeding adjusted the interstate transport rate structure to reflect the
policy of promoting interstate access competition. The intent of these orders
and other related FCC decisions is to allow interstate special access
competition with telephone companies and provide telephone companies with
increased pricing flexibility, allowing them to compete on fair terms with the
new entrants. On August 3, 1993, the FCC adopted a framework parallel to their
special access interconnection rules for interstate switched access transport
services. Less than one percent of the Company's consolidated revenues are
derived from special access transport services and less than seven percent are
derived from switched access transport services. Further, the rules do not apply
to the Company's telephone subsidiaries, but could lead to changes in other FCC
rules and policies that affect the way certain services are priced. Bills are
pending in both Houses of Congress that propose to open local exchange and other
telecommunications services to competition and apply expanded interconnection
requirements to some or all local exchange telephone companies. Technological
developments in cellular telephone, digital microwave, coaxial cable, fiber
optics and other wireless and wired technologies may further permit the
development of alternatives to traditional landline service. The Company and
many other members of the local exchange carrier industry are seeking to
maintain a strong universally affordable public telecommunications network
through regulatory policies and programs that are sensitive to the needs of
small communities and rural areas serviced by many of the Company's telephone
subsidiaries.
Certain providers and users of toll service may seek to bypass the LEC's
switching services and local distribution facilities, particularly if services
are not strategically priced. There are three primary ways which users of toll
service may bypass the Company's switching services. First, users may construct
and operate or lease facilities to transmit their traffic to an interexchange
carrier. Second, certain interexchange carriers provide services which allow
users to divert their traffic from the LEC's usage-sensitive services to their
flat-rate services. Third, users may choose to use cellular telephone service to
bypass the LEC's switching services. The Company's telephone subsidiaries have
experienced only a small loss of traffic to such bypass. The Company and the
exchange carrier industry are seeking to address bypass by advocating flexible
pricing, including reduced pricing of access and toll services, where
appropriate.
The FCC released other significant orders and proposed rulemakings during
1992 and 1993 which are intended to further promote competition in video and
voice communications and which may provide the Company with increased
communications opportunities.
On August 14, 1992, the FCC issued a "video dialtone" order permitting
telephone companies greater participation in the video marketplace. Video
dialtone enables telephone companies to provide
9
<PAGE>
network distribution platforms, various ancillary services such as billing and
collections, and enhanced gateway services on behalf of video programmers. The
FCC also tentatively concluded that the CATV rural exemption should be increased
from its current population ceiling for communities in the service areas of
2,500 to 10,000. The rural exemption sets a population benchmark defining areas
where a telephone company can directly provide cable TV service to its telephone
customers.
In addition, the FCC has authorized cellular telephone and other
technologies as discussed above under "Regulatory Developments" which may be
competitive with traditional telephone operations as well as provide new
business opportunities.
The Company actively monitors these proceedings seeking to protect its
interests, and continues to evaluate new business opportunities that arise out
of these regulatory decisions.
The Clinton Administration has made its intentions known, through Vice
President Gore, to develop a national communications policy, backed by
legislation. The policy will be directed toward creation of a broadband
interactive National Information Infrastructure. The administration has
advocated legislation based on five principles: to encourage private investment,
to provide and protect competition, to provide open access to the network, to
take action to avoid creating a society of information "haves" and "have nots"
and to encourage flexible and responsive governmental action.
Because of the legislation proposed by leadership in each house of Congress
and the Administration's initiatives, the Company expects that there eventually
may be open entry in nearly every aspect of communications. On the other hand,
Vice President Gore and certain House and Senate bills suggest that all
participants should contribute to universal service and intend, to varying
degrees, that geographic location should not determine who has access to an
advanced infrastructure. The Company believes high-cost funds and similar
cost-averaging methods should continue to be employed to ensure that advanced
services reach rural areas. It plans to compete by providing high-quality
advanced voice, video, data and image services.
CELLULAR TELEPHONE OPERATIONS
THE CELLULAR TELEPHONE INDUSTRY
THE CELLULAR TELEPHONE INDUSTRY. The cellular telephone industry has been
in existence for approximately eleven years in the United States. Although the
industry is still relatively new, it has grown significantly during this period.
According to the Cellular Telecommunications Industry Association, at December
31, 1993, there were estimated to be over 16 million cellular customer units in
service in the United States, generating nearly $11 billion of revenue per year.
Cellular service is now available throughout the United States. The commercial
feasibility of cellular systems in the United States has not, however, been
proven over a long period of time.
Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle cellular telephones and hand-held portable
cellular telephones. Cellular technology is a major improvement over earlier
mobile telephone technologies. Cellular telephone systems are designed to allow
for maximum mobility of the customer. In addition to mobility, cellular
telephone systems provide access through system interconnections to local,
regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, facsimile and
data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO"). The MTSO is connected to the conventional ("landline")
telephone network. Each conversation on a cellular phone involves a transmission
over a specific range of radio frequencies from the cellular phone to a
transmitter/receiver at a cell site. The transmission is forwarded from the cell
site to the MTSO and from there may be forwarded to the landline telephone
network to complete the call. As the cellular telephone moves from one cell to
another, the MTSO determines radio signal strength and transfers ("hands off")
the call from one cell to the next. This hand-off is not noticeable to either
party on the phone call.
10
<PAGE>
USM provides cellular telephone service under licenses granted by the FCC.
The FCC grants only two licenses to provide cellular telephone service in each
market. However, competition for customers includes competing communications
technologies such as conventional landline and mobile telephone, SMR systems and
radio paging. In addition, emerging technologies such as Enhanced Specialized
Mobile Radio ("ESMR"), mobile satellite communication systems, second generation
cordless telephones ("CT-2") and PCS may prove to be competitive with cellular
service in the future in some or all of the markets where USM has operations.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers are charged a separate fee
for system access, airtime, long-distance calls, and ancillary services.
Technical standards require that analog cellular telephones be compatible
with all cellular systems in all market areas in the United States. Because of
this compatibility feature, cellular system operators often provide service to
customers of other operators' cellular systems while the customers are
temporarily located within the operators' service areas. Customers using service
away from their home system are called "roamers." The system that provides the
service to these roamers will generate usage revenue. Many operators, including
USM, charge premium rates for this roaming service.
There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, most
of the radio transmission is done on an analog basis. Digital radio technology
offers advantages, including less transmission noise, greater system capacity,
and potentially lower incremental costs for additional customers. The conversion
from analog to digital radio technology is expected to be an industry-wide
process that will take a number of years.
During 1992, a new transmission technique was approved for implementation by
the cellular industry. Time Division Multiple Access ("TDMA") technology was
selected as one industry standard by the cellular industry and has been deployed
in several markets, including USM's operations in Tulsa, Oklahoma. However,
another digital technology, Code Division Multiple Access ("CDMA"), is expected
to be in a commercial trial by the end of 1994. USM expects to deploy some
digital radio channels in other markets in the near future.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
CERTAIN CONSIDERATIONS REGARDING CELLULAR TELEPHONE OPERATIONS
A significant portion of the aggregate market value of TDS's Common Shares
is represented by the market value of TDS's interest in USM. Since its inception
in 1983, USM has principally been in a start-up phase in which its activities
have been concentrated significantly on the acquisition of interests in entities
licensed or designated to receive a license ("licensees") from the FCC to
provide cellular service and on the construction and initial operation of
cellular systems. The development of a cellular system is capital-intensive and
requires substantial investment prior to and subsequent to initial operation.
USM has experienced operating losses and net losses in all but a few quarters
since its inception. USM may incur operating losses for the next few quarters,
and there is no assurance that future operations, individually or in the
aggregate, will be profitable.
The licensing (including renewal of licenses), construction, operation,
sale, interconnection arrangements and acquisition of cellular systems are
regulated by the FCC and various state public utility commissions. Changes in
the regulation of cellular operators or their activities and of other mobile
service providers (such as the decision by the FCC to permit PCS licensees)
could have a material adverse effect on USM's operations. See "Legal Proceedings
- -- La Star Application" for a discussion of certain FCC proceedings which have
suspended the Company's and USM's licensing authority in a Wisconsin market
pending the outcome of an FCC hearing.
11
<PAGE>
The number of population equivalents represented by USM's cellular interests
bears no direct relationship to the number of potential cellular customers or
the revenues that may be realized from the operation of the related cellular
systems. The fair market value of USM's cellular interests will ultimately
depend on the success of its operations. There is no assurance that the value of
cellular interests will not be significantly lower in the future than at
present.
While there are numerous cellular systems operating in the United States and
other countries, the industry has only a limited operating history. As a result,
there is uncertainty regarding its future, including, among other factors: (i)
the growth in customers; (ii) the usage and pricing of cellular services; (iii)
the percentage of customers who terminate service each month (the "churn rate");
(iv) the cost of providing cellular services, including the cost of attracting
new customers; and (v) continuing technological advances which may provide
competitive alternatives.
Media reports have suggested that certain radiofrequency ("RF") emissions
from portable cellular telephones might be linked to cancer. USM has reviewed
relevant scientific information and, based on such information, is not aware of
any credible evidence linking the usage of portable cellular telephones with
cancer. The FCC currently has a rulemaking proceeding pending to update the
guidelines and methods it uses for evaluating RF emissions in radio equipment,
including cellular telephones. While the proposal would impose more restrictive
standards on RF emissions from low-power devices such as portable cellular
telephones, it is anticipated that all cellular telephones currently marketed
and in use will comply with those standards.
CELLULAR OPERATIONS
USM is building a substantial presence in selected geographic areas
throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include market clusters in
Northern Florida, Eastern Tennessee/Western North Carolina, Eastern North
Carolina/ Virginia, Maine/New Hampshire/Vermont, West
Virginia/Pennsylvania/Maryland, Indiana/Kentucky, Iowa,
Wisconsin/Illinois/Minnesota, Oklahoma, Missouri, Southwestern Texas,
Texas/Oklahoma, Oregon/California and Washington/Idaho areas. See "The Company's
Cellular Interests." USM has acquired its cellular interests through the
wireline application process (22%), including settlements and exchanges with
other applicants, and through acquisitions (78%), including acquisitions from
TDS and third parties.
USM's management plans to retain minority interests in certain cellular
markets which it believes will earn a favorable return on investment. Other
minority interests may be traded for interests in markets which enhance USM's
market clusters or may be sold for cash or other consideration.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. During the last three years, USM has aggressively expanded
its size, particularly in markets which share adjacency, through an ongoing
acquisition program aimed at strengthening USM's position in the cellular
industry. This growth has resulted primarily from acquisitions of interests in
RSAs and has been based on obtaining interests with rights to manage the
underlying market.
The Company has nearly tripled its population equivalents from approximately
8.4 million at December 31, 1988, to approximately 23.7 million at December 31,
1993. Similarly, markets managed or to be managed by USM have increased from 33
markets at December 31, 1988, to 144 markets at December 31, 1993. As of
December 31, 1993, almost 86% of the Company's population equivalents
represented interests in markets USM manages or expects to manage, compared to
62% at December 31, 1988.
USM seeks and is currently negotiating for the acquisition of additional
cellular interests and plans to acquire significant additional cellular
interests in markets that complement its developing market clusters and in other
attractive markets. USM also seeks to acquire minority interests in markets
where it already owns (or has the right to acquire) the majority interest. At
the same time USM continues to evaluate the disposition of interests which are
not essential to its corporate development strategy.
12
<PAGE>
USM, or TDS for the benefit of USM, will ordinarily make acquisitions using
securities or cash or by exchanging cellular interests it already owns. There is
no assurance that USM will be able to purchase any additional interests, or that
any such additional interests, if purchased, will be purchased on terms that are
favorable to USM.
USM, or TDS for the benefit of USM, has negotiated acquisitions of cellular
interests from third parties primarily in consideration for USM's Common Shares
or TDS's Common or Preferred Shares. Cellular interests acquired by TDS are
generally assigned to USM. At that time, USM reimburses TDS for the value of TDS
securities issued in such transactions, generally by issuing Common Shares and
Preferred Stock (redeemable by the delivery of Common Shares) to TDS or by
increases to the balance due TDS under USM's Revolving Credit Agreement in
amounts equal to the value of TDS capital stock at the time the acquisitions are
closed. The fair market value of the Common Shares and Preferred Stock issued to
TDS in connection with these transactions is equal to the fair market value of
the TDS securities issued in the transactions and is determined at the time the
transactions are closed.
In cases where USM's Common Shares are used as consideration in connection
with acquisitions, most of the agreements call for such shares to be delivered
in 1994 and later years. In a limited number of transactions, USM has agreed to
pay some portion of the purchase price in cash.
COMPLETED ACQUISITIONS. During 1993, the Company completed the acquisition
of controlling interests in 25 markets and several minority interests
representing approximately 3.8 million population equivalents for an aggregate
consideration of $281.9 million. The consideration consisted of 6.1 million TDS
Common Shares, 157,000 USM Common Shares, $19.5 million in cash, 29,000 shares
of subsidiary preferred stock which are exchangeable into 73,000 TDS Common
Shares, and the obligation to deliver approximately 140,000 USM Common Shares to
third parties in 1994. USM reimbursed TDS for TDS securities issued and cash
paid in the acquisitions through an increase in the debt to TDS under the
Revolving Credit Agreement of $101.5 million and the issuance to TDS of 5.5
million USM Common Shares.
PENDING ACQUISITIONS. At December 31, 1993, TDS and/or USM had entered into
agreements to acquire controlling interests in nine markets and a minority
interest representing approximately 1.2 million population equivalents for an
aggregate consideration estimated to be approximately $128.4 million. If all of
the pending acquisitions are completed as planned, TDS and/or USM will issue
approximately 2.4 million TDS Common Shares, all of which are expected to be
issued in 1994, and 49,000 USM Common Shares, and will pay approximately $6.2
million in cash. Any interests acquired by TDS in these transactions are
expected to be assigned to USM and at that time, USM will reimburse TDS for
TDS's consideration delivered and costs incurred in such acquisitions in the
form of USM Common Shares or increases in the balance under the Revolving Credit
Agreement. In addition to the agreements discussed above, the Company has
agreements to acquire interests representing 302,000 population equivalents in
three markets. The consideration for these acquisitions will be determined based
on future appraisals of the fair market values of the interests to be acquired.
All population equivalents pursuant to these agreements are included in the
table on pages 15 to 18.
TDS and USM maintain shelf registration of their respective Common Shares
and Preferred Shares under the Securities Act of 1933 for issuance specifically
in connection with acquisitions.
CELLULAR INTERESTS AND CLUSTERS
USM operates clusters of adjacent cellular systems, enabling its customers
to benefit from a larger service area than otherwise possible. USM's strategy
was initially implemented by filing for licenses to operate cellular systems in
MSAs. Following the MSA lotteries and settlements, USM acquired interests in
certain additional MSAs through purchases. USM has acquired substantial
additional population equivalents through the purchase of interests in RSAs. USM
plans to continue to acquire controlling interests in cellular licenses to
provide service in systems that complement its developing market clusters and in
other attractive systems.
USM anticipates that clustering markets will expand its cellular service
areas and provide certain economies in its capital and operating costs. In areas
where USM has clusters of contiguous markets it may offer wide-area coverage.
This would allow uninterrupted service within the area and allow the customer to
make outgoing and receive incoming calls without special roamer arrangements.
Clustering
13
<PAGE>
also makes possible greater sharing of facilities, personnel and other costs and
may thereby reduce the costs of serving each customer. The extent to which these
revenue enhancements and economies of operation will be realized through
clustering is dependent upon market conditions, population sizes of the clusters
and engineering considerations.
USM's market clusters have grown rapidly. At December 31, 1993,
approximately 87%, or 17.7 million, of USM's managed population equivalents were
in contiguous markets within market clusters. Additionally, 92% of USM's managed
markets were adjacent to another USM-managed market at that time. USM
anticipates continuing to pursue strategic acquisitions and trades in order to
complement its developing market clusters. USM has also acquired minority
interests in markets where it already owns, or has the right to acquire, a
majority interest. From time to time, USM may consider trading or selling some
of its cellular interests which do not fit well with its long-term strategies.
USM owned or had the right to acquire interests in cellular telephone
systems in 205 markets at December 31, 1993. At December 31, 1993, approximately
86%, or 20.4 million, of USM's population equivalents were in markets that USM
manages or expects to manage. At that date, approximately 95% of USM's managed
population equivalents were in markets where cellular service has been initiated
and where USM is currently operating the system. The following table summarizes
the growth in USM's population equivalents in recent years and the development
status of these population equivalents.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed........................................... 18,212 14,268 10,427 5,110 4,060
Minority-Owned and Managed(2)........................................ 1,139 2,007 1,755 1,291 994
Markets Under Construction and to be Managed:(3)
Majority-Owned....................................................... 996 1,811 2,973 4,372 2,458
Minority-Owned(2).................................................... 6 5 122 444 757
--------- --------- --------- --------- ---------
Total Markets Managed and to be Managed.............................. 20,353 18,091 15,277 11,217 8,269
Minority Interests in Markets Managed by Others........................ 3,378 3,474 3,229 3,428 3,482
--------- --------- --------- --------- ---------
Total................................................................ 23,731 21,565 18,506 14,645 11,751
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<FN>
- ---------
(1) Based on 1993 Donnelley Marketing Services estimates for all years.
(2) Includes markets where USM has the right to acquire an interest but does
not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
</TABLE>
The following section details USM's cellular interests, including those it
owned or had the right to acquire as of December 31, 1993. The table presented
therein lists clusters of markets, including both MSAs and RSAs, that USM
operates or anticipates operating. USM's market clusters show the areas in which
USM is currently focusing its development efforts. These clusters have been
devised with a long-term goal of allowing delivery of cellular service to areas
of economic interest and along corridors of economic activity.
14
<PAGE>
THE COMPANY'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which USM and TDS owned or had the right to acquire pursuant
to definitive agreements as of December 31, 1993.
<TABLE>
<CAPTION>
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1993 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ---------- ----------- -------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY:
EASTERN NORTH CAROLINA/VIRGINIA:
Northampton (NC 8)...................... 282,000 100.00% 100.00% 282,000
Rockingham (NC 7)....................... 276,000 100.00 100.00 276,000
Harnett (NC 10)......................... 266,000 100.00 100.00 266,000
Greene (NC 13).......................... 235,000 100.00 100.00 235,000
Greenville (NC 14)...................... 232,000 100.00 100.00 232,000
Hoke (NC 11)............................ 212,000 100.00 100.00 212,000
Chesterfield (SC 4)..................... 209,000 100.00 100.00 209,000
Bedford (VA 4).......................... 171,000 100.00 100.00 171,000
Sampson (NC 12)......................... 120,000 100.00 100.00 120,000
Chatham (NC 6).......................... 146,000 81.16 81.16 119,000
Camden (NC 9)........................... 117,000 100.00 100.00 117,000
Buckingham (VA 7)....................... 88,000 100.00 100.00 88,000
Bath (VA 5)............................. 62,000 100.00 100.00 62,000
---------- -----------------
2,416,000 2,389,000
---------- -----------------
WISCONSIN/ILLINOIS/MINNESOTA:
Peoria, IL.............................. 346,000 100.00 100.00 346,000
Jo Daviess (IL 1)....................... 313,000 100.00 100.00 313,000
Vernon (WI 8)(2)*....................... 227,000 100.00 100.00 227,000
Adams (IL 4)(3)*........................ 216,000 100.00 100.00 216,000
Mercer (IL 3)........................... 204,000 100.00 100.00 204,000
Rochester, MN*.......................... 113,000 69.80 30.20% 100.00 113,000
Pierce (WI 5)........................... 92,000 100.00 100.00 92,000
Wausau, WI*............................. 119,000 71.76 71.76 85,000
Trempealeau (WI 6)(3)................... 81,000 100.00 100.00 81,000
LaCrosse, WI............................ 99,000 52.08 52.08 52,000
---------- -----------------
1,810,000 1,729,000
---------- -----------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA:
Knoxville, TN*.......................... 531,000 96.03 96.03 510,000
Henderson (NC 4)(3)*.................... 271,000 100.00 100.00 271,000
Whitfield (GA 1)........................ 206,000 100.00 100.00 206,000
Asheville, NC*.......................... 200,000 100.00 100.00 200,000
Bledsoe (TN 7)(3)*...................... 139,000 96.03 96.03 133,000
Giles (TN 6)*........................... 153,000 80.00 80.00 122,000
Hamblen (TN 4)(3)*...................... 121,000 100.00 100.00 121,000
Lake (TN 1)*............................ 75,000 16.33 83.67 100.00 75,000
Macon (TN 3)*........................... 323,000 16.67 16.67 54,000
Yancey (NC 2)(3)*....................... 30,000 100.00 100.00 30,000
---------- -----------------
2,049,000 1,722,000
---------- -----------------
IOWA:
Des Moines, IA.......................... 410,000 100.00 100.00 410,000
Davenport, IA-IL........................ 360,000 97.37 97.37 350,000
Humboldt (IA 10)........................ 182,000 100.00 100.00 182,000
Cedar Rapids, IA........................ 173,000 83.16 83.16 143,000
Waterloo-Cedar Falls, IA................ 149,000 73.27 73.27 109,000
Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000
Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000
Mills (IA 1)............................ 62,000 100.00 100.00 62,000
Dubuque, IA............................. 88,000 70.01 70.01 61,000
Audubon (IA 7).......................... 55,000 100.00 100.00 55,000
Union (IA 2)............................ 50,000 100.00 100.00 50,000
Monroe (IA 3)*.......................... 90,000 49.00 49.00 44,000
Winneshiek (IA 12)*..................... 115,000 24.50 24.50 28,000
Ida (IA 9)*............................. 63,000 16.67 16.67 11,000
---------- -----------------
1,972,000 1,680,000
---------- -----------------
MAINE/NEW HAMPSHIRE/VERMONT:
Manchester-Nashua, NH................... 336,000 86.43 86.43 291,000
Kennebec (ME 3)......................... 221,000 100.00 100.00 221,000
Coos (NH 1)*............................ 221,000 100.00 100.00 221,000
Somerset (ME 2)......................... 158,000 100.00 100.00 158,000
Bangor, ME.............................. 148,000 73.33 73.33 108,000
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1993 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ---------- ----------- -------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY: (CONTINUED)
MAINE/NEW HAMPSHIRE/VERMONT: (CONTINUED)
Addison (VT 2)(3)*...................... 105,000 100.00% 100.00% 105,000
Washington (ME 4)*...................... 85,000 100.00 100.00 85,000
Oxford (ME 1)........................... 82,000 100.00 100.00 82,000
Lewiston-Auburn, ME..................... 103,000 75.06 75.06 78,000
---------- -----------------
1,459,000 1,349,000
---------- -----------------
WEST VIRGINIA/PENNSYLVANIA/MARYLAND:
Monongalia (WV 3)*...................... 266,000 100.00 100.00 266,000
Greene (PA 9)........................... 187,000 20.00 80.00% 100.00 187,000
Grant (WV 4)*........................... 164,000 100.00 100.00 164,000
Tucker (WV 5)*.......................... 129,000 100.00 100.00 129,000
Hagerstown, MD* #....................... 125,000 100.00 100.00 125,000
Cumberland, MD*......................... 102,000 100.00 100.00 102,000
Wetzel (WV 2)........................... 79,000 100.00 100.00 79,000
Bedford (PA 10)(3)*..................... 50,000 100.00 100.00 50,000
Garrett (MD 1)*......................... 30,000 100.00 100.00 30,000
---------- -----------------
1,132,000 1,132,000
---------- -----------------
MISSOURI:
Joplin, MO*............................. 138,000 49.67 50.33 100.00 138,000
Columbia, MO*........................... 119,000 100.00 100.00 119,000
Brown (KS 5)............................ 119,000 100.00 100.00 119,000
Stone (MO 15)........................... 103,000 100.00 100.00 103,000
Laclede (MO 16)......................... 92,000 100.00 100.00 92,000
Washington (MO 13)...................... 88,000 100.00 100.00 88,000
Callaway (MO 6)*........................ 84,000 100.00 100.00 84,000
Madison (AR 1).......................... 70,000 51.00 49.00 100.00 70,000
Linn (MO 5)............................. 68,000 100.00 100.00 68,000
DeKalb (MO 4)........................... 68,000 100.00 100.00 68,000
Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000
Shannon (MO 17)*........................ 54,000 100.00 100.00 54,000
Atchison (MO 1)......................... 43,000 100.00 100.00 43,000
---------- -----------------
1,102,000 1,102,000
---------- -----------------
NORTHERN FLORIDA:
Worth (GA 14)........................... 237,000 100.00 100.00 237,000
Gainesville, FL......................... 216,000 100.00 100.00 216,000
Toombs (GA 11).......................... 147,000 100.00 100.00 147,000
Early (GA 13)*.......................... 144,000 100.00 100.00 144,000
Walton (FL 10) #........................ 107,000 100.00 100.00 107,000
Putnam (FL 5)........................... 103,000 100.00 100.00 103,000
Jefferson (FL 8)........................ 52,000 100.00 100.00 52,000
Dixie (FL 6)............................ 50,000 100.00 100.00 50,000
Calhoun (FL 9)#......................... 39,000 100.00 100.00 39,000
---------- -----------------
1,095,000 1,095,000
---------- -----------------
WASHINGTON/IDAHO:
Clark (ID 6)............................ 281,000 100.00 100.00 281,000
Richland-Kennewick-Pasco, WA*........... 164,000 100.00 100.00 164,000
Butte (ID 5)............................ 149,000 100.00 100.00 149,000
Yakima, WA*............................. 202,000 54.55 54.55 110,000
Okanogan (WA 4)......................... 110,000 100.00 100.00 110,000
Umatilla (OR 3)*........................ 145,000 60.42 60.42 88,000
Pacific (WA 6)*......................... 174,000 49.00 49.00 85,000
Kittitas (WA 5)(3)*..................... 66,000 83.50 83.50 55,000
Hood River (OR 2)*...................... 68,000 27.98 (5.98) 22.00 15,000
Skamania (WA 7)* #...................... 26,000 22.00 22.00 6,000
---------- -----------------
1,385,000 1,063,000
---------- -----------------
INDIANA/KENTUCKY:
Meade (KY 3)............................ 300,000 100.00 100.00 300,000
Evansville, IN.......................... 316,000 78.13 78.13 247,000
Owen (IN 7)............................. 219,000 100.00 100.00 219,000
Union (KY 2)............................ 126,000 100.00 100.00 126,000
Owensboro, KY........................... 89,000 78.69 78.69 70,000
Warren (IN 5)*.......................... 119,000 33.33 33.33 40,000
Miami (IN 4)*........................... 182,000 14.29 14.29 26,000
---------- -----------------
1,351,000 1,028,000
---------- -----------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1993 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ---------- ----------- -------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY: (CONTINUED)
TEXAS/OKLAHOMA:
Cherokee (TX 11)(4)..................... 275,000 100.00% 100.00% 275,000
Garvin (OK 9)........................... 197,000 100.00 100.00 197,000
Tyler, TX (4)........................... 158,000 100.00 100.00 158,000
Haskell (OK 10)......................... 82,000 100.00% 100.00 82,000
Wichita Falls, TX*...................... 130,000 49.66 1.99 51.65 67,000
Lawton, OK*............................. 112,000 100.00 (48.35) 51.65 58,000
Jackson (OK 8)*......................... 96,000 34.00 17.65 51.65 50,000
Hardeman (TX 5)(3)*..................... 37,000 16.33 35.32 51.65 19,000
Briscoe (TX 4)(3)*...................... 11,000 49.00 2.65 51.65 6,000
Beckham (OK 7)(3)*...................... 10,000 34.00 17.65 51.65 5,000
---------- -----------------
1,108,000 917,000
---------- -----------------
OREGON/CALIFORNIA:
Coos (OR 5)............................. 247,000 100.00 100.00 247,000
Del Norte (CA 1)........................ 209,000 100.00 100.00 209,000
Medford, OR*............................ 158,000 100.00 100.00 158,000
Mendocino (CA 9)........................ 139,000 100.00 100.00 139,000
Modoc (CA 2)............................ 59,000 100.00 100.00 59,000
Crook (OR 6)*........................... 177,000 33.33 33.33 59,000
---------- -----------------
989,000 871,000
---------- -----------------
SOUTHWESTERN TEXAS:
Atascosa (TX 19)........................ 213,000 100.00 100.00 213,000
Edwards (TX 18)......................... 202,000 100.00 100.00 202,000
Laredo, TX.............................. 149,000 91.78 91.78 137,000
Wilson (TX 20).......................... 134,000 100.00 100.00 134,000
Victoria, TX............................ 78,000 96.22 96.22 75,000
---------- -----------------
776,000 761,000
---------- -----------------
OKLAHOMA:
Tulsa, OK*.............................. 780,000 55.06 55.06 429,000
Seminole (OK 6)......................... 214,000 100.00 100.00 214,000
---------- -----------------
994,000 643,000
---------- -----------------
OTHER OPERATIONS:
Union (PA 8)*........................... 407,000 100.00 100.00 407,000
Jefferson (NY 1)........................ 256,000 54.00 46.00 100.00 256,000
Tuscarawas (OH 7)....................... 253,000 100.00 100.00 253,000
Poughkeepsie, NY........................ 262,000 81.05 81.05 213,000
Newton (IN 1)+.......................... 210,000 100.00 100.00 210,000
Glades (FL 2)+.......................... 206,000 100.00 100.00 206,000
Atlantic City, NJ#...................... 327,000 8.74 50.01 58.75 192,000
Kosciusko (IN 2)........................ 163,000 100.00 100.00 163,000
Hawaii (HI 3)........................... 136,000 100.00 100.00 136,000
Fort Pierce, FL (5)*.................... 271,000 49.00 49.00 133,000
Cheboygan (MI 4)*....................... 128,000 100.00 100.00 128,000
Williamsport, PA*....................... 121,000 100.00 100.00 121,000
Ross (OH 9)*............................ 243,000 49.00 49.00 119,000
Copiah (MS 9)#.......................... 117,000 100.00 100.00 117,000
Williams (OH 1)*........................ 126,000 75.00 75.00 95,000
Vineland-Millville-Bridgeton, NJ........ 139,000 67.23 67.23 94,000
St. Cloud, MN*.......................... 202,000 14.29 14.29 29,000
---------- -----------------
3,567,000 2,872,000
---------- -----------------
Total Population Equivalents of
Managed Markets...................... 23,205,000 20,353,000
---------- -----------------
MARKETS MANAGED BY OTHERS:
Los Angeles, Oxnard, CA*................ 15,281,000 5.50 5.50 840,000
Nashville/Clarksville-Hopkinsville,
TN-KY*................................. 1,200,000 49.00 49.00 588,000
Baton Rouge, LA (6)*.................... 553,000 52.00 52.00 288,000
Seattle-Everett/Tacoma/Bremerton, WA*... 2,931,000 6.25 6.25 184,000
Biloxi/Pascagoula, MS*.................. 334,000 49.00 49.00 164,000
Oklahoma City, OK*...................... 963,000 14.60 14.60 141,000
McAllen, TX............................. 419,000 26.20 26.20 110,000
Portsmouth-Dover-Rochester, NH-ME*...... 269,000 40.00 40.00 107,000
Others (Fewer than 100,000 population
equivalents each)...................... 956,000
-----------------
Total Population Equivalents of Markets Managed by Others........................................ 3,378,000
-----------------
Total Population Equivalents..................................................................... 23,731,000
-----------------
-----------------
<FN>
- ---------
* Designates wireline system.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
+ Designates non-operational system.
# Designates operational system managed by third parties until USM acquires a
controlling interest.
(1) Interests under these agreements are expected to be acquired at the various
times specified therein following the satisfaction of customary closing
conditions.
(2) USM's interest in the license for this market has been set aside by the
FCC. USM is currently operating the market under interim operating
authority granted by the FCC. See Item 3, "Legal Proceedings -- La Star
Application."
(3) This market has been or will be partitioned into more than one licensed
area. The 1993 population, percentage ownership and number of population
equivalents shown is for the licensed area within the market in which USM
owns or has the right to acquire an interest.
(4) USM's interests in these markets are the subject of litigation. See Item
3., "Legal Proceedings -- Townes Telecommunications, Inc., et. al. v. TDS,
et. al."
(5) USM owns 80% of the entity which owns and operates this market but has only
a 49% interest in the earnings and profits.
(6) Represents a noncontrolling limited partnership interest.
</TABLE>
SYSTEM DESIGN AND CONSTRUCTION. USM designs and constructs its systems in
a manner it believes will permit it to provide high-quality service to mobile,
transportable and portable cellular telephones, generally based on market and
engineering studies which relate to specific markets. Engineering studies are
performed by USM personnel or independent engineering firms. USM's switching
equipment is digital, which reduces noise and crosstalk and is capable of
interconnecting in a manner which reduces costs of operation. While digital
microwave interconnections are typically made between the MTSO and cell sites,
primarily analog radio transmission is used between cell sites and the cellular
telephones themselves.
In accordance with its strategy of building and strengthening market
clusters, USM has selected high capacity with service-upgraded digital cellular
switching systems that are capable of serving multiple markets via a single
MTSO. USM's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and each
cell site. USM has implemented such microwave interconnection in most of the
cellular systems it manages. In other systems in which USM owns or has an option
to purchase a majority interest and where it is believed to be cost-efficient,
such microwave technology will also be implemented. Otherwise, such systems will
rely upon landline telephone connections or microwave links owned by others to
link cell sites with the MTSO. Although the installation of microwave network
interconnection equipment requires a greater initial capital investment, a
microwave network enables a system operator to avoid the current and future
charges associated with leasing telephone lines from the landline telephone
company, while generally improving system reliability. In addition, microwave
facilities can be used to connect separate cellular systems to allow shared
switching, which reduces the aggregate cost of the equipment necessary to
operate both systems.
USM has continued to expand its internal, nationwide seamless network in
1993 to encompass over 100 markets in the United States. This network provides
automatic call delivery for USM's customers and handoff between adjacent
markets. The seamless network has also been extended, using IS-41 technology,
via links with certain systems operated by several other carriers, incuding GTE,
US West, Ameritech, BellSouth, Centennial Cellular Corp., Southwestern Bell,
McCaw Cellular Communications, Inc., Vanguard Cellular Systems, Inc. and others.
Additionally, USM has conducted Signaling System 7 field trials with AT&T and
with Independent Telephone Network to determine the most viable approach to
establish a backbone network that will enable USM to interface with other
national networks.
During 1994, USM expects to significantly extend the seamless network for
its customers into additional areas in Texas, Arkansas, Indiana, Idaho, Utah,
California, Louisiana, Massachusetts, Washington, Florida and several other
states. Not only will this expanded network increase the area in which customers
can automatically receive incoming calls, but it will also reduce the incidence
of fraud due to the pre-call validation feature of the IS-41 technology.
USM believes that currently available technologies will allow sufficient
capacity on USM's networks to meet anticipated demand over the next few years.
18
<PAGE>
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, customer equipment, engineering and
installation. USM, consistent with FCC control requirements, uses primarily its
own personnel to engineer and oversee construction of each cellular system where
it owns or has the right to acquire a controlling interest. In so doing, USM
expects to improve the overall quality of its systems and to reduce the expense
and time required to make them operational.
The costs (exclusive of license costs) of the operational systems in which
USM owns or has the right to acquire an interest are generally financed through
capital contributions or intercompany loans to the partnerships or subsidiaries
owning the systems, and through certain vendor financing.
MARKETING AND CUSTOMER SERVICE
USM's marketing plan is designed to capitalize on its clustering strategy
and to increase revenue by growing USM's customer base, increasing customers'
usage of cellular service and reducing churn or customer disconnects. The
marketing plan stresses service quality and incorporates programs aimed at
developing and expanding new and existing distribution channels, stimulating
customer usage by offering new and enhanced services and by increasing the
public's awareness and understanding of the cellular services offered by USM.
Most of USM's operations market cellular service under the "United States
Cellular"-TM- name and service mark.
USM's marketing strategy is to develop a local, customer-oriented operation,
the primary goal of which is to provide quality cellular service to its
customers. USM's marketing program focuses on obtaining customers who need
cellular service, such as business people who, while out of their offices, need
to be in contact with others. USM plans to follow the same marketing program in
the other systems it expects to manage.
USM manages each cellular cluster, and in some cases individual markets,
with a local staff, including a manager and customer service representatives.
Sales consultants are typically maintained in each market within the clusters.
Customers are able to report cellular service problems or concerns 24 hours a
day. It is USM's goal to respond to customers' concerns and to correct reported
service deficiencies within 24 hours of notification. USM has established local
service centers in order to repair and maintain most major brands of user
equipment.
USM has relied primarily on its own direct and retail sales channels to
obtain customers for the cellular markets it manages. USM maintains an ongoing
training program to improve the effectiveness of the sales consultants and
retail associates in obtaining customers as well as maximizing the sale of high-
user packages. These packages commit customers to pay for a minimum amount of
usage at discounted rates per minute, even if usage falls below the monthly
minimum amount. USM also uses agents, dealers and retailers to obtain customers.
Agents and dealers are independent business people who sell to customers on a
commission basis for USM. USM's agents are in the business of selling cellular
telephones, cellular service packages and other related products to customers.
USM's dealers include car stereo companies and other companies whose customers
are also potential cellular customers. USM's retailers include car dealers,
major appliance dealers, office supply dealers and mass merchants.
USM began to specifically address the fast-growing consumer market by
opening its own retail stores in late 1993. These small facilities are located
in high-traffic areas and are designed to cater to walk-in customers. USM plans
to open more locations in 1994 to further its presence in the local markets.
USM also actively pursues national retail accounts which may potentially
yield new customer additions in multiple markets. The national account effort is
expected to enable USM to reach segments of the market other than those accessed
by the local sales force. Agreements have been entered into with such national
distributors as Chrysler Corporation, Ford Motor Company, General Motors, Honda,
AT&T, Radio Shack, Best Buy, and Sears, Roebuck & Co. for certain of USM's
markets. Upon the sale of a cellular telephone by one of these national
distributors, USM receives, often exclusively within the territories served, the
resulting cellular customer. In recognition of the needs of these national
accounts,
19
<PAGE>
USM initiated a centralized customer support program. This program allows for
customer activation during peak retail business hours (weekends and evenings)
when USM's local office might otherwise be closed.
USM uses a variety of direct mail, billboard, radio, television and
newspaper advertising to stimulate interest by prospective customers in cellular
service and to establish familiarity with USM's name. Advertising is directed at
gaining customers, increasing usage by existing customers and increasing the
public awareness and understanding of the cellular services offered by USM. USM
attempts to select the advertising and promotion media that are most appealing
to the targeted groups of potential customers in each local market. USM utilizes
local advertising media and public relations activities and establishes programs
to enhance public awareness of USM, such as providing telephones and service for
public events and emergency uses.
CUSTOMERS AND SYSTEM USAGE
USM data for 1993 indicate that 52% of USM's customers use their cellular
telephones primarily for business. Cellular customers come from a wide range of
occupations. They typically include a large proportion of individuals who work
outside of their offices such as people in the construction, real estate,
wholesale and retail distribution businesses, and professionals. Most of USM's
customers use in-vehicle cellular telephones. However, more customers (71% of
new customers in 1993 compared to 21% in 1988) are selecting portable and other
transportable cellular telephones as these units become more compact and fully
featured as well as more attractively priced.
USM's cellular systems are used most extensively during normal business
hours between 7:00 am and 6:00 pm. On average, the local retail customers in
USM's majority-owned and managed systems used their cellular systems
approximately 103 minutes per unit each month and generated retail revenue of
approximately $49 per month during 1993, compared to 121 minutes and $52 per
month in 1992. Revenue generated by roamers, together with local, toll and other
revenues, brought USM's total average monthly service revenue per customer unit
in majority-owned and managed markets to $99 during 1993. Average monthly
service revenue per customer unit decreased approximately 6% during 1993,
reflecting primarily the decline in average local minutes per customer unit. USM
anticipates that average monthly service revenue per customer unit may continue
to decline as retail distribution channels provide additional consumer customers
who generate fewer local minutes of use and as roamer revenues grow more slowly.
Roaming is a service offered by USM which allows a customer to place or
receive a call in a cellular service area away from the customer's home market
area. USM has entered into "roaming agreements" with operators of other cellular
systems covering virtually all systems in the United States and Canada. These
agreements offer customers the opportunity to roam in these systems. These
reciprocal agreements automatically pre-register the customers of USM's systems
in the other carriers' systems. Also, a customer of a participating system
roaming (i.e. travelling) in a USM market where this arrangement is in effect is
able to automatically make and receive calls on USM's system. The charge for
this service is typically at premium rates and is billed by USM to the
customer's home system, which then bills the customer. USM has entered into
agreements with other cellular carriers to transfer roaming usage at agreed-upon
rates. In some instances, based on competitive factors, USM may charge a lower
amount to its customers than the amount actually charged to USM by another
cellular carrier for roaming; however, these services include call delivery and
call handoff.
20
<PAGE>
The following table summarizes certain information about customers and
market penetration in USM's managed operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-----------------------------------------------------------------------
1993 1992 1991 1990 1989
--------------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)................. 116 92 67 32 25
Total population of markets in service (000s)..... 19,383 15,014 11,481 6,314 5,228
Customer Units:
at beginning of period (2)...................... 150,800 97,000 57,300 36,100 13,600
additions during period (2)..................... 165,300 88,600 59,800 31,800 28,000
disconnects during period (2)................... 55,100 34,800 20,100 10,600 5,500
at end of period (2)............................ 261,000 150,800 97,000 57,300 36,100
Market penetration at end of period (3)(4)........ 1.35% 1.00% 0.84% 0.91% 0.69%
Consolidated revenues............................... $ 247,259 $ 164,085 $ 99,477 $ 62,452 $ 39,935
Depreciation expense................................ 25,665 16,606 8,814 4,363 3,199
Amortization expense................................ 19,362 13,033 10,455 7,287 4,684
Operating (loss).................................... (8,656) (12,705) (16,831) (9,141) (15,636)
Construction expenditures........................... 94,088 58,832 66,037 21,189 10,032
Identifiable assets................................. $ 1,275,569 $ 858,795 $ 612,981 $ 293,368 $ 189,544
<FN>
- ---------
(1) Represents the number of markets in which USM owned at least a 50%
interest and which it managed, including its reseller operation in
1989-1992. The revenues and expenses of these cellular markets are
included in USM's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular
telephones served by the cellular markets referred to in footnote (1). The
revenue generated by such cellular telephones is included in consolidated
revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service for the respective years.
(4) The decrease from 1990 to 1991 is due to the addition of 32 majority-owned
and managed RSAs in 1991. Market penetration for majority-owned and
managed MSAs was 1.48% in 1991 and 1.07% in 1990.
</TABLE>
21
<PAGE>
The following table summarizes, by cluster, the total population, USM's
customer units and penetration for USM's majority-owned and managed markets that
were operational as of December 31, 1993.
<TABLE>
<CAPTION>
POPULATION CUSTOMERS PENETRATION
--------------- ----------- -------------
<S> <C> <C> <C>
Eastern North Carolina/Virginia....................................................... 2,416,000 20,500 0.85%
Wisconsin/Illinois/Minnesota.......................................................... 1,810,000 23,400 1.29%
Eastern Tennessee/Western North Carolina.............................................. 1,651,000 27,800 1.68%
Iowa.................................................................................. 1,704,000 31,500 1.85%
Maine/New Hampshire/Vermont........................................................... 1,459,000 19,700 1.35%
West Virginia/Pennsylvania/Maryland................................................... 820,000 5,100 0.62%
Missouri.............................................................................. 964,000 6,700 0.70%
Northern Florida...................................................................... 951,000 10,400 1.09%
Washington/Idaho...................................................................... 972,000 8,100 0.83%
Indiana/Kentucky...................................................................... 1,050,000 15,600 1.49%
Texas/Oklahoma........................................................................ 742,000 12,400 1.67%
Oregon/California..................................................................... 812,000 8,100 1.00%
Southwestern Texas.................................................................... 776,000 7,100 0.91%
Oklahoma.............................................................................. 994,000 34,900 3.51%
Other Operations...................................................................... 2,262,000 29,700 1.31%
--------------- ----------- ---
19,383,000 261,000 1.35%
--------------- ----------- ---
--------------- ----------- ---
</TABLE>
CELLULAR TELEPHONES AND INSTALLATION
There are a number of different types of cellular telephones, all of which
are currently compatible with cellular systems nationwide. USM offers a full
range of vehicle-mounted, transportable, and hand-held portable cellular
telephones. Features offered in some of the cellular telephones include
hands-free calling, repeat dialing, horn alert and others.
USM has established service and/or installation facilities in many of its
local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow USM to improve its service by
promptly assisting customers who experience equipment problems.
USM negotiates volume discounts from its cellular telephone suppliers. USM
discounts cellular telephones in most markets to meet competition or to
stimulate sales by reducing the cost of becoming a cellular customer. In these
instances, where permitted by law, customers are generally required to sign an
extended service contract with USM. USM also cooperates with cellular equipment
manufacturers in local advertising and promotion of cellular equipment.
PRODUCTS AND SERVICES
USM's customers are able to choose from a variety of packaged pricing plans
which are designed to fit different calling patterns. USM's customer bills
typically show separate charges for custom-calling features, airtime in excess
of the packaged amount, and toll calls. Custom-calling features provided by USM
include wide-area call delivery, call forwarding, call waiting, three-way
calling and no-answer transfer. USM also offers a voice message service in many
of its markets. This service, which functions like a sophisticated answering
machine, allows customers to receive messages from callers when they are not
available to take calls.
REGULATION
The construction, operation and transfer of cellular systems in the United
States are regulated to varying degrees by the FCC pursuant to the
Communications Act. The FCC has promulgated regulations governing construction
and operation of cellular systems, and licensing and technical standards for the
provision of cellular telephone service.
For licensing purposes, the FCC divided the United States into separate
geographic markets (MSAs and RSAs). In each market, the allocated cellular
frequencies are divided into two equal blocks. During the application process,
the FCC reserved one block of frequencies for nonwireline applicants and another
block for wireline applicants. Subject to FCC approval, a cellular system may be
sold to either a wireline or nonwireline entity, but no entity which controls a
cellular system may own an interest in another cellular system in the same MSA
or RSA.
22
<PAGE>
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the Company's
application for approval of the proposed transfer.
When the first cell of a cellular system has been constructed, the licensee
is required to notify the FCC that construction has been completed. Immediately
upon this notification, but not before, FCC rules authorize the licensee to
offer commercial service to the public. The licensee is then said to have
"operating authority." Initial operating licenses are granted for ten-year
periods. The FCC must be notified each time an additional cell is constructed.
The FCC's rules also generally require persons or entities holding cellular
construction permits or licenses to coordinate their proposed frequency usage
with other cellular users and licensees in order to avoid electrical
interference between adjacent systems. The height and power of base stations in
the cellular system are regulated by FCC rules, as are the types of signals
emitted by these stations. In addition to regulation by the FCC, cellular
systems are subject to certain Federal Aviation Administration regulations
respecting the siting and construction of cellular transmitter towers and
antennas.
On January 9, 1992, the FCC adopted a Report and Order ("R&O") which
establishes standards for conducting comparative renewal proceedings between a
cellular licensee seeking renewal of its license and challengers filing
competing applications. In the R&O, the FCC: (i) established criteria for
comparing the renewal applicant to challengers, including the standards under
which a "renewal expectancy" will be granted to the applicant seeking license
renewal; (ii) established basic qualifications standards for challengers; and
(iii) provided procedures for preventing possible abuses in the comparative
renewal process. The FCC has concluded that it will award a renewal expectancy
if the licensee has (i) substantially used its spectrum for its intended
purposes; (ii) complied with FCC rules, policies and the Communications Act, as
amended; and (iii) not engaged in substantial relevant misconduct. If a renewal
expectancy is awarded to an existing licensee, that expectancy will be more
significant in the renewal proceeding than any other criterion used to compare
the licensee to challengers. Licenses of USM's affiliates in Knoxville and Tulsa
will be its first to come up for renewal in 1994. See "Legal Proceedings -- La
Star Application" for a discussion of certain FCC proceedings which have
suspended the Company's and USM's licensing authority in a Wisconsin market
pending the outcome of an FCC hearing.
USM conducts and plans to conduct its operations in accordance with all
relevant FCC rules and regulations and would anticipate being able to qualify
for a renewal expectancy. Accordingly, USM believes that the regulations will
have no significant effect on its operations and financial condition.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and nonwireline entities and by third parties. The
FCC established 1993 filing dates for filing "unserved area" applications in
MSAs in which the five-year period had expired and many unserved area
applications were filed in certain MSAs. USM's strategy with respect to system
construction in its markets has been and will be to build cells covering every
area within such markets that USM considers economically feasible to serve or
might conceivably wish to serve and to do so within the five-year period
following issuance of the license.
USM is also subject to state and local regulation in some instances. In
1981, the FCC preempted the states from exercising jurisdiction in the areas of
licensing, technical standards and market structure. However, certain states
require cellular system operators to go through a state certification process to
serve communities within their borders. All such certificates can be revoked for
cause. In addition, certain state authorities regulate several aspects of a
cellular operator's business, including the rates it charges its customers and
cellular resellers, the resale of long-distance service to its customers, the
technical arrangements and charges for interconnection with the landline network
and the transfer of interests in cellular systems. The siting and construction
of the cellular facilities, including transmitter towers, antennas and equipment
shelters may also be subject to state or local zoning, land use and other local
regulations. Public utility or public service commissions (or certain of the
commissioners) in several states have expressed an interest in examining whether
the cellular industry should be more closely regulated by such states.
23
<PAGE>
COMPETITION
USM's only facilities-based competitor for cellular telephone service in
each market is the licensee of the second cellular system in that market.
Competition for customers between the two systems in each market is principally
on the basis of quality of service, price, size of area covered, services
offered, and responsiveness of customer service. The competing entities in many
of the markets in which USM has an interest have financial resources which are
substantially greater than those of USM and its partners in such markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, conventional mobile
telephone and SMR systems, both of which are able to connect with the landline
telephone network. USM believes that conventional mobile telephone systems and
conventional SMR systems are competitively disadvantaged because of
technological limitations on the capacity of such systems. The FCC has recently
given approval, via waivers of its rules, to ESMR, an enhanced SMR system. ESMR
systems may have cells and frequency reuse like cellular, thereby potentially
eliminating any current technological limitation. The first ESMR systems were
implemented in 1993 in Los Angeles. Although less directly a substitute for
cellular service, wireless data services and one-way paging service (and in the
future, two-way paging services) may be adequate for those who do not need full
two-way voice service.
Continuing technological advances in the communications field make it
impossible to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and a consortium to provide such service
has been formed. Such a system is designed primarily to serve the communications
needs of remote locations and a mobile satellite system could provide viable
competition for land-based cellular systems in such areas. It is also possible
that the FCC may in the future assign additional frequencies to cellular
telephone service to provide for more than two cellular telephone systems per
market.
CT-2, second generation cordless telephones, and PCS, personal
communications network services, may prove to be competitive with cellular
service in the future. CT-2 will allow a customer to make a call from a personal
phone as long as the person is within range of a telepoint base station which
connects the call to the public switched telephone network. PCS will be digital,
wireless communications systems which currently are primarily targeted for use
in very densely populated areas. Various CT-2 and PCS trials are in process
throughout the United States. CT-2 and PCS are not anticipated to be significant
sources of competition in USM's markets in the near future. Similar
technological advances or regulatory changes in the future may make available
other alternatives to cellular service, thereby creating additional sources of
competition.
RADIO PAGING OPERATIONS
WIRELESS MESSAGING INDUSTRY
Paging is a wireless messaging technology which uses an assigned radio
frequency to contact a paging customer within a geographic service area. Pagers
are small, lightweight, easy-to-use, battery-operated devices which receive
messages by the broadcast of a radio signal. To contact a customer, a message is
initiated by placing a telephone call to the customer's pager number. The
telephone call is received by a computerized paging switch which generates a
signal sent to microprocessor-controlled radio transmitters within the service
area. The transmitters broadcast a digital or analog signal that is received by
the pager and delivered as a tone, voice, numeric or alphanumeric text message.
The paging industry started in 1949 when the FCC set aside certain radio
frequencies for exclusive use in providing one-way mobile communications
services. Until the 1980s, the industry was highly fragmented with a large
number of small, local firms. During that decade, acquisitions of many firms by
regional telephone companies greatly consolidated the industry. While it is
estimated that by late 1993
24
<PAGE>
more than 500 licensed paging companies remained in the United States, most
providing local service in a single market, the ten largest companies served
more than 47% of all pager units, with no single provider serving more than 16%
of the United States marketplace.
The FCC has recently allocated certain radio spectrum channels designated
for Advanced Messaging Services ("AMS"), which are also known as Narrowband PCS.
These frequency channels, which are anticipated to be auctioned by the FCC in
1994, will accommodate a wide array of emerging wireless technologies and
ancillary communications services to both individuals and businesses. As a
potential AMS provider, APP is exploring the potential to offer acknowledgment
paging, two-way data services, wireless E-mail, location services and the
transmission of voice messages and high-resolution graphics.
Additional innovations in technology combined with further reduced costs of
equipment are expected to continue to broaden the potential market size for
paging services and support the industry's rapid growth rate. Management also
believes that future developments in the wireless communications industry will
produce additional consolidations of smaller operators with larger, multi-market
paging companies.
APP provides one-way wireless messaging services in the United States with
operations concentrated in Florida and in the Mid-Atlantic and Midwest regions.
APP has experienced strong growth in the number of pagers in service, increasing
from 161,600 at the end of 1989 to 460,900 at year-end 1993, a compound annual
growth rate of 30.0%
The following table summarizes certain information about APP's operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Pagers in service.............................................. 460,900 322,200 236,800 201,200 161,600
Total revenues................................................. $ 75,363 $ 54,716 $ 43,973 $ 38,022 $ 31,822
Depreciation and amortization expense.......................... 13,392 10,412 9,047 8,304 6,494
Operating (loss)............................................... (721) (5,448) (7,750) (6,442) (7,429)
Additions to property and equipment............................ 24,813 15,501 13,322 14,347 10,433
Identifiable assets............................................ $ 74,923 $ 57,080 $ 41,726 $ 38,067 $ 32,403
</TABLE>
COMPANY STRATEGY
APP has authorizations for more than 500 transmitter sites on Private
Carrier Paging ("PCP") channel 929.3375 MHz in 47 states. Under recently adopted
changes in FCC rules, APP has requested exclusive use of this channel throughout
the United States. Other companies also hold authorizations for PCP channels and
are expected to request exclusive use of PCP channels for systems serving
nationwide, regional or local service areas. APP believes this license will
enable APP to offer competitive regional and nationwide messaging services and
is building certain systems required to utilize and retain its exclusive
license.
In addition, APP has applied for SMR licenses in several markets, including
certain markets it presently serves. These licenses would allow APP to offer a
broad range of innovative mobile data services, including one-and two-way
messaging, high-resolution graphics, wireless E-mail, and facsimile. Since the
FCC classifies APP as a wireline carrier as a result of its relationship with
TDS, APP must receive a waiver from the FCC to obtain such licenses. APP is
unable to predict whether it will receive such a waiver from the FCC. In the
event APP is unable to obtain the SMR licenses, APP believes that it would be
able to provide such mobile data services in the pertinent markets though the
use of other frequencies for which FCC licenses must be obtained but where no
such waiver would be required.
APP has recently entered into a joint venture with NEXUS Telecommunications
Systems of Israel Ltd. ("NEXUS") to develop proprietary wireless technologies.
As part of this arrangement, APP has the exclusive right to market two-way
lower-speed data messaging, vehicle location, and inventory management services
using patented spread spectrum technology in the western hemisphere. Management
believes its alliance with NEXUS has the potential to result in advanced two-way
messaging services for current and future customers. APP also expects to have
access to two-way messaging service technology offered by other manufacturers.
25
<PAGE>
Both wireless and wireline carriers will compete to offer services on
America's "information highway" -- the electronic marketplace which will provide
consumers and businesses with access to a wide array of data and other services.
Paging traditionally provides high-quality service at the lowest price and cost
of any wireless service. TDS believes that the wireless messaging industry,
including APP's wireless network, will be an important part of the information
highway and will permit APP to compete successfully as a provider of information
services. One of the many potentials of this network is the ability, through
alliances with other firms, to provide customers with a shopping list of
specialized information services. For example, APP's customers could receive
E-mail messages, news or sports headlines, stock quotes, or morning wake-up
calls that also provide the weather forecast. APP's substantial base of loyal
customers, modern wireless network infrastructure and well-trained sales force
position APP to continue transitioning customers to higher-value, more
profitable products and services.
Many of the services discussed above can be provided with little or no
significant additional capital investment. APP anticipates that marketing
expenses will be minimized by selling such services through existing
distribution channels and incorporating these services into existing advertising
and promotional campaigns. Incremental operational expenses are expected to be
minimized by using existing support functions such as APP's customer service and
technical staffs to service these new customers.
Services which may require additional capacity, such as E-mail, will require
higher-speed networks to support the customer base. This, in turn, may require
more transmitter sites, more complex communication switches, and other
enhancements to APP's infrastructure. Also, additional capital spending may be
required to secure the necessary radio spectrum in the auctions the FCC will
hold in the future which will allow APP to offer two-way communication, and to
expand its one-way capacity.
Many of the services such as information services are currently offered in
several of APP's operations. The time-frame for new two-way services is
projected to be mid-1995, but there can be no assurance at this early stage of
development of such services that APP will be willing or able to invest in some
or all of such services or that, if implemented, such services will be
commercially successful.
PAGING OPERATIONS
APP provides local, wide-area, regional, and nationwide paging services to
customers through its operations centers. It offers local and regional paging
coverage throughout Florida, in the Midwest (Illinois, Indiana, Kentucky,
Minnesota, Missouri and Wisconsin) and the Mid-Atlantic (Maryland, Pennsylvania,
Virginia, and Washington, D.C.) regions, and in the states of Oklahoma, Texas,
Arizona and Utah. Nationwide paging is offered through APP's alliance with a
nonaffiliated service provider.
APP currently provides four types of pagers in all of its markets: digital
display, alphanumeric text display, voice and tone. A digital display pager
permits a caller to transmit to the customer a numeric message that may consist
of a telephone number, an account number or coded information. It has the memory
to store several numeric messages that can be recalled by the customer when
desired. Alphanumeric text display service allows customers to receive, store,
and display full text messages of between 80 and 160 characters, which are sent
from either a data entry device or an operator. In the case of voice service,
the notification is followed by a brief voice message. A tone pager notifies the
customer that a message has been received by emitting an audible beep,
displaying a flashing light or vibrating.
Since 1986, APP has made a limited number of selective acquisitions of
paging companies which had been providing service in the same areas as APP, or
in areas adjacent to APP's service areas. In 1991, APP exchanged approximately
22,000 customers in its California, Connecticut, and Rhode Island subsidiaries
for 27,000 customers in Florida, where APP already had existing paging
operations. In total, APP has added 30,700 net customers through acquisitions
since 1986. As the industry continues to consolidate, APP expects to evaluate
and may purchase attractive acquisition opportunities on an ongoing basis.
MARKETING STRATEGY
APP generates its revenues from (i) service usage billed primarily on a
flat-rate basis, (ii) pager rentals, (iii) pager warranties, maintenance
contracts and repair, (iv) loss protection, (v) voice mail usage on a flat rate
or measured service basis, (vi) activation fees, (vii) the sale of new and used
pagers,
26
<PAGE>
(viii) the sale of pager accessories and (ix) service usage of value-added
services such as text dispatching, second telephone numbers or group calls.
Service to end users is provided directly by APP in most cases.
APP markets its services directly, through its sales force complemented by
customer service representatives, and indirectly, through third-party resellers,
agents and retailers. APP's sales force and customer service representatives
have the responsibility to ensure that all customers and prospects as well as
resellers, agents and retailers understand APP's significant competitive
advantages: reliable wireless network, wide-area coverage, value-priced
selection of pagers and services, and responsive sales and customer service
staff.
APP offers its services to third-party resellers and retailers under
marketing agreements. APP offers resellers paging airtime in bulk quantities at
wholesale rates. Resellers then sell APP's airtime to end users at a markup.
Agents, on the other hand, refer customers directly to APP. Retail outlets sell
the pagers to the customers and the customers then purchase the services from
APP. Resellers and retailers may also sell services of other wireless
communications companies which may compete with APP. APP seeks to develop
long-term and cooperative relationships with its resellers, agents and
retailers. APP's cost of obtaining customer units through resellers is
substantially less than the cost of obtaining customer units through direct
sales or retail distribution channels. Resellers incur the cost to acquire
customers as well as to service pagers and to bill and collect revenues from the
customer. They also assume the cost of the paging unit for those who rent rather
than purchase.
COMPETITION
APP faces significant competition in all of its markets. Many of APP's
competitors, which include local, regional and national paging companies and
certain regional telephone companies, possess greater financial, technical and
other resources than APP. Moreover, certain competitors in the paging business
offer wider coverage in certain geographic areas than does APP and certain
competitors follow a low-price discounting strategy to expand market share. If
any of such companies were to devote additional resources to the paging business
or increase competitive pressure in APP's markets, APP's results of operations
could be adversely affected.
A number of technologies, including cellular, broadband and narrowband PCS,
SMR and others, are competitive forms of technology used in, or projected to be
used for, wireless one-way and two-way communications. Cellular telephone
technology provides an alternative communications system for customers who are
frequently away from fixed-wire communications systems (i.e., ordinary
telephones). APP believes that paging will remain one of the lowest-cost forms
of wireless messaging due to the low-cost infrastructure associated with paging
systems, as well as advances in technology that will provide for reduced paging
costs.
Future technological developments in the wireless telecommunications
industry and the enhancement of current technologies will likely create new
products and services that are competitive with the paging services currently
offered by APP. There can be no assurance that APP would not be adversely
affected by such technology changes.
GOVERNMENT REGULATION
APP's message paging operations are subject to regulation by the FCC under
the Communications Act. Currently, paging services are offered primarily over
radio frequencies that the FCC has allocated for either common carriage
(licensees are known as radio common carriers ("RCC")) or private carriage
(licensees are known as private carrier paging operators ("PCP")). An RCC
license is an exclusive license to a specific radio frequency in a particular
locality or region and the licensee is regulated as a common carrier. A PCP
license may be designated by the FCC as exclusive or non-exclusive, and may be
subject to frequency sharing and coordination procedures. These procedures are
designed to avoid interference with the operation of communications by other
carriers using the same frequency. PCP licensees are private carriers, not
subject to common carrier regulation.
The FCC has granted APP licenses to use the radio frequencies required to
conduct its paging operations and these licenses define the technical parameters
under which APP is authorized to use
27
<PAGE>
those frequencies. APP primarily provides paging services directly to customers
over its own transmission facilities, and is currently regulated as an RCC for
some of its current services. APP also holds PCP licenses.
The FCC licenses granted to APP are issued for up to ten years in the case
of RCC licenses and five years in the case of PCP licenses, at the end of which
time renewal applications must be approved by the FCC. Most of APP's current
licenses expire between 1997 and 2001. FCC renewals are generally granted as
long as APP is in compliance with FCC regulations. Although APP is unaware of
any circumstances which would prevent the approval of any pending or future
renewal applications, no assurance can be given that APP's licenses will be
renewed by the FCC in the future. Moreover, although revocation and involuntary
modification of licenses are extraordinary regulatory measures, the FCC has the
authority to restrict the operation of licensed facilities or revoke or modify
licenses. No license of APP has ever been revoked or modified involuntarily. See
"Legal Proceedings--La Star Application" for a discussion of certain FCC
proceedings which have suspended the Company's and USM's licensing authority in
a Wisconsin market pending the outcome of an FCC hearing.
The Communications Act requires licensees such as APP to obtain prior
approval from the FCC for the assignment or transfer of control of any
construction permit or station license, or any rights thereunder. The
Communications Act also requires prior approval by the FCC of acquisitions of
other paging companies by APP. The FCC has approved all transfers of control for
which APP has sought approval. APP also routinely applies for FCC authority to
use frequencies, modify the technical parameters of existing licenses, expand
its service territory and provide new services. Although there can be no
assurance that any future requests for approval or applications filed by APP
will be approved or acted upon in a timely manner by the FCC, or that the FCC
will grant the relief requested, subject to the forthcoming rules for
competitive bidding, APP has no reason to believe that any such requests,
applications or relief will not be approved or granted.
28
<PAGE>
OTHER SUBSIDIARIES
Subsidiaries of the Company provide engineering and technical management
consulting services (American Communications Consultants, Inc.); data processing
and related services (TDS Computing Services, Inc.); graphic communications
services (Suttle Press, Inc.); and telemessaging services (Integrated
Communications Services, Inc.).
EMPLOYEES
The Company enjoys satisfactory employee relations. As of December 31, 1993,
4,343 persons were employed by the Company, 91 of whom are represented by
unions.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The property of TDS consists principally of telephone lines, central office
equipment, telephone instruments and related equipment, and land and buildings
related to telephone operations; switching and cell site equipment related to
cellular telephone operations; and radio pagers and transmitting equipment
related to radio paging operations. As of December 31, 1993, TDS's gross
property, plant and equipment of approximately $1.3 billion consisted of the
following:
<TABLE>
<S> <C>
Telephone
Telephone lines.................................. 33.4%
Central office equipment......................... 17.8
Telephone instruments and related equipment...... 1.5
Land and buildings............................... 3.4
Miscellaneous.................................... 6.6
Plant under construction......................... 2.7
-----
Total Telephone.............................. 65.4
Cellular telephone................................. 23.7
Radio paging....................................... 6.5
Other.............................................. 4.4
-----
100.0%
-----
-----
</TABLE>
"Telephone lines" consists primarily of buried cable and also includes
aerial cable, poles, and wire. "Central office equipment" consists of switching
equipment, carrier equipment, and related facilities. "Telephone instruments and
related equipment" consists of equipment located on the subscribers' premises
and includes private branch exchanges. "Land and buildings" consists of land
owned in fee simple and improvements thereto. "Miscellaneous" consists of tools,
furnishings, fixtures, motor vehicles, work equipment, and plant held for future
use. "Plant under construction" includes property of the foregoing categories
which had not been placed in service because it was still under construction.
The plant and equipment of TDS is maintained in good operating condition and is
suitable and adequate for the Company's business operations. The properties of
the operating telephone subsidiaries and most of the tangible assets of the
cellular subsidiaries are subject to the lien of the mortgages securing the
funded debt of such companies. The Company owns substantially all of its central
office buildings, local administrative buildings, warehouses, and storage
facilities used in its telephone operations and leases most of its offices and
transmitter sites used in its cellular and paging businesses. All of the
Company's telephone lines and cell and transmitter sites are located either on
private or public property. Locations on private land are by virtue of easements
or other arrangements.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain landline or cellular telephone markets. The
more significant proceedings involving the Company are described in the
following paragraphs.
29
<PAGE>
LA STAR APPLICATION. Star Cellular Telephone Company, Inc. ("Star
Cellular"), an indirect, wholly owned subsidiary of USM, is a 49% owner of La
Star Cellular Telephone Company ("La Star"), an applicant for a construction
permit for a cellular system in St. Tammany Parish in the New Orleans MSA. In
June 1992, the FCC affirmed an Administrative Law Judge's order which had
granted the mutually exclusive application of New Orleans CGSA, Inc. ("NOCGSA")
and dismissed La Star's application. The ground for the FCC's action was its
finding that Star Cellular, and not the 51% owner, SJI Cellular, Inc. ("SJI"),
in fact controlled La Star. La Star, TDS and USM have appealed that order to the
United States Court of Appeals of the District of Columbia Circuit and those
appeals are pending.
In a footnote to its decision, the FCC stated, in part, that "Questions
regarding the conduct of SJI and [USM] in this case may be revisited in light of
the relevant findings and conclusions here in future proceedings where the other
interests of these parties have decisional significance." Certain adverse
parties have attempted to use the footnote in the LA STAR decision in a number
of unrelated, contested proceedings which TDS and USM have pending before the
FCC. In addition, since the LA STAR proceeding, FCC authorizations in
uncontested FCC proceedings have been granted subject to any subsequent action
the FCC may take concerning the LA STAR footnote.
On February 1, 1994, in a proceeding involving a license originally issued
to TDS for a rural service area in Wisconsin, the FCC instituted a hearing to
determine whether in the La Star case USM had misrepresented facts to, lacked
candor in its dealings with or attempted to mislead the FCC and, if so, whether
TDS possesses the requisite character qualifications to hold that Wisconsin
license. The FCC stated that, pending resolution of the issues in the Wisconsin
proceeding, further grants to TDS and its subsidiaries will be conditioned on
the outcome of that proceeding. TDS was granted interim authority to continue to
operate the Wisconsin system pending completion of the hearing.
An adverse finding in the Wisconsin hearing could result in a variety of
possible sanctions, ranging from a fine to loss of the Wisconsin license, and
could, as stated in the FCC order, be raised and considered in other proceedings
involving TDS and its subsidiaries. TDS and USM believe they acted properly in
connection with the La Star application and that the findings and record in the
La Star proceeding are not relevant in any other proceeding involving their FCC
license qualifications.
TOWNES TELECOMMUNICATIONS, INC., ET. AL. V. TDS, ET. AL. Plaintiffs Townes
Telecommunications, Inc. ("Townes"), Tatum Telephone Company ("Tatum Telephone")
and Tatum Cellular Telephone Company ("Tatum Cellular") filed a suit in the
District Court of Rusk County, Texas, against both TDS and USM as defendants.
Plaintiff Townes alleges that it entered into an oral agreement with defendants
which established a joint venture to develop cellular business in certain
markets. Townes alleges that defendants usurped a joint venture opportunity and
breached fiduciary duties to Townes by purchasing interests in nonwireline
markets in Texas RSA #11 and the Tyler (Texas) MSA on their own behalf rather
than on behalf of the alleged joint venture. In its Fifth Amended Original
Petition, Townes seeks unspecified damages not to exceed $33 million for
usurpation, breach of fiduciary duty, civil conspiracy, breach of contract and
tortious interference. Townes also seeks imposition of a constructive trust on
defendants' profits from Texas RSA #11 and the Tyler (Texas) MSA and transfer of
those interests to the alleged joint venture. In addition Townes seeks
reasonable attorneys' fees equal to one-third of the judgment, along with the
prejudgment interest. Plaintiffs Tatum Telephone and Tatum Cellular seek a
declaration that transfers by defendants of a 49% interest in Tatum Cellular
violated a five-year restriction on alienation of Tatum Cellular shares
contained in a written shareholders' agreement. Tatum Telephone and Tatum
Cellular seek to void the transfers. All plaintiffs together seek as much as
$200 million in punitive damages.
Defendants have asserted meritorious defenses to each of the plaintiffs'
claims and are vigorously defending this case. Discovery is ongoing. A jury
trial in this case is set to commence on April 25, 1994.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1993.
30
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"TDS Stock and Dividend Information" and "Market Price per Common Share by
Quarter."
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Selected Consolidated Financial Data," except for ratios of earnings to fixed
charges, which are incorporated herein by reference from Exhibit 12 to this
Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"Consolidated Statements of Income," "Consolidated Statements of Cash Flows,"
"Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders'
Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly
Income Information (Unaudited)," and "Report of Independent Public Accountants."
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Exhibit 99.1 sections entitled "Election of
Directors" and "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Exhibit 99.1 section entitled "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Exhibit 99.1 sections entitled "Security
Ownership of Management" and "Principal Shareholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Exhibit 99.1 section entitled "Certain
Relationships and Related Transactions."
32
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a)(1) Financial Statements
<TABLE>
<S> <C> <C>
Consolidated Statements of Income......................... Annual Report*
Consolidated Statements of Cash Flows..................... Annual Report*
Consolidated Balance Sheets............................... Annual Report*
Consolidated Statements of Common Stockholders' Equity.... Annual Report*
Notes to Consolidated Financial Statements................ Annual Report*
Consolidated Quarterly Income Information (Unaudited)..... Annual Report*
Report of Independent Public Accountants.................. Annual Report*
<FN>
- ---------
* Incorporated by reference from Exhibit 13.
</TABLE>
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
-----------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedules..................................... page 35
II. Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than
Related Parties for each of the Three Years in the Period Ended December 31, 1993.................. page 35
III. Condensed Financial Information of Registrant-Balance Sheets as of December 31, 1993 and 1992 and
Statements of Income and Statements of Cash Flows for each of the Three Years in the Period Ended
December 31, 1993.................................................................................. page 36
V. Property, Plant and Equipment for each of the Three Years in the Period Ended December 31, 1993.... page 40
VI. Reserve for Depreciation for each of the Three Years in the Period Ended December 31, 1993......... page 43
VIII. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31,
1993............................................................................................... page 46
X. Supplementary Income Statement Information for each of the Three Years in the Period Ended December
31, 1993........................................................................................... page 47
Los Angeles SMSA, Nashville/Clarksville MSA, and Baton Rouge MSA Limited Partnership Combined Financial
Statements.................................................................................................. page 48
Compilation Report of Independent Public Accountants on Combined Financial Statements.............. page 49
Reports of Other Independent Accountants........................................................... page 50
Combined Statements of Operations (Unaudited)...................................................... page 55
Combined Balance Sheets (Unaudited)................................................................ page 56
Combined Statements of Cash Flows (Unaudited)...................................................... page 57
Combined Statements of Changes in Partners' Capital (Unaudited).................................... page 58
Notes to Unaudited Combined Financial Statements................................................... page 59
All other schedules have been omitted because they are not applicable or not required because the required
information is shown in the financial statements or notes thereto.
</TABLE>
33
<PAGE>
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a part
of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984.
10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981.
10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated May 28, 1991.
10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson.
10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the Company and
LeRoy T. Carlson.
10.5 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the Company and
LeRoy T. Carlson, Jr.
10.6 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company and James Barr
III.
10.7(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company.
10.7(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company.
10.7(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company.
10.8 1985 Incentive Stock Option Plan of the Company.
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1993.
TDS filed a Report on Form 8-K dated October 18, 1993, which described
certain completed and pending acquisitions. The Report filed the financial
statements of several companies which were acquired or which became pending
in 1993 and unaudited consolidated pro forma financial statements reflecting
the effects of the completed and pending acquisitions.
TDS filed a Form 8-K dated November 17, 1993, which discussed the
completion of a rights offering by United States Cellular Corporation. The
Form 8-K included a press release by United States Cellular Corporation as
an exhibit.
No other reports on Form 8-K were filed during the quarter ended December 31,
1993.
34
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of Directors of Telephone and Data Systems, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Telephone and Data Systems, Inc.
and Subsidiaries Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated February 8, 1994. Our report
on the consolidated financial statements includes an explanatory paragraph with
respect to the change in the method of accounting for cellular sales
commissions, with respect to the change in the method of accounting for
postretirement benefits other than pensions and with respect to the change in
the method of accounting for income taxes as discussed in Note 1, Note 1 and
Note 2, respectively, of the Notes to Consolidated Financial Statements; and an
explanatory paragraph calling attention to certain litigation as discussed in
Note 14 of the Notes to Consolidated Financial Statements.
Our audits were made for the purpose of forming an opinion on those financial
statements taken as a whole. The financial statement schedules listed in Item
14(a)(2) are the responsibility of the Company's management and are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These financial statement
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
February 8, 1994
- --------------------------------------------------------------------------------
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
<TABLE>
<CAPTION>
COLUMN D COLUMN E
DEDUCTIONS
--------------------- BALANCE AT END OF
COLUMN B (2) PERIOD
BALANCE AT (1) AMOUNTS --------------------
COLUMN A BEGINNING COLUMN C AMOUNTS WRITTEN (1) (2)
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED OFF CURRENT NOT CURRENT
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1993
Independent Cellular Telephone Company, Inc.(1) $ 542 $ -- $ -- $ -- $ -- $ 542
Gregory E. Webb(2) $ 235 $ -- $ 235 $ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1992
Independent Cellular Telephone Company, Inc.(1) $ 542 $ -- $ -- $ -- $ -- $ 542
Gregory E. Webb(2) $ -- $ 235 $ -- $ -- $ 235 $ --
Jerry W. Masters(2) $ 156 $ 120 $ 276 $ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1991
Independent Cellular Telephone Company, Inc.(1) $ 381 $ 161 $ -- $ -- $ -- $ 542
Jerry W. Masters(2) $ -- $ 156 $ -- $ -- $ 156 $ --
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The promissory note face amount, together with simple interest at an annual
rate of 6.68%, is due June 29, 1994.
(2) The promissory note was a bridge loan connected with the purchase of a
residence. The note bore no interest and was fully payable within 15 days
of the availability of funds from the sale of the maker's previous
residence.
</TABLE>
35
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
BALANCE SHEETS
ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1993 1992
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 24,651 $ 505
Temporary investments 57 171
Notes receivable from affiliates 119,786 256,772
Advances to affiliates 1,616 2,689
Accounts receivable
Due from subsidiaries--Income taxes 9,008 10,228
Due from subsidiaries--Other 9,618 8,098
Other 1,130 6,538
Other current assets 632 352
--------------------------------
166,498 285,353
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARIES
Underlying book value 1,242,274 771,504
Cost in excess of underlying book value at date of acquisition 49,821 34,417
--------------------------------
1,292,095 805,921
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS
Minority interests in telephone and cellular companies and other investments 57,187 32,512
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES
Debt issuance expenses 2,020 1,482
Development and acquisition expenses 1,036 427
Other 3,138 3,028
--------------------------------
6,194 4,937
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,521,974 $ 1,128,723
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
36
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1993 1992
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock $ 3,339 $ 4,739
Notes payable 6,000 46,140
Notes payable to affiliates 1,818 1,993
Advances from affiliates 348 348
Accounts payable
Due to subsidiaries--Federal income taxes 4,212 9,481
Due to subsidiaries--Other 472 374
Other 1,722 1,159
Accrued interest 8,078 5,557
Accrued taxes 2,463 --
Other 1,257 837
--------------------------------
29,709 70,628
- ----------------------------------------------------------------------------------------------------------------------------------
DEFERRED LIABILITIES AND CREDITS
Investment tax credits (2,117) (2,224)
Income taxes 6,218 1,762
Postretirement benefits obligation other than pensions (Note D) 12,856 14,149
Other 3,526 3,487
--------------------------------
20,483 17,174
- ----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, excluding current portion (Note B) 205,032 122,106
- ----------------------------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion (Note A) 25,632 27,163
- ----------------------------------------------------------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES 16,833 14,233
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding
43,503,584 and 34,383,483 shares, respectively 43,504 34,383
Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and
outstanding 6,881,001 and 6,863,819 shares, respectively 6,881 6,864
Common Shares issuable, 304,328 shares 15,189 --
Capital in excess of par value 1,069,022 761,706
Retained earnings 89,689 74,466
--------------------------------
1,224,285 877,419
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,521,974 $ 1,128,723
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
37
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Operating sales and service revenues $ 17,179 $ 14,849 $ 13,887
Cost of sales and expenses 17,109 14,896 13,959
----------------------------------------
Net operations 70 (47) (72)
Other income
Interest income received from affiliates 27,333 15,792 12,707
Other, net (1,128) (2,969) (270)
----------------------------------------
26,205 12,823 12,437
Interest expense (18,934) (16,428) (15,920)
Federal income tax credit (expense) 2,602 (4,710) 10,064
----------------------------------------
Corporate operations 9,943 (8,362) 6,509
Equity in net income of subsidiaries and other investments 23,953 46,882 9,569
----------------------------------------
Net income before extraordinary item and cumulative effect of accounting changes 33,896 38,520 16,078
Extraordinary item (Note C) -- (769) --
Cumulative effect of accounting changes (Note D) -- (6,866) --
----------------------------------------
Net income $ 33,896 $ 30,885 $ 16,078
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
<TABLE>
<S> <C>
Note A: The annual requirements for redemption of Redeemable Preferred Shares are $1.7
million, $10.8 million, $11.4 million, $1.2 million and $249,000 for the years 1994
through 1998, respectively.
Note B: The annual requirements for principal payments on long-term debt are $1.6 million,
$1.4 million, $406,000, $386,000 and $482,000 for the years 1994 through 1998,
respectively.
Note C: During 1992 the Company retired at a premium $20.8 million of its Senior Notes. The
notes carried interest rates of 9.75% to 13.75% and were due in 1996 through 2004.
The transaction resulted in an extraordinary loss of $769,000, net of income tax
benefits of $491,000.
Note D: The Company implemented SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," effective January 1, 1992. See Note 1 of Notes to
Consolidated Financial Statements, included in the Annual Report, for a discussion
of the Company's postretirement benefit plans.
</TABLE>
38
<PAGE>
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 33,896 $ 30,885 $ 16,078
Add (Deduct) adjustments to reconcile net income to net cash provided by operating
activities
Extraordinary item -- 769 --
Cumulative effect of accounting change -- 6,866 --
Depreciation and amortization 2,547 1,568 1,355
Deferred taxes 4,563 3,459 (2,976)
Equity income (23,953) (46,882) (9,569)
Other noncash expense 6 3,156 332
Change in accounts receivable 1,076 (6,440) (3,670)
Change in accounts payable (4,603) 5,430 531
Change in accrued taxes 2,463 428 (1,149)
Change in other assets and liabilities 2,689 (447) 3,074
------------------------------------------
18,684 (1,208) 4,006
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 91,601 7,235 98,946
Repayment of long-term debt (11,935) (28,780) (8,449)
Premium on retirement of long-term debt -- (1,117) --
Change in notes payable (40,140) 6,511 (29,971)
Change in notes payable to affiliates (175) (5,727) 2,871
Change in advances from affiliates -- (6,103) 2,906
Common stock issued 109,972 78,592 3,146
Redemption of preferred shares (220) (407) (106)
Dividends paid (17,830) (13,902) (11,293)
------------------------------------------
131,273 36,302 58,050
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions
Value of assets acquired (331,225) (154,569) (185,614)
Common Shares issued 281,605 134,612 150,288
Preferred Shares issued 3,000 -- 23,059
------------------------------------------
Net cash paid for acquisitions (46,620) (19,957) (12,267)
Investments in subsidiaries (126,108) (2,923) (9,321)
Dividends from subsidiaries 16,266 21,544 15,705
Investments in cellular minority interests (28) (299) (493)
Other investments 1,452 (5,585) (833)
Change in notes receivable from affiliates 28,040 (28,460) (53,235)
Change in advances to affiliates 1,073 127 (1,036)
Change in temporary investments 114 17 (43)
------------------------------------------
(125,811) (35,536) (61,523)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,146 (442) 533
CASH AND CASH EQUIVALENTS--
Beginning of period 505 947 414
------------------------------------------
End of period $ 24,651 $ 505 $ 947
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
39
<PAGE>
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN C
BALANCE AT COLUMN D
COLUMN B DATE OF COLUMN F
ACQUISITION COLUMN C LESS COLUMN E
COLUMN A BALANCE AT OF COMPANIES RETIREMENTS BALANCE AT
BEGINNING ACQUIRED ADDITIONS OR SALES OTHER END
CLASSIFICATION OF PROPERTY OF PERIOD IN 1993 AT COST AT COST CHANGES OF PERIOD
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Telephone Plant in Service and Under Construction:
Organization $ 5,657 $ 44 $ -- $ 26 $ (6) $ 5,669
Land 2,598 228 127 3 -- 2,950
Buildings 35,839 2,810 2,068 256 -- 40,461
Central office equipment 207,100 15,235 29,224 21,480 -- 230,079
Station apparatus 2,783 508 304 75 -- 3,520
Station connections 2,721 131 -- 1,752 -- 1,100
Pole lines 19,869 656 1,567 268 -- 21,824
Aerial cable 93,326 895 8,244 1,486 -- 100,979
Buried cable 256,385 20,489 27,774 1,982 -- 302,666
Underground conduit 4,947 1,250 870 (3) -- 7,070
Furniture and office equipment 39,291 1,742 4,157 762 206 44,634
Vehicles and other work equipment 24,083 1,406 4,003 2,127 12 27,377
Plant under construction 32,313 271 2,526 -- (137) 34,973
Plant acquisition adjustment 8,002 -- -- -- 15 8,017
Early retirements 894 29 88 -- (387) 624
Nonregulated investment 13,443 52 2,094 1,041 -- 14,548
- ---------------------------------------------------------------------------------------------------------------------------------
Total Telephone Property 749,251 45,746 83,046 31,255 (297) 846,491
- ---------------------------------------------------------------------------------------------------------------------------------
Cellular Telephone
Switching and cell site equipment 161,003 24,837 68,829 597 93 254,165
Other 32,678 2,729 18,588 1,949 (93) 51,953
License costs 495,361 261,209 49,083 -- -- 805,653
Deferred start-up costs 10,161 909 979 839 (242) 10,968
- ---------------------------------------------------------------------------------------------------------------------------------
Total Cellular Telephone 699,203 289,684 137,479 3,385 (242) 1,122,739
- ---------------------------------------------------------------------------------------------------------------------------------
Radio Paging
Pagers 33,289 508 19,031 17,469 -- 35,359
Transmitting equipment and other 22,961 200 9,542 730 -- 31,973
Deferred charges 11,608 4,078 1,465 201 -- 16,950
- ---------------------------------------------------------------------------------------------------------------------------------
Total Radio Paging 67,858 4,786 30,038 18,400 -- 84,282
- ---------------------------------------------------------------------------------------------------------------------------------
Other $ 54,415 $ -- $ 7,648 $ 4,771 $ (64) $ 57,228
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPRECIATION
Depreciation is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, were 7.3% for telephone, 10.5% for cellular telephone, 17.4% for radio
paging, and 12.9% for other property.
40
<PAGE>
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN C
BALANCE AT COLUMN D
COLUMN B DATE OF COLUMN F
ACQUISITION COLUMN C LESS COLUMN E
COLUMN A BALANCE AT OF COMPANIES RETIREMENTS BALANCE AT
BEGINNING ACQUIRED ADDITIONS OR SALES OTHER END
CLASSIFICATION OF PROPERTY OF PERIOD IN 1992 AT COST AT COST CHANGES OF PERIOD
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Telephone Plant in Service and Under Construction:
Organization $ 111 $ 3 $ -- $ -- $ 5,543 $ 5,657
Land 2,424 72 132 4 (26) 2,598
Buildings 33,355 752 2,130 203 (195) 35,839
Central office equipment 189,750 3,055 22,497 8,202 -- 207,100
Station apparatus 2,499 30 406 152 -- 2,783
Station connections 8,225 160 -- 5,020 (644) 2,721
Pole lines 19,657 98 1,096 982 -- 19,869
Aerial cable 89,002 553 6,044 2,273 -- 93,326
Buried cable 234,416 3,705 21,695 3,431 -- 256,385
Underground conduit 4,527 27 397 4 -- 4,947
Furniture and office equipment 36,548 199 3,069 525 -- 39,291
Vehicles and other work equipment 22,492 405 3,123 1,937 -- 24,083
Plant under construction 25,827 147 4,741 -- 1,598 32,313
Plant acquisition adjustment 2,337 -- -- -- 5,665 8,002
Early retirements 1,036 14 126 -- (282) 894
Nonregulated investment 12,917 342 1,594 1,888 478 13,443
- ----------------------------------------------------------------------------------------------------------------------------------
Total Telephone Property 685,123 9,562 67,050 24,621 12,137 749,251
- ----------------------------------------------------------------------------------------------------------------------------------
Cellular Telephone
Switching and cell site equipment 104,768 14,140 44,111 2,386 370 161,003
Other 22,685 1,798 9,654 1,089 (370) 32,678
License costs 312,159 100,879 86,090 3,735 (32) 495,361
Deferred start-up costs 8,669 1,247 694 131 (318) 10,161
- ----------------------------------------------------------------------------------------------------------------------------------
Total Cellular Telephone 448,281 118,064 140,549 7,341 (350) 699,203
- ----------------------------------------------------------------------------------------------------------------------------------
Radio Paging
Pagers 28,918 410 16,437 12,476 -- 33,289
Transmitting equipment and other 19,342 200 3,905 486 -- 22,961
Deferred charges 7,978 3,813 91 -- (274) 11,608
- ----------------------------------------------------------------------------------------------------------------------------------
Total Radio Paging 56,238 4,423 20,433 12,962 (274) 67,858
- ----------------------------------------------------------------------------------------------------------------------------------
Other $ 35,695 $ -- $ 20,797 $ 1,499 $ (578) $ 54,415
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPRECIATION
Depreciation is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, were 7.2% for telephone, 10.5% for cellular telephone, 17.2% for radio
paging, and 12.8% for other property.
41
<PAGE>
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED DECEMBER 31, 1991
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN C
BALANCE AT COLUMN D
COLUMN B DATE OF COLUMN F
ACQUISITION COLUMN C LESS COLUMN E
COLUMN A BALANCE AT OF COMPANIES RETIREMENTS BALANCE AT
BEGINNING ACQUIRED ADDITIONS OR SALES OTHER END
CLASSIFICATION OF PROPERTY OF PERIOD IN 1991 AT COST AT COST CHANGES OF PERIOD
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Telephone Plant In Service and Under Construction:
Organization $ 103 $ 8 $ -- $ -- $ -- $ 111
Land 2,234 83 46 9 70 2,424
Buildings 29,659 1,651 2,230 115 (70) 33,355
Central office equipment 165,335 11,160 25,604 12,349 -- 189,750
Station apparatus 2,282 165 256 204 -- 2,499
Station connections 7,383 842 -- -- -- 8,225
Pole lines 18,144 987 1,211 685 -- 19,657
Aerial cable 80,053 4,740 5,540 1,331 -- 89,002
Buried cable 206,272 12,651 18,285 2,792 -- 234,416
Underground conduit 3,870 259 398 -- -- 4,527
Furniture and office equipment 30,671 841 5,465 429 -- 36,548
Vehicles and other work equipment 19,076 1,412 3,072 1,068 -- 22,492
Plant under construction 19,537 1,087 5,203 -- -- 25,827
Plant acquisition adjustment 1,075 -- -- -- 1,262 2,337
Early retirements 2,112 -- (720) 11 (345) 1,036
Nonregulated investment 10,785 633 1,881 382 -- 12,917
- ----------------------------------------------------------------------------------------------------------------------------------
Total Telephone Property 598,591 36,519 68,471 19,375 917 685,123
- ----------------------------------------------------------------------------------------------------------------------------------
Cellular Telephone
Switching and cell site equipment 43,031 14,250 47,403 79 163 104,768
Other 10,301 1,953 11,319 725 (163) 22,685
License costs 91,697 198,182 22,280 -- -- 312,159
Deferred start-up costs 6,769 1,699 2,364 -- (2,163) 8,669
- ----------------------------------------------------------------------------------------------------------------------------------
Total Cellular Telephone 151,798 216,084 83,366 804 (2,163) 448,281
- ----------------------------------------------------------------------------------------------------------------------------------
Radio Paging
Pagers 26,779 -- 10,004 7,865 -- 28,918
Transmitting equipment and other 16,141 -- 5,782 2,581 -- 19,342
Deferred charges 7,094 -- 884 -- -- 7,978
- ----------------------------------------------------------------------------------------------------------------------------------
Total Radio Paging 50,014 -- 16,670 10,446 -- 56,238
- ----------------------------------------------------------------------------------------------------------------------------------
Other $ 30,805 $ 963 $ 5,659 $ 1,760 $ 28 $ 35,695
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPRECIATION
Depreciation is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, were 6.7% for telephone, 10.4% for cellular telephone, 17.1% for radio
paging, and 10.1% for other property.
42
<PAGE>
SCHEDULE VI--RESERVE FOR DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN E
COLUMN C OTHER CHARGES
BALANCE AT COLUMN C(1) ----------------------------
COLUMN B DATE OF ADDITIONS PROVISIONS SALVAGE COLUMN F
BALANCE AT ACQUISITION OF CHARGED TO CHARGED TO LESS BALANCE AT
COLUMN A BEGINNING OF COMPANIES COSTS AND COLUMN D CLEARING REMOVAL END
DESCRIPTION PERIOD ACQUIRED EXPENSES RETIREMENTS ACCOUNTS COST OTHER OF PERIOD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Telephone
Organization $ 313 $ -- $ 221 $ -- $ -- $ -- $ -- $ 534
Unclassified 785 -- -- -- -- -- (785) --
Buildings 11,679 1,186 1,283 256 -- 63 (135) 13,820
Central office equipment 81,486 4,502 22,611 21,480 -- 402 571 88,092
Station apparatus 1,710 298 357 76 -- (8 ) 1 2,282
Station connections 2,696 131 23 1,751 -- -- -- 1,099
Pole lines 9,736 470 1,354 268 -- (57 ) 24 11,259
Aerial cable 40,618 798 5,697 1,486 -- (393 ) 152 45,386
Buried cable 86,640 7,031 13,762 1,981 -- (28 ) 2 105,426
Underground conduit 1,496 348 200 (3 ) -- -- -- 2,047
Furniture and office equipment 20,190 527 6,376 750 73 (3 ) (73) 26,340
Vehicles and other work
equipment 13,122 1,129 2,517 2,117 104 451 25 15,231
Plant acquisition adjustment 427 -- 226 -- -- -- -- 653
Nonregulated investment 9,283 26 1,697 1,041 -- 192 (25) 10,132
- ------------------------------------------------------------------------------------------------------------------------------------
Total Telephone Property 280,181 16,446 56,324 31,203 177 619 (243) 322,301
- ------------------------------------------------------------------------------------------------------------------------------------
Cellular Telephone
Switching and cell site
equipment 26,667 3,582 20,338 255 -- -- (3,014) 47,318
Other 8,066 219 5,327 1,065 -- -- (161) 12,386
License costs 25,001 148 17,281 -- -- -- 483 42,913
Deferred start-up
costs 4,882 311 1,809 838 -- -- (145) 6,019
- ------------------------------------------------------------------------------------------------------------------------------------
Total Cellular Telephone 64,616 4,260 44,755 2,158 -- -- (2,837) 108,636
- ------------------------------------------------------------------------------------------------------------------------------------
Radio Paging
Pagers 10,808 -- 7,174 7,725 -- -- -- 10,257
Transmitting equipment and other 10,810 -- 4,008 826 -- -- -- 13,992
Deferred charges 4,602 -- 2,210 -- -- -- 276 7,088
- ------------------------------------------------------------------------------------------------------------------------------------
Total Radio Paging 26,220 -- 13,392 8,551 -- -- 276 31,337
- ------------------------------------------------------------------------------------------------------------------------------------
Other $ 21,442 $ -- $ 7,347 $ 3,963 $ -- $ -- $ -- $ 24,826
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
Note: (1) Depreciation and amortization as reflected in business segment
information, included in Management's Discussion and Analysis (Results
of Operations):
</TABLE>
<TABLE>
<S> <C>
Telephone:
Depreciation $ 55,856
Amortization 468
---------
included above 56,324
Depreciation not included above 168
Amortization of excess cost and other 3,070
---------
As shown in business segment information $ 59,562
---------
---------
Cellular:
Depreciation $ 25,665
Amortization of licenses and deferred start-up
costs 19,090
---------
included above 44,755
Amortization of other deferred costs 272
---------
As shown in business segment information $ 45,027
---------
---------
Paging:
Depreciation $ 11,182
Amortization 2,210
---------
As shown in business segment information $ 13,392
---------
---------
</TABLE>
The depreciation charged to costs and expenses for "Other" is included in "Other
income, net" in the Consolidated Statements of Income.
43
<PAGE>
SCHEDULE VI--RESERVE FOR DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1992
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN E
COLUMN C COLUMN OTHER CHARGES
BALANCE AT C(1) ----------------------------
COLUMN B DATE OF ADDITIONS PROVISIONS SALVAGE COLUMN F
BALANCE AT ACQUISITION OF CHARGED TO CHARGED TO LESS BALANCE AT
COLUMN A BEGINNING OF COMPANIES COSTS AND COLUMN D CLEARING REMOVAL END
DESCRIPTION PERIOD ACQUIRED EXPENSES RETIREMENTS ACCOUNTS COST OTHER OF PERIOD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Telephone
Organization $ -- $ 1 $ 312 $ -- $ -- $ -- $ -- $ 313
Unclassified 814 -- -- -- -- -- (29) 785
Buildings 10,787 250 1,101 203 -- (185 ) (71) 11,679
Central office equipment 69,062 1,363 18,270 8,202 -- 382 611 81,486
Station apparatus 2,087 27 288 152 -- (74 ) (466) 1,710
Station connections 7,721 150 35 5,020 -- 1 (191) 2,696
Pole lines 9,461 18 1,307 982 -- (45 ) (23) 9,736
Aerial cable 37,754 135 5,458 2,273 -- (443 ) (13) 40,618
Buried cable 77,248 1,556 11,947 3,431 -- (86 ) (594) 86,640
Underground conduit 1,323 23 160 4 -- 2 (8) 1,496
Furniture and office equipment 14,298 126 5,900 524 124 131 135 20,190
Vehicles and other work
equipment 11,919 347 2,375 1,937 97 304 17 13,122
Plant acquisition adjustment 69 -- 358 -- -- -- -- 427
Nonregulated investment 8,286 332 1,773 1,888 -- 149 631 9,283
- -----------------------------------------------------------------------------------------------------------------------------------
Total Telephone Property 250,829 4,328 49,284 24,616 221 136 (1) 280,181
- -----------------------------------------------------------------------------------------------------------------------------------
Cellular Telephone
Switching and cell site
equipment 13,563 1,617 12,577 624 -- -- (466) 26,667
Other 4,585 167 4,029 457 -- -- (258) 8,066
License costs 14,861 -- 10,868 738 -- -- 10 25,001
Deferred start-up costs 3,220 144 1,959 124 -- -- (317) 4,882
- -----------------------------------------------------------------------------------------------------------------------------------
Total Cellular Telephone 36,229 1,928 29,433 1,943 -- -- (1,031) 64,616
- -----------------------------------------------------------------------------------------------------------------------------------
Radio Paging
Pagers 11,196 -- 6,009 6,397 -- -- -- 10,808
Transmitting equipment and other 7,893 -- 3,326 445 -- -- 36 10,810
Deferred charges 3,798 -- 1,077 -- -- -- (273) 4,602
- -----------------------------------------------------------------------------------------------------------------------------------
Total Radio Paging 22,887 -- 10,412 6,842 -- -- (237) 26,220
- -----------------------------------------------------------------------------------------------------------------------------------
Other $ 16,950 $ -- $ 5,324 $ 1,199 $ -- $ -- $ 367 $ 21,442
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
Note: (1) Depreciation and amortization as reflected in business segment
information, included in Management's Discussion and Analysis (Results
of Operations):
</TABLE>
<TABLE>
<S> <C>
Telephone:
Depreciation $ 48,653
Amortization 631
---------
included above 49,284
Depreciation not included above 177
Amortization of excess cost and other 2,485
---------
As shown in business segment information $ 51,946
---------
---------
Cellular:
Depreciation $ 16,606
Amortization of licenses and deferred start-up costs 12,827
---------
included above 29,433
Amortization of other deferred costs 206
---------
As shown in business segment information $ 29,639
---------
---------
Paging:
Depreciation $ 9,335
Amortization 1,077
---------
As shown in business segment information $ 10,412
---------
---------
</TABLE>
The depreciation charged to costs and expenses for "Other" is included in "Other
income, net" in the Consolidated Statements of Income.
44
<PAGE>
SCHEDULE VI--RESERVE FOR DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1991
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN E
COLUMN C COLUMN OTHER CHARGES
BALANCE AT C(1) ----------------------------
COLUMN B DATE OF ADDITIONS PROVISIONS SALVAGE COLUMN F
BALANCE AT ACQUISITION OF CHARGED TO CHARGED TO LESS BALANCE AT
COLUMN A BEGINNING OF COMPANIES COSTS AND COLUMN D CLEARING REMOVAL END
DESCRIPTION PERIOD ACQUIRED EXPENSES RETIREMENTS ACCOUNTS COST OTHER OF PERIOD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Telephone
Unclassified $ 2 $ 785 $ 27 $ -- $ -- $ -- $ -- $ 814
Buildings 9,255 612 1,005 115 3 45 (18) 10,787
Central office equipment 63,356 4,373 13,489 12,338 3 445 (266) 69,062
Station apparatus 1,538 530 222 204 -- 5 (4) 2,087
Station connections 7,069 291 273 -- -- -- 88 7,721
Pole lines 8,283 508 1,300 686 -- (98 ) 154 9,461
Aerial cable 31,625 1,945 5,532 1,336 -- (331 ) 319 37,754
Buried cable 65,731 2,678 10,538 2,792 -- 64 1,029 77,248
Underground conduit 1,161 66 103 -- -- (1 ) (6) 1,323
Furniture and office equipment 8,919 640 4,999 424 160 8 (4) 14,298
Vehicles and other work
equipment 9,947 833 2,069 1,081 42 214 (105) 11,919
Plant acquisition adjustment (58 ) -- -- -- -- -- 127 69
Nonregulated investment 6,981 428 1,263 394 -- 68 (60) 8,286
- -----------------------------------------------------------------------------------------------------------------------------------
Total Telephone Property 213,809 13,689 40,820 19,370 208 419 1,254 250,829
- -----------------------------------------------------------------------------------------------------------------------------------
Cellular Telephone
Switching and cell site
equipment 6,744 885 6,669 (1 ) -- -- (736) 13,563
Other 2,544 278 2,146 346 -- -- (37) 4,585
License costs 5,470 478 8,949 -- -- -- (36) 14,861
Deferred start-up costs 3,869 149 1,366 -- -- -- (2,164) 3,220
- -----------------------------------------------------------------------------------------------------------------------------------
Total Cellular Telephone 18,627 1,790 19,130 345 -- -- (2,973) 36,229
- -----------------------------------------------------------------------------------------------------------------------------------
Radio Paging
Pagers 9,997 -- 5,484 4,300 -- -- 15 11,196
Transmitting equipment and other 6,593 -- 2,702 1,410 -- -- 8 7,893
Deferred charges 2,945 -- 861 -- -- -- (8) 3,798
- -----------------------------------------------------------------------------------------------------------------------------------
Total Radio Paging 19,535 -- 9,047 5,710 -- -- 15 22,887
- -----------------------------------------------------------------------------------------------------------------------------------
Other $ 14,937 $ 189 $ 3,392 $ 1,598 $ -- $ -- $ 30 $ 16,950
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
Note: (1) Depreciation and amortization as reflected in business segment
information, included in Management's Discussion and Analysis (Results
of Operations):
</TABLE>
<TABLE>
<S> <C>
Telephone:
Depreciation $ 40,734
Amortization 86
---------
included above 40,820
Depreciation not included above 312
Amortization of excess cost and other 2,293
---------
As shown in business segment information $ 43,425
---------
---------
Cellular:
Depreciation $ 8,814
Amortization of licenses and deferred start-up costs 10,316
---------
included above 19,130
Amortization of other deferred costs 139
---------
As shown in business segment information $ 19,269
---------
---------
Paging:
Depreciation $ 8,186
Amortization 861
---------
As shown in business segment information $ 9,047
---------
---------
</TABLE>
The depreciation charged to costs and expenses for "Other" is included in "Other
income, net" in the Consolidated Statements of Income.
45
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN B COLUMN C(1) COLUMN C(2) COLUMN E
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
COLUMN A BEGINNING OF COSTS AND OTHER COLUMN D END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1993
Deducted from deferred state tax asset:
For unrealized net operating losses (1) $ (6,452) $ -- $ (2,252) $ -- $ (8,704)
Deducted from accounts receivable:
For doubtful accounts (1,608) (5,837) -- 5,352 (2,093)
Deducted from marketable equity securities:
For unrealized loss -- -- (626) -- (626)
FOR THE YEAR ENDED DECEMBER 31, 1992
Deducted from accounts receivable:
For doubtful accounts (1,200) (4,457) -- 4,049 (1,608)
FOR THE YEAR ENDED DECEMBER 31, 1991
Deducted from accounts receivable:
For doubtful accounts $ (733) $ (3,335) $ -- $ 2,868 $ (1,200)
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
Note: (1) The beginning balance represents the implementation of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
on January 1, 1993.
</TABLE>
46
<PAGE>
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN B
COLUMN A CHARGED TO COSTS AND EXPENSES
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Maintenance and repairs $ 58,348 $ 46,883 $ 42,523
Taxes, other than payroll and income taxes
Gross receipts 4,432 3,370 2,999
Property 9,855 8,307 7,093
Advertising 13,645 10,848 6,835
</TABLE>
47
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED FINANCIAL STATEMENTS
The following financial statements are the combined financial statements of
the cellular system partnerships listed below which are accounted for by the
Company following the equity method. The combined financial statements were
compiled from financial statements and other information obtained by the Company
as a minority limited partner of the cellular limited partnerships listed below.
The cellular system partnerships included in the combined financial statements,
the periods each partnership is included, and the Company's ownership percentage
of each cellular system partnership at December 31, 1993 are set forth in the
following table.
<TABLE>
<CAPTION>
THE
PERIODS COMPANY'S
INCLUDED LIMITED
IN COMBINED PARTNERSHIP
CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST
- ------------------------------------------------------------------------------------------------------ ------------ -------------
<S> <C> <C>
Los Angeles SMSA Limited Partnership.................................................................. 1991-93 5.5%
Nashville/Clarksville MSA Limited Partnership......................................................... 1991-93 49.0%
Baton Rouge MSA Limited Partnership................................................................... 1991-93 52.0%
</TABLE>
48
<PAGE>
COMPILATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
TELEPHONE AND DATA SYSTEMS, INC.:
The accompanying combined balance sheets of the Los Angeles SMSA Limited
Partnership, the Nashville/Clarksville MSA Limited Partnership and the Baton
Rouge MSA Limited Partnership as of December 31, 1993 and 1992 and the related
combined statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1993, have been
prepared from the separate financial statements, which are not presented
separately herein, of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships, as described in Note 1. We have reviewed for
compilation only the accompanying combined financial statements, and, in our
opinion, those statements have been properly compiled from the amounts and notes
of the underlying separate financial statements of the Los Angeles SMSA,
Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, on the basis
described in Note 1.
The statements for the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships were audited by other auditors as set forth in
their reports included on pages 50 through 54. The report of the other auditors
of the Los Angeles SMSA Limited Partnership contains explanatory paragraphs with
respect to the uncertainties discussed in the fourth and fifth paragraphs of
Note 7. We have not been engaged to audit either the separate financial
statements of the aforementioned limited partnerships or the related combined
financial statements in accordance with generally accepted auditing standards
and to render an opinion as to the fair presentation of such financial
statements in accordance with generally accepted accounting principles.
As discussed in "Change in Accounting Principle" in Note 2, the method of
accounting for cellular sales commissions was changed effective January 1, 1991,
for the Nashville/Clarksville MSA Limited Partnership and the Baton Rouge MSA
Limited Partnership.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
February 11, 1994
49
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
LOS ANGELES SMSA LIMITED PARTNERSHIP:
We have audited the balance sheets of Los Angeles SMSA Limited Partnership
as of December 31, 1993 and 1992, and the related statements of operations,
partners' capital and cash flows for each of the three years in the period ended
December 31, 1993; such financial statements are not included separately herein.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Los Angeles SMSA Limited
Partnership as of December 31, 1993 and 1992, and results of its operations and
its cash flows for each of the three years in the period ended December 31, 1993
in conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements, two cellular agents
filed complaints against the Partnership. 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, a class action suit was filed against
the Partnership alleging violations of state and federal antitrust laws. The
outcome of this matter is uncertain and, accordingly, no accrual for this matter
has been made in the financial statements.
COOPERS & LYBRAND
Newport Beach, California
February 4, 1994
50
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1993, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1993, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1994
51
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1992, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1992, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1993
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1991, and the related statements of operations,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/ Clarksville MSA
Limited Partnership as of December 31, 1991, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Partnership changed
its method of accounting for commissions in 1991.
COOPERS & LYBRAND
Atlanta, Georgia
February 10, 1992
52
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1993, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1993, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1994
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1992, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1992, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1993
53
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1991, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1991, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Partnership changed
its method of accounting for commissions in 1991.
COOPERS & LYBRAND
Atlanta, Georgia
February 10, 1992
54
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................................... $ 506,028 $ 400,738 $ 338,494
Expenses
Selling, general and administrative...................................... 287,299 235,038 169,912
Depreciation and amortization............................................ 57,357 46,740 40,687
----------- ----------- -----------
Total expenses........................................................... 344,656 281,778 210,599
----------- ----------- -----------
Operating income........................................................... 161,372 118,960 127,895
Other income............................................................... 272 477 81
----------- ----------- -----------
Net income before cumulative effect of a change in accounting principle.... 161,644 119,437 127,976
Cumulative effect of a change in accounting principle (Note 2)............. -- -- (3,178)
----------- ----------- -----------
Net Income................................................................. $ 161,644 $ 119,437 $ 124,798
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
55
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Assets
Cash.................................................................................. $ 27 $ 26
Accounts receivable--customers, net................................................... 81,656 58,141
Accounts receivable--affiliates....................................................... 29,981 16,074
Notes receivable--affiliates.......................................................... 3,756 3,751
Other current assets.................................................................. 5,689 7,823
----------- -----------
121,109 85,815
Property, Plant and Equipment, net...................................................... 304,926 277,228
Other................................................................................... 1,631 4,846
----------- -----------
Total Assets............................................................................ $ 427,666 $ 367,889
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Liabilities
Accounts payable--other............................................................... $ 38,776 $ 33,433
Accounts payable--affiliates.......................................................... 1,039 1,061
Customer deposits..................................................................... 2,996 2,499
Other current liabilities............................................................. 22,101 18,721
----------- -----------
64,912 55,714
----------- -----------
Deferred Rent........................................................................... 4,571 4,015
Capital Lease Obligation................................................................ 713 592
Long-Term Debt.......................................................................... -- 281
Partners' Capital....................................................................... 357,470 307,287
----------- -----------
Total Liabilities and Partners' Capital................................................. $ 427,666 $ 367,889
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
56
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------
1993 1992 1991
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................. $ 161,644 $ 119,437 $ 124,798
Add (Deduct) adjustments to reconcile net income to net cash provided
by operating activities
Cumulative effect of a change in accounting principle................ -- -- 3,178
Depreciation and amortization........................................ 57,357 46,740 40,687
Deferred revenue and other credits................................... 497 (3) (4)
Loss on asset dispositions........................................... 3,838 4,294 397
Change in prepaid expenses........................................... (22) 4 14
Change in accounts receivable........................................ (37,422) (3,417) (28,599)
Change in accounts payable and accrued expenses...................... 6,097 17,307 1,997
Change in other assets and liabilities............................... 4,942 3,967 834
------------ ------------ -----------
196,931 188,329 143,302
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable.............................................. -- (2,305) 2,114
Change in notes receivable........................................... (5) (3,751) 556
Principal payments on capital lease obligations...................... (612) (442) --
Capital contribution................................................. -- 2,474 5,802
Capital distribution................................................. (111,461) (114,876) (71,032)
------------ ------------ -----------
(112,078) (118,900) (62,560)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements....... (86,011) (68,595) (76,297)
Decreases (increases) in other assets................................ 1,335 (856) (4,180)
Change in deferred charges........................................... (202) (36) (266)
Proceeds from sale of assets......................................... 26 61 --
------------ ------------ -----------
(84,852) (69,426) (80,743)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH.......................................... 1 3 (1)
CASH
Beginning of period.................................................. 26 23 24
------------ ------------ -----------
End of period........................................................ $ 27 $ 26 $ 23
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
57
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<S> <C>
(DOLLARS IN THOUSANDS)
Balance at January 1, 1991...................................................... $ 240,684
Contributions................................................................. 5,802
Distributions................................................................. (71,032)
Net Income for the year ended December 31, 1991............................... 124,798
---------
Balance at December 31, 1991.................................................... 300,252
Contributions................................................................. 2,474
Distributions................................................................. (114,876)
Net Income for the year ended December 31, 1992............................... 119,437
---------
Balance at December 31, 1992.................................................... 307,287
Distributions................................................................. (111,461)
Net Income for the year ended December 31, 1993............................... 161,644
---------
Balance at December 31, 1993.................................................... $ 357,470
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
58
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. BASIS OF COMBINATION:
The combined financial statements and notes thereto were compiled from the
individual financial statements of cellular limited partnerships listed below in
which United States Cellular Corporation (AMEX symbol "USM") has a
noncontrolling ownership interest and which it accounts for using the equity
method. The cellular partnerships, the period each partnership is included in
the combined financial statements and USM's ownership interest in each
partnership are set forth in the table below. The combined financial statements
and notes thereto present 100% of each partnership whereas USM's ownership
interest is shown in the table.
<TABLE>
<CAPTION>
PERIOD INCLUDED LIMITED
IN COMBINED PARTNERSHIP
STATEMENTS INTEREST
--------------- -------------
<S> <C> <C>
Los Angeles SMSA Limited Partnership................................................................ 1991-93 5.5%
Nashville/Clarksville MSA Limited Partnership....................................................... 1991-93 49.0%
Baton Rouge MSA Limited Partnership................................................................. 1991-93 52.0%
</TABLE>
Profits, losses and distributable cash are allocated to the partners based
upon respective partnership interests. Distributions are made quarterly at the
discretion of the General Partner for one of the Partnerships.
Of the partnerships included in the combined financial statements, the Los
Angeles SMSA Limited Partnership is the most significant, accounting for
approximately 89% of the combined total assets at December 31, 1993, and
substantially all of the combined net income for the year then ended.
USM's investment in and advances to Los Angeles SMSA Limited Partnership
totalled $15,212,000 as of December 31, 1993, of which $17,398,000 represents
its proportionate share of net assets of the Partnership. USM's investment in
and advances to the Nashville/Clarksville MSA Limited Partnership totalled
$14,300,000 as of December 31, 1993, which represents its proportionate share of
net assets. USM's investment in and advances to the Baton Rouge MSA Limited
Partnership totalled $8,935,000 as of December 31, 1993, $6,207,000 of which
represents its proportionate share of net assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR COMBINED ENTITIES:
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the following estimated lives:
<TABLE>
<S> <C>
Buildings.............................................. 10-15 years
Equipment.............................................. 3-10 years
Furniture and Fixtures................................. 5-10 years
Leasehold Improvements................................. 10 years
</TABLE>
59
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land.................................................................................... $ 1,819 $ 1,510
Buildings and Leasehold Improvements.................................................... 79,704 69,150
Equipment............................................................................... 355,376 293,176
Furniture and Fixtures.................................................................. 19,734 12,634
Under Construction...................................................................... 32,052 31,677
----------- -----------
488,685 408,147
Less Accumulated Depreciation........................................................... 183,759 130,919
----------- -----------
$ 304,926 $ 277,228
----------- -----------
----------- -----------
</TABLE>
Included in buildings are costs relating to the acquisition of cell site
leases; such as legal, consulting, and title fees. Lease acquisition costs are
capitalized when incurred and amortized over the period of the lease. Costs
related to unsuccessful negotiations are expensed in the period the negotiations
are terminated.
Gains and losses on disposals are included in income at amounts equal to the
difference between net book value and proceeds received upon disposal.
During 1993 and 1992, one of the Partnerships recorded capital lease
additions of $827,000 and $513,000, respectively.
Commitments for future equipment acquisitions amounted to $22,734,000 at
December 31, 1993.
On January 10, 1994, one of the Partnerships entered into an agreement with
its major supplier to purchase $77 million in equipment.
OTHER ASSETS
Other assets consist primarily of the costs of acquiring the right to serve
certain customers previously served by resellers and are being amortized over
three years using the straight-line method. Accumulated amortization was
$4,806,000 and $2,797,000 at December 31, 1993 and 1992, respectively.
CHANGE IN ACCOUNTING PRINCIPLE
In the third quarter of 1991, the General Partner of two of the Partnerships
changed its policy of capitalizing certain third party sales commissions and
amortizing them over the average customer life. The General Partner's parent
effected this change to standardize the accounting treatment of sales
commissions throughout its consolidated cellular operations. These amounts will
be expensed in the period in which they are incurred by the agent. In 1991, this
change in accounting principle was retroactively applied as of January 1, 1991.
Had the change not been made, 1991 net income before the cumulative effect of a
change in accounting principle would have increased $1,838,000.
REVENUE RECOGNITION
Revenues from operations primarily consist of charges to customers for
monthly access charges, cellular airtime usage, and roamer charges. Revenues are
recognized as services are rendered. Unbilled revenues, resulting from cellular
service provided from the billing cycle date to the end of each month and from
other cellular carriers' customers using the partnership's cellular systems for
the last half of each month, are estimated and recorded as receivables. Unearned
monthly access charges relating to the periods after month-end are deferred and
netted against accounts receivable.
60
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
No provisions have been made for federal or state income taxes since such
taxes, if any, are the responsibility of the individual partners.
3. LEASE COMMITMENTS:
Future minimum rental payments required under operating leases for real
estate that have initial or remaining noncancellable lease terms in excess of
one year as of December 31, 1993, are as follows:
<TABLE>
<S> <C>
(DOLLARS IN THOUSANDS)
1994............................................................. $ 11,445
1995............................................................. 10,890
1996............................................................. 10,643
1997............................................................. 9,983
1998............................................................. 9,696
Thereafter....................................................... 51,910
---------
$ 104,567
---------
---------
</TABLE>
The initial lease terms generally range from 5 to 25 years with the majority
of them having initial terms of 10 years and providing for one renewal option of
5 years and for rental escalation. Included in selling, general and
administrative expense are rental costs of $7,897,000, $5,996,000 and $4,463,000
for the years ended December 31, 1993, 1992 and 1991, respectively. One of the
Partnerships leases office facilities under a ten-year lease agreement which
provides for free rent incentives for six months and rent escalation over the
ten-year period. The Partnership recognizes rent expense on a straight-line
basis and recorded the related deferred rent as a noncurrent liability to be
amortized as an adjustment to rental costs over the life of the lease.
4. CAPITAL LEASE OBLIGATION:
One of the Partnerships leases equipment under capital lease agreements. At
December 31, 1993 and 1992, respectively, the amount of such equipment included
in property, plant and equipment is $3,324,000 and $2,638,000 less accumulated
amortization of $1,914,000 and $1,451,000. Future minimum annual lease payments
on noncancellable capital leases are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1994............................................................... $ 768
1995............................................................... 526
1996............................................................... 216
1997............................................................... 20
---------
Total future minimum lease payments................................ 1,530
Less amounts representing interest............................... 129
---------
Present value of net future minimum lease payments................. 1,401
Less current portion............................................. 688
---------
Lease obligation, noncurrent....................................... $ 713
---------
---------
</TABLE>
5. RELATED PARTY TRANSACTIONS:
Certain affiliates of these cellular limited partnerships provide services
for the system operations, legal, financial, management and administration of
these entities. These affiliates are reimbursed for both direct and allocated
costs (totaling $57.1 million in 1993 $52.2 million in 1992 and $50.0 million in
1991) related to providing these services. In addition, certain affiliates have
established a credit facility with certain partnerships to provide working
capital to the partnership. One of the partnerships participates in a
centralized cash management arrangement with its general partner. At December
31, 1993
61
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
and 1992, the interest-bearing balance amounted to $29,981,000 and $16,074,000,
respectively. Effective January 1, 1989, the general partner pays or charges the
Partnership monthly interest, computed using the general partner's average
borrowing rate, on the amounts due to or from the Partnership. Interest earned
in 1993, 1992 and 1991 was $1,294,000, $1,396,000 and $675,000, respectively.
6. REGULATORY INVESTIGATIONS:
The California Public Utilities Commission (CPUC) has issued an Order
Instituting Investigation of the regulation of cellular radiotelephone utilities
operating in the State of California under Order Number I.88-11-040. The intent
of the investigation was to determine the appropriate regulatory objectives for
the cellular industry, and whether current regulations applicable to the
cellular industry and its operators meet those objectives or should be modified.
On October 6, 1992, the CPUC adopted an Order which, among other things,
imposes an accounting methodology on cellular utilities to separate wholesale
and retail costs, permits resellers to operate a reseller switch interconnected
to the cellular carrier's facilities, and requires the unbundling of certain
wholesale rates to the resellers. On May 19, 1993, the CPUC granted limited
rehearing of the decision. In addition, the CPUC rescinded its order to modify
the method for allocating costs between wholesale and retail operations.
On December 17, 1993, the CPUC adopted a new Order Instituting Investigation
into the regulation of mobile telephone service and wireless communications,
Order Number I.93-12-007. The investigation proposes a regulatory program which
would encompass all forms of mobile telephone service. Currently, one of the
Partnerships affected is unable to quantify the precise impact of these Orders
on its future operations, but that impact may be material to the Partnership
under certain circumstances.
In January 1992, the CPUC commenced a separate investigation of all cellular
companies operating in the State 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.
One of the Partnerships affected has prepared and filed the information
requested by the CPUC. The CPUC will review the information provided by the
Partnership and, if violations of G.O. 159 are found, it may assess penalties
against the Partnership. The outcome of this investigation is uncertain and
accordingly, no accrual for this matter has been made.
7. CONTINGENCIES AND COMMITMENTS:
On June 28, 1993, an applicant for an unserved area license in the Los
Angeles market filed an informal objection with the FCC to one of the
Partnerships' System Information Update map. The applicant claims the
Partnership was not legally authorized to provide service in parts of its
described service area. The applicant requests that the FCC correct the
Partnership's service area to eliminate such areas and suggests the FCC impose
"such sanctions as it deems appropriate." The Partnership filed a response with
the FCC in which it reported that, in its review of the applicant's allegations,
it found certain errors that were made in its filings but disputed any of these
were intentional. The FCC could assess penalties against the partnership for
nonconformance with its license. The outcome of this matter remains uncertain
and, accordingly, the Partnership has not recorded an accrual. The Partnership
intends to defend its position vigorously.
The Partnership filed for its 10-year license renewal for the Los Angeles
market on August 30, 1993. The Partnership is currently operating with FCC
authority while the renewal application is pending resolution of the FCC's
decision on claims mentioned above. The Partnership fully expects that its
license will be renewed.
62
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Two agents of a competing carrier have named one of the Partnerships in
several complaints against the carrier. The general allegations include
violations of California Unfair Practices Act and price fixing. The ultimate
outcome of both these actions is uncertain at this time. Accordingly, no accrual
for these contingencies has been made. The Partnership intends to defend its
position vigorously.
On November 24, 1993, a class action suit was filed against one of the
Partnerships and another cellular carrier alleging conspiracy to fix the price
of cellular service in violation of state and federal antitrust laws. The
plaintiffs are seeking substantial monetary damages and injunctive relief in
excess of $100 million. The outcome of this matter is uncertain and,
accordingly, the Partnership has not recorded an accrual. The Partnership
intends to defend its position vigorously.
One of the Partnerships is a party to various other lawsuits arising in the
ordinary course of business. In the opinion of management, based on a review of
such litigation with legal counsel, any losses resulting from these actions are
not expected to materially impact the financial condition of the Partnership.
Two of the Partnerships provide cellular service and sell cellular
telephones to diversified groups of consumers within concentrated geographical
areas. The general partner performs credit evaluations of the Partnerships'
customers and generally does not require collateral. Receivables are generally
due within 30 days. Credit losses related to customers have been within
management's expectations.
One of the Partnerships purchases substantially all of its equipment from
one supplier.
The General Partner of two of the Partnerships entered into agreements with
an equipment vendor on behalf of the Partnerships to replace the Partnerships'
cellular equipment with new cellular technology which will support both analog
and digital voice transmissions.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
TELEPHONE AND DATA SYSTEMS, INC.
By: /S/ LEROY T. CARLSON
------------------------------------------
LeRoy T. Carlson,
CHAIRMAN
By: /S/ LEROY T. CARLSON, JR.
------------------------------------------
LeRoy T. Carlson, Jr.,
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /S/ MURRAY L. SWANSON
------------------------------------------
Murray L. Swanson
EXECUTIVE VICE PRESIDENT-FINANCE
(PRINCIPAL FINANCIAL OFFICER)
By: /S/ GREGORY J. WILKINSON
------------------------------------------
Gregory J. Wilkinson,
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Dated March 28, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------------------------- ----------- ---------------------
<S> <C> <C>
/S/ LEROY T. CARLSON DIRECTOR March 28, 1994
-----------------------------------------------
LeRoy T. Carlson
/S/ LEROY T. CARLSON, JR. DIRECTOR March 28, 1994
-----------------------------------------------
LeRoy T. Carlson, Jr.
/S/ MURRAY L. SWANSON DIRECTOR March 28, 1994
-----------------------------------------------
Murray L. Swanson
/S/ RUDOLPH E. HORNACEK DIRECTOR March 28, 1994
-----------------------------------------------
Rudolph E. Hornacek
/S/ JAMES BARR III DIRECTOR March 28, 1994
-----------------------------------------------
James Barr III
/S/ LESTER O. JOHNSON DIRECTOR March 28, 1994
-----------------------------------------------
Lester O. Johnson
/S/ DONALD C. NEBERGALL DIRECTOR March 28, 1994
-----------------------------------------------
Donald C. Nebergall
/S/ HERBERT S. WANDER DIRECTOR March 28, 1994
-----------------------------------------------
Herbert S. Wander
/S/ WALTER C. D. CARLSON DIRECTOR March 28, 1994
-----------------------------------------------
Walter C. D. Carlson
/S/ DONALD R. BROWN DIRECTOR March 28, 1994
-----------------------------------------------
Donald R. Brown
/S/ ROBERT J. COLLINS DIRECTOR March 28, 1994
-----------------------------------------------
Robert J. Collins
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
3.1(a) Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's
Amendment No. 1 on Form 8 dated February 5, 1992 to the Company's Report on Form 8-A.
3.1(b) Articles of Amendment to Articles of Incorporation relating to designation of Series RR Preferred Shares, is
hereby incorporated by reference to Exhibit 4.4(b)to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
3.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 1 on Form 8
dated February 5, 1992 to the Company's Report on Form 8-A.
4.1(a) Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's
Amendment No. 1 on Form 8 dated February 5, 1992 to the Company's Report on Form 8-A.
4.1(b) Articles of Amendment to Articles of Incorporation relating to designation of Series RR Preferred Shares, is
hereby incorporated by reference to Exhibit 4.4(b) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
4.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 1 on Form 8
dated February 5, 1992 to the Company's Report on Form 8-A.
4.3 The Indenture and Supplemental Indentures for the Company's Series A, B, C, D, E and F Subordinated Debentures are
not being filed as exhibits because the total authorized subordinated debentures do not exceed 10% of the total
assets of the Company and its Subsidiaries. The Company agrees to furnish a copy of such Indentures and
Supplemental Indentures if so requested by the Commission.
4.4 The Indenture between the Company and Harris Trust and Savings Bank, Trustee, dated February 1, 1991, under which
the Company's Medium-Term Notes are issuable, is hereby incorporated by reference to the Company's Current Report
on Form 8-K filed on February 19, 1991.
9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by reference to an exhibit to
Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-12943.
9.1(b) Amendment dated as of May 9, 1991 to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated
by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is
hereby incorporated by reference to Exhibit 9.1(c) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984 is
hereby incorporated by reference to the Company's Registration Statement on Form S-2, No. 2-92307.
10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981, is hereby
incorporated by reference to an exhibit to the Company's Registration Statement on Form S-7, No. 2-74615.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated as of May 28, 1991, is hereby incorporated by
reference to Exhibit 10.2(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson, is hereby incorporated
by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated as of March 14, 1988, between the
Company and LeRoy T. Carlson, is hereby incorporated by reference to an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988.
10.5 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the
Company and LeRoy T. Carlson, Jr., is hereby incorporated by reference to an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988.
10.6 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company and James
Barr III, is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991.
10.7(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by reference to
Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated March 31, 1988.
10.7(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company.
10.7(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company.
10.8 1985 Incentive Stock Option Plan of the Company, is hereby incorporated by reference to Exhibit A to the Company's
definitive Notice of Annual Meeting and Proxy Statement dated April 24, 1986.
11 Statement regarding computation of per share earnings.
12 Statements regarding computation of ratios.
13 Incorporated portions of 1993 Annual Report to Security Holders.
21 List of Subsidiaries of the Company.
23.1 Consent of independent public accountants.
23.2 Consent of independent accountants.
99.1 Incorporated portions items as expected to be included in the 1994 Proxy Statement.
99.2 Pro Forma Financial Statements.
</TABLE>
<PAGE>
[LOGO]
TELEPHONE AND DATA SYSTEMS, INC.
30 North LaSalle Street
Chicago, Illinois 60602
312/630-1900
<PAGE>
EXHIBIT 10.7(b)
AMENDMENT NO. 1
TO
TELEPHONE AND DATA SYSTEMS, INC.
1988 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
----------------------------------------------------
The Plan is amended as follows to include:
"4(d) Cessation of Employment by Retirement. If a
Participant retires from the Company after having reached
the age of 65, each Option or SAR held by the Participant
shall be exercisable for a period of 90 days after the
effective date of the retirement and only to the extent that
such Option or SAR could have been exercised on such date;
provided, however, that if such Participant shall die within
such 90 day period, each such Option or SAR shall be
exercisable (to the same extent) by the person to whom the
Participant's rights under such Option or SAR shall pass by
will or by the applicable laws of descent and distribution
for a period ending 180 days after the effective date of
such Participants' resignation."
Existing Paragraph 4(d) is amended to become Paragraph 4(d) and
Paragraph 4(e) is amended to become 4(f).
<PAGE>
EXHIBIT 10.7(c)
AMENDMENT NO. 2
TO
TELEPHONE AND DATA SYSTEMS, INC.
1988 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
----------------------------------------------------
Section 6.4 of the Plan is hereby amended by adding thereto:
An acceptable method by which a Participant may pay the
Option Price shall include, but is not limited to,
authorizing the Company to retain from the Common
Shares purchased upon the exercise of an Option that
number of whole Common Shares having an aggregate Fair
Market Value on the date of exercise equal to the
Option Price.
Section 6.6 of the Plan is hereby amended by adding thereto:
A Participant may elect to deliver to the Company
(or authorize the Company to retain from the
Common Shares purchased upon such exercise) whole
Common Shares to satisfy the Company's obligation,
if any, to withhold such taxes; provided,
however, that in the case of a Participant who is
an officer or director of the Company (within the
meaning of Section 16 of the Securities Act of
1934), such election may not be made during the
six-month period beginning on the date that an
Option is granted (except in the case of the death
or disability of the Participant) and must be made
either (i) at least six months prior to the date
on which the amount of such taxes is determined,
or (ii) during the ten business day period
beginning on the third business day following
release of the Company's quarterly or annual
summary of sales and earnings.
<PAGE>
EXHIBIT 11
TELEPHONE AND DATA SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993 1992 1991
- ------------------------------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY EARNINGS
Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ 33,896 $ 38,520 $ 21,113
Dividends on Preferred Shares........................................................... (2,386) (2,237) (1,688)
Minority income adjustment assuming issuance of a subsidiary's issuable securities...... -- (546) --
----------- ----------- -----------
Net income before Extraordinary Item and Cumulative Effect of Accounting Changes
applicable to Common................................................................... 31,510 35,737 19,425
Extraordinary Item...................................................................... -- (769) --
Cumulative Effect of Accounting Changes................................................. -- (6,866) (5,035)
----------- ----------- -----------
Net Income Available to Common.......................................................... $ 31,510 $ 28,102 $ 14,390
----------- ----------- -----------
----------- ----------- -----------
PRIMARY SHARES
Weighted average number of Common and Series A Common Shares Outstanding................ 46,995 38,672 32,432
Additional shares assuming issuance of:
Options and Stock Appreciation Rights................................................. 267 337 328
Convertible Preferred Shares.......................................................... -- 30 276
Common Shares Issuable................................................................ 4 2 --
Public offering shares................................................................ -- 33 --
----------- ----------- -----------
Primary Shares.......................................................................... 47,266 39,074 33,036
----------- ----------- -----------
----------- ----------- -----------
PRIMARY EARNINGS PER COMMON SHARE
Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ .67 $ .91 $ .59
Extraordinary Item...................................................................... -- (.02) --
Cumulative Effect of Accounting Changes................................................. -- (.17) (.15)
----------- ----------- -----------
Net Income.............................................................................. $ .67 $ .72 $ .44
----------- ----------- -----------
----------- ----------- -----------
FULLY DILUTED EARNINGS*
Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ 33,896 $ 38,520 $ 21,113
Dividends on Preferred Shares........................................................... (2,386) (2,054) (1,688)
Minority income adjustment assuming issuance of a subsidiary's issuable securities...... -- (546) --
----------- ----------- -----------
Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes
applicable to Common................................................................... 31,510 35,920 19,425
Extraordinary Item...................................................................... -- (769) --
Cumulative Effect of Accounting Changes................................................. -- (6,866) (5,035)
----------- ----------- -----------
Net Income Available to Common.......................................................... $ 31,510 $ 28,285 $ 14,390
----------- ----------- -----------
----------- ----------- -----------
FULLY DILUTED SHARES
Weighted average number of Common and Series A Common Shares Outstanding................ 46,995 38,672 32,432
Additional shares assuming issuance of:
Options and Stock Appreciation Rights................................................. 293 371 365
Convertible Preferred Shares.......................................................... -- 257 276
Common Shares issuable................................................................ 4 2 --
Public offering shares................................................................ -- 33 --
----------- ----------- -----------
Fully Diluted Shares.................................................................... 47,292 39,335 33,073
----------- ----------- -----------
----------- ----------- -----------
FULLY DILUTED EARNINGS PER COMMON SHARE
Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ .67 $ .91 $ .59
Extraordinary Item...................................................................... -- (.02) --
Cumulative Effect of Accounting Changes................................................. -- (.17) (.15)
----------- ----------- -----------
Net Income.............................................................................. $ .67 $ .72 $ .44
----------- ----------- -----------
----------- ----------- -----------
<FN>
- ----------
* This calculation is submitted in accordance with Securities Act of 1934
Release No. 9083 although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
</TABLE>
<PAGE>
EXHIBIT 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
12 MONTHS ENDED
12/31/93
----------------
<S> <C>
EARNINGS:
Income from Continuing Operations before Income Taxes........................................................ $ 60,393
Add (Deduct):
Minority Share of Losses................................................................................. (4,860)
Earnings on Equity Method................................................................................ (20,015)
Distributions from Minority Subsidiaries................................................................. 11,943
Amortization of Non-Telephone Capitalized Interest....................................................... 42
Minority share of income in majority-owned subsidiaries that have fixed charges.......................... 1,308
--------
48,811
Add fixed charges:
Consolidated interest expense............................................................................ 37,282
Interest Portion (1/3) of Consolidated Rent Expense...................................................... 4,914
Amortization of debt expense and discount on indebtedness................................................ 184
--------
$ 91,191
--------
--------
FIXED CHARGES:
Consolidated interest expense................................................................................ $ 37,282
Interest Portion (1/3) of Consolidated Rent Expense.......................................................... 4,914
Amortization of debt expense and discount on indebtedness.................................................... 184
--------
$ 42,380
--------
--------
RATIO OF EARNINGS TO FIXED CHARGES............................................................................. 2.15
--------
--------
Tax-Effected Redeemable Preferred Dividends.................................................................. $ 2,376
Fixed Charges................................................................................................ 42,380
--------
Fixed Charges and Redeemable Preferred Dividends........................................................... $ 44,756
--------
--------
RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS.......................................... 2.04
--------
--------
Tax-Effected Preferred Dividends............................................................................. $ 4,251
Fixed Charges................................................................................................ 42,380
--------
Fixed Charges and Preferred Dividends...................................................................... $ 46,631
--------
--------
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS..................................................... 1.96
--------
--------
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
INCORPORATED PORTIONS OF 1993 ANNUAL REPORT TO SECURITIES HOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified
telecommunications company which provides high-quality telecommunications
services to nearly 1.1 million consolidated telephone, cellular telephone and
radio paging customer units in 37 states and the District of Columbia. The
accompanying financial statements present the results of operations of the
Company's three primary businesses: TDS Telecommunications Corporation ("TDS
Telecom"), United States Cellular Corporation (AMEX symbol "USM"), and American
Paging, Inc. (AMEX symbol "APP"), as well as TDS and its service subsidiaries.
TDS's long-term business development strategy is to expand its operations
through internal growth and acquisitions, and to explore and develop other
telecommunications services.
Rapid growth in customers served generated substantial increases in
revenues and operating cash flows, while the costs of rapidly developing new
cellular markets and vigorously adding cellular customers slowed growth in
operating income and net income. TDS Telecom is expanding through the selective
acquisition of local exchange telephone companies serving rural and suburban
areas and by offering additional lines of telecommunications products and
services to existing customers. USM is developing its cellular operations by
rapidly building cell sites to broaden and improve its communications network,
by vigorously marketing its services to rapidly growing number of customers, and
by enhancing its cellular clusters through strategic acquisitions and trades.
APP is rapidly growing by focusing its efforts on improving the quality of its
messaging services and by vigorously marketing those services.
CONSOLIDATED
Consolidated operating results for 1993 and 1992 reflect primarily the effects
of very rapid expansion and development of cellular operations, steady growth in
telephone operations, dynamic increases in paging units in service, improving
economies of scale in cellular and paging operations, continuing improvements in
business processes and systems, the impact of acquisitions and trades and the
costs of financing these high-growth activities. During 1993 and 1992, the
Company's wireline telephone operations provided a growing foundation of
operating cash flow and earnings to support development of its wireless cellular
and paging operations. While wireless operations were not profitable during 1993
and 1992, they each contributed rapidly growing operating cash flow as they
progressed toward overall profitability. Results for 1993 include a $2.3
million net-of-tax gain on sales of cellular interests and a $600,000 provision
for discontinuance of national retailer distribution of pagers. Results for 1992
include net-of-tax gains on sales and exchanges of cellular interests totalling
$14.7 million, the $6.9 million one-time cost of adopting a new accounting
standard for postretirement benefits and other nonrecurring items totalling
$200,000. On a comparable basis, excluding these nonrecurring and unusual items,
net income available to common increased 44.5% to $29.8 million and earnings per
share rose 18.9% to $.63.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Income
Telephone $ 79,110 $ 72,218 $ 65,242
Cellular telephone (8,656) (12,705) (16,831)
Radio paging (721) (5,448) (7,750)
--------------------------------------------
$ 69,733 $ 54,065 $ 40,661
--------------------------------------------
--------------------------------------------
Operating Margin
Telephone 29.5% 30.3% 30.9%
Cellular telephone (3.5%) (7.7%) (16.9%)
Radio paging (1.0%) (10.0%) (17.6%)
Consolidated 11.8% 11.8% 11.5%
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</TABLE>
Certain 1992 and 1991 amounts have been reclassified to conform to current year
presentation.
TDS Telecom has acquired nine telephone companies since December 31, 1991.
These acquisitions added 24,100 access lines while internal growth added 28,100
lines. USM, TDS's 85.1%-owned subsidiary, has added 51 markets to consolidated
operations through acquisitions
<PAGE>
and the initiation of cellular operations. USM currently provides cellular
service through systems serving 116 majority-owned and managed markets. APP has
acquired three paging systems which added approximately 21,000 pagers. APP
provides service to its customers through 17 customer operations centers.
OPERATING REVENUES increased 29.3% during 1993 and 28.8% during 1992
primarily as a result of increases in customers served and modest price changes.
The rapid expansion of cellular telephone revenues, 41.9% and 35.9%,
respectively, of total 1993 and 1992 revenues, reflects sharp increases in
cellular telephones in service driven by vigorous marketing activities and rapid
expansion of cellular telephone systems, strong growth in keeper roaming
revenues and declines in average revenue per customer averaging 0.6% over the
two-year period ended December 31, 1993. Growth in telephone revenues, 45.4%
and 52.1%, respectively, of total 1993 and 1992 revenues, are the result of
access line growth averaging 0.6% and modest changes in average revenue per
access line averaging 4.6% during the two-year period. The rapid growth in
paging revenues, 12.7% and 12.0%, respectively, of total 1993 and 1992 revenues,
is due to increases in paging units in service of 43.0% during 1993 and 36.1%
during 1992 offset by continuing decreases in average revenue per unit averaging
5.3% over the two-year period.
OPERATING EXPENSES rose 29.3% ($118.2 million) in 1993 and 28.3% ($88.8 million)
in 1992 as a result of the continued rapid growth in and start-up of USM's
cellular telephone operations and the steady growth in TDS Telecom's and APP's
operations. The increase in cellular expenses reflects the rapid expansion of
this segment during the past three years. Telephone operating expenses increased
due to the effects of acquisitions and growth in internal operations. Radio
paging expenses increased to serve the growing customer base and to expand
market share in certain service areas.
OPERATING INCOME increased 29.0% ($15.7 million) in 1993 and 33.0% ($13.4
million) in 1992 due to improved operating results in all three business units.
Management anticipates continued rapid growth in revenues as all three
business units continue to add customers. This growth and additional expansion
and market development costs are anticipated to slow the rate of growth in
improvements in consolidated operating performance during 1994.
CELLULAR INVESTMENT INCOME, representing the Company's share of income of
markets in which the Company has a minority interest and follows the equity
method of accounting, increased 70.3% ($6.5 million) in 1993 and 35.2% ($2.4
million) in 1992.
GAIN ON SALE OF CELLULAR INTERESTS reflects the sale of a majority-owned
and managed cellular system in 1992 and the sale or exchange of minority
interests in 1993, 1992 and 1991. Approximately $2.9 million of the 1991 gain
was offset by an equal amount of income tax expense, resulting in no effect on
net income.
MINORITY SHARE OF INCOME includes (a) the minority shareholders' share of
USM's net income (1992) or losses (1993 and 1991), (b) the minority partners'
share of income or loss of the cellular markets majority-owned by USM and (c)
the minority shareholders' share of income of a telephone company majority-owned
by TDS.
MINORITY SHARE OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
United States Cellular
Minority Shareholders' Share $ 4,270 $ (1,088) $ 4,250
Minority Partner's Share (3,496) (2,615) (1,467)
-----------------------------------------
774 (3,703) 2,783
TDS Telecom (1,249) -- --
-----------------------------------------
$ (475) $ (3,703) $ 2,783
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</TABLE>
OTHER INCOME, NET includes a $1.0 million pretax charge in 1993, as APP
elected to cease national retailer distribution of pagers through its wholly
owned subsidiary, American Paging Network ("APN").
INTEREST EXPENSE increase 14.9% ($4.9 million) in 1993 and 12.5% ($3.6
million) in 1992. Long-term debt under the TDS Medium-Term Note Program
increased $92.5 million in 1993 and $7.5 million in 1992, and cellular vendor
financing increased a net $35.4 million in 1992. Short-term interest expense
declined 7.8% ($154,000) in 1993 and 46.8% ($1.7 million) in 1992, as interest
rates declined in both years and as the average balance of notes payable during
1992 declined $11.9 million. The average amount of short-term debt outstanding
totalled $32.3 million in 1993, $31.1 million in 1992 and $43.0 million in 1991.
The average interest rate on such short-term debt was 3.9% in 1993, 4.5% in 1992
and 6.6% in 1991. See "Financial Resources and Liquidity" for a further
discussion of short- and long-term debt.
<PAGE>
INCOME TAX EXPENSE decreased 11.0% ($3.3 million) in 1993 and increased
99.2% ($14.8 million) in 1992, reflecting primarily changes in pretax income.
The effective income tax rates were 43.9%, 43.6% and 41.4% in 1993, 1992 and
1991, respectively. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 1,
1993. Income tax expense for 1993 reflects the new accounting principle; income
tax expense for prior years has not been restated. The increase in the 1992 rate
over 1991 reflects primarily the effect of USM's net income and the related
pretax deduction for financial reporting purposes of the minority shareholders'
share of such income. For purposes of income tax accounting under the then
existing accounting principles, such pretax accounting deduction was a
"permanent difference" and had the effect of increasing the effective tax rate
in 1992.
NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES was $33.9 million in 1993, $38.5 million in 1992 and $21.1 million in
1991. The decrease in 1993 from 1992 and the increase in 1992 over 1991 reflect
the significant improvement in operating results of all three business segments
and the $14.7 million (after income taxes and minority shareholders' share)
gains on the sales of cellular interests in 1992.
EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGES were $.67 in 1993, $.91 in 1992 and $.59 in 1991. Changes
in earnings per share reflect changes in net income and 21.0% and 18.3%
increases in weighted average common shares outstanding in 1993 and 1992,
respectively. TDS sold 1,320,000 and 2,000,000 Common Shares for cash in 1993
and 1992, respectively. Approximately 6.8 million and 3.7 million Common Shares
have been issued in 1993 and 1992, respectively, in connection with
acquisitions.
EXTRAORDINARY ITEM: During 1992, the Company retired at a premium $20.8
million of its Senior Notes. The notes carried interest rates of 9.75% to 13.75%
and were due in 1996 through 2004. The transaction resulted in an extraordinary
loss of $769,000 ($.02 per share), net of income tax benefits of $491,000.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES: Effective January 1, 1992, the
Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." Approximately $11.3 million was recorded as the cumulative
effect of an accounting change for the year ended December 31, 1992. The
$6.9 million cumulative effect, net of related income tax benefits of $4.4
million, reduced earnings per share by $.17. Operating results for 1993 and 1992
reflect the new accounting standard. The 1991 financial statements have not been
restated.
Effective January 1, 1991, USM changed its method of accounting for sales
commissions from capitalizing and amortizing these costs over 36 months to
expensing as incurred. In addition, two of USM's equity method investees made a
similar change. The cumulative effect of the change on years prior to 1991 was a
charge to income of $5.0 million, or $.15 per share, net of USM's minority
shareholders' share, $1.9 million, and income tax benefits of $3.4 million.
EARNINGS PER COMMON SHARE were $.67 in 1993, $.72 in 1992 and $.44 in 1991,
reflecting results of operations, the 1992 extraordinary item and the accounting
changes in 1992 and 1991.
Excluding significant nonrecurring and unusual items, net income available
to common and earnings per share were approximately $29.8 million and $.63 for
1993 as compared to $20.6 million and $.53 for 1992 and $19.1 million and $.58
for 1991, as shown in the accompanying table.
NET INCOME AVAILABLE TO COMMON
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S> <C> <C> <C>
As Reported $31.5 $ 28.6 $ 14.4
Nonrecurring and Unusual
Items (estimated net-of-tax):
Provision for discontinuance
of national retailer
distribution of pagers
through APN .6 -- --
Cumulative effect of
accounting changes -- 6.9 5.0
Extraordinary loss on
retirement of debt -- .8 --
Gain on sales or exchanges
of cellular interests
(net of USM minority share) (2.3) (14.7) (.3)
TDS Telecom directory
revenue settlement -- (1.0) --
----------------------------------------
Excluding Nonrecurring and
Unusual Items $ 29.8 $ 20.6 $ 19.1
----------------------------------------
----------------------------------------
Earnings Per Share,
excluding Nonrecurring and
Unusual Items $ .63 $ .53 $ .58
- --------------------------------------------------------------------------------
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</TABLE>
TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Local service $ 72,191 $ 65,131 $ 61,313
Network access and
long-distance 159,111 137,747 120,375
Miscellaneous 36,820 35,217 29,543
------------------------------------------
268,122 238,095 211,231
------------------------------------------
OPERATING EXPENSES
Plant operations 42,524 36,100 32,760
Depreciation 56,024 48,830 41,046
Amortization 3,538 3,116 2,379
Customer operations 39,416 35,103 31,255
Corporate and other 47,510 42,728 38,549
------------------------------------------
189,012 165,877 145,989
------------------------------------------
OPERATING INCOME $ 79,110 $ 72,218 $ 65,242
- --------------------------------------------------------------------------------
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Telephone revenues as a
percent of total revenues 45.4% 52.1% 59.6%
Construction expenditures $ 82,233* $67,357* $ 67,856*
Identifiable assets 829,489 723,855 674,712
Telephone plant in service
per access line $ 2,317 $ 2,210 $ 2,209
- --------------------------------------------------------------------------------
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Companies 94 90 85
Access lines 356,200 321,700 304,000
Growth in access lines
from prior year-end:
Acquisitions 20,100 4,000 15,800
Internal growth 14,400 13,700 9,500
Average monthly revenue
per access line $ 66 $ 63 $ 60
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<FN>
*Includes noncash amounts (in thousands) of $1,415, $1,705 and $(796),
respectively.
</TABLE>
<PAGE>
OPERATING REVENUES from telephone operations increased 12.6% ($30.0
million) in 1993 and 12.7% ($26.9 million) in 1992. The increases in revenues
were due to acquisitions, increased usage of the network, recovery of increased
costs of providing long-distance services and internal access line growth.
Acquisitions increased telephone revenues 4.9% ($11.7 million) in 1993 and 4.4%
($9.4 million) in 1992. Telephone results of operations include the results of
acquired companies since the respective dates of acquisition.
Local service revenues increased 10.8% ($7.1 million) in 1993 and 6.2%
($3.8 million) in 1992, with acquisitions increasing these revenues 3.8% ($2.5
million) in 1993 and 4.1% ($2.5 million) in 1992. Internal growth in access
lines and sales of custom-calling and other features increased local service
revenues approximately $3.3 million in 1993 and $3.1 million in 1992. 1991
revenues totalling $1.0 million for Extended Area Service ("EAS") were
eliminated in 1992 due to a change in a revenue settlement arrangement.
Network access and long-distance revenues increased 15.5% ($21.4 million)
in 1993 and 14.4% ($17.4 million) in 1992. Acquisitions increased these revenues
5.5% ($7.6 million) in 1993 and 4.5% ($5.4 million) in 1992. Recovery of
increased costs of providing long-distance services increased revenues
$4.4 million in 1993 and $4.6 million in 1992. Changes in Federal Communications
Commission ("FCC")-mandated cost separations rules increased revenues
$2.1 million in 1993 and $2.0 million in 1992. Certain settlements relating to
prior periods, due primarily to retroactively billed access services and
finalization of cost separation studies, increased these revenues 2.2%
($3.0 million) in 1993. Network access service and long-distance revenues
decreased 1.3% ($1.5 million) in 1992 as certain billing and collection revenues
are now reported as miscellaneous revenues. The remainder of the revenue
increases in 1993 and 1992 were primarily due to increased minutes of use,
increases in access lines served and changes in rates of return.
Miscellaneous revenues increased 4.6% ($1.6 million) in 1993 and 19.2%
($5.7 million) in 1992. Acquisitions increased miscellaneous revenues 4.8% ($1.7
million) in 1993 and 4.9% ($1.4 million) in 1992. A settlement relating to a
directory agreement increased these revenues 5.9% ($1.8 million) in 1992. A new
contract for billing and collection services decreased these revenues 1.6%
($550,000) in 1993. Certain billing and collection revenues previously reported
as long-distance and network access revenues increased miscellaneous revenues
5.2% ($1.5 million) in 1992. The remaining increases in 1993 and 1992 are due to
acquisitions, increased message volumes, providing billing and collection
services for Alternate Operator Service providers, and additional non-regulated
revenues as a result of increased marketing efforts and access line growth.
OPERATING EXPENSES increased 13.9% ($23.1 million) in 1993 and 13.6% ($19.9
million) in 1992. The effects of acquisitions increased expenses 5.4% ($9.0
million) in 1993 and 5.5% ($8.0 million) in 1992. Plant operations expense
increased 17.8% ($6.4 million) in 1993 and 10.2% ($3.3 million) in 1992, with
acquisitions increasing this expense 8.1% ($2.9 million) in 1993 and 5.2%
($1.7 million) in 1992. The remaining increase in 1993 was primarily due to
salary and work force changes along with the effects of general inflation. A
change in a settlement arrangement for EAS revenues decreased these expenses
3.2% ($1.0 million) in 1992.
Depreciation and amortization expense increased 14.7% ($7.6 million) in
1993 and 19.6% ($8.5 million) in 1992, with acquisitions increasing such expense
5.2%
<PAGE>
($2.7 million) in 1993 and 6.4% ($2.8 million) in 1992. Lump-sum depreciation
adjustments and increases in certain depreciation rates increased these expenses
4.3% ($2.2 million) in 1993 and 5.6% ($2.4 million) in 1992. The remainder of
the increase in depreciation expense is due to growth in plant and equipment.
The composite depreciation rate was 7.3% in 1993, 7.2% in 1992 and 6.7% in 1991.
Customer operations expense increased 12.3% ($4.3 million) in 1993 and
12.3% ($3.8 million) in 1992, with acquisitions providing 3.9% ($1.4 million) of
the increase in 1993 and 4.1% ($1.3 million) in 1992. The remainder of the
increases are due primarily to increased marketing activities, increased
customer billing and programming costs and the effects of inflation.
Corporate and other expenses increased 11.2% ($4.8 million) in 1993 and
10.8% ($4.2 million) in 1992, with acquisitions increasing these expenses 4.6%
($2.0 million) in 1993 and 5.9% ($2.3 million) in 1992. The remainder of the
increases are due primarily to the effects of inflation, employee-related costs,
additional staffing and increases in legal and other costs related to new
business development and long-range planning activities.
OPERATING INCOME from telephone operations increased 9.5% ($6.9 million) in
1993 and 10.7% ($7.0 million) in 1992. The effects of acquisitions increased
operating income 3.8% ($2.8 million) in 1993 and 2.1% ($1.3 million) in 1992.
The telephone operating margin was 29.5% in 1993 compared to 30.3% in 1992 and
30.9% in 1991.
TDS Telecom's revenues are expected to continue to increase in 1994.
However, due to expected increases in customer operations expense (primarily due
to increased marketing activities) and accelerated depreciation on certain
switching equipment, the 1994 operating margin may be lower than the 1993 level.
CELLULAR TELEPHONE OPERATIONS
USM owns or has the right to acquire interests, both majority and minority, in
205 cellular telephone markets at December 31, 1993, representing 23,731,000
population equivalents ("pops") as summarized in the accompanying table.
Consolidated revenues and expenses include 100% of the revenues and expenses of
USM's majority-owned markets. The December 31, 1993 consolidated results of
operations include 116 markets compared to 92 markets in 1992 and 67 markets in
1991. Investment and Other Income includes USM's pro rata share of the net
income or loss of 18 minority-owned and managed markets and 15 minority-owned
markets managed by others. USM's investments in 46 minority-owned markets
managed by others, which are being held for sale or exchange, are accounted
for by the cost method of accounting.
<TABLE>
<CAPTION>
December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Population Equivalents(1)
Majority-Owned and
Managed(2) 18,212 14,268 10,427
Minority-Owned and
Managed 1,139 2,007 1,755
To Be Managed(4) 1,002 1,816 3,095
----------------------------------------
Total Managed by USM 20,353 18,091 15,277
----------------------------------------
Managed by Others(5) 3,378 3,474 3,229
----------------------------------------
Total 23,731 21,565 18,506
----------------------------------------
----------------------------------------
TDS's proportionate
share(6) 18,869 16,001 13,491
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Markets
Majority-Owned and
Managed(2) 116 92 67
Minority-Owned and
Managed(3) 20 24 24
To Be Managed(4) 8 13 21
--------------------------------------
Total Managed by USM 144 129 112
--------------------------------------
Managed by Others(5) 61 64 65
--------------------------------------
Total 205 193 177
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<FN>
(1) 1993 Donnelley Marketing Service estimates are used for all years. Includes
pops relating to interests which are acquirable in the future.
(2) Includes one market managed by a third party in 1993 and 1992, and one
wholly owned reseller operation in 1992 and 1991.
(3) Includes markets where USM has the right to acquire an interest but did not
own an interest at the respective dates (two markets in 1993, six in 1992
and seven in 1991).
(4) Represents markets which are not yet operational or which are managed by
third parties until USM acquires a majority interest in the markets.
(5) Represents markets in which USM owns or has the right to acquire a minority
or other noncontrolling interest and which are managed by others. Some
markets were not in operation in 1991.
(6) Based on TDS's ownership of USM, assuming all pending acquisitions have
been completed.
</TABLE>
CELLULAR TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Service $ 236,749 $ 154,822 $ 91,977
Equipment sales 10,510 9,263 7,500
---------------------------------------------
247,259 164,085 99,477
---------------------------------------------
OPERATING EXPENSES
System operations 67,251 48,373 30,746
Marketing and selling 43,478 30,643 18,053
Cost of equipment sold 25,688 17,311 13,575
General and administrative 74,471 50,824 34,665
Depreciation 25,665 16,606 8,814
Amortization 19,362 13,033 10,455
---------------------------------------------
255,915 176,790 116,308
---------------------------------------------
OPERATING (LOSS) $ (8,656) $ (12,705) $ (16,831)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Cellular telephone
revenues as a percent
of total revenues 41.9% 35.9% 28.0%
Additions to property,
plant and equipment $ 94,088* $ 58,832* $ 66,037*
Identifiable assets $ 1,275,569 $ 858,795 $ 612,981
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Majority-Owned, Managed
and Consolidated Markets:
Customers 261,000 150,800 97,000
Market penetration 1.35% 1.00% .84%
Cell sites in service 522 320 186
Average monthly
revenue per customer $ 99 $ 105 $ 100
Churn rate per month 2.3% 2.4% 2.2%
Marketing cost per net
customer addition $ 677 $ 765 $ 710
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- -------------------------------------------------------------------------------
<FN>
*Includes noncash amounts (in thousands) of $6,611, $2,799 and $3,039,
respectively.
</TABLE>
<PAGE>
OPERATING REVENUES increased 50.7% ($83.2 million) in 1993 and 64.9% ($64.6
million) in 1992. Service revenues include monthly service fees for providing
access, airtime, and value-added services to customers; for providing airtime to
users roaming through USM's service areas; for other carriers providing airtime
to USM's customers roaming through their service areas; and long-
distance charges. Service revenues increased 52.9% ($81.9 million) in 1993 and
68.3% ($62.8 million) in 1992. The service revenue increases in 1993 and 1992
were primarily attributable to increases in the number of local retail telephone
customers and growth in inbound roamer revenues. In addition, acquisitions of
controlling interests and the start-up of operations in new markets increased
revenues 16.0% ($26.2 million) in 1993 and 31.9% ($31.7 million) in 1992.
Minutes of use averaged 103 per month in 1993 compared to 121 per month in 1992
and 130 in 1991. The decline in average local minutes of use follows an
industry-wide trend and is believed to be related to the tendency of the early
subscribers in a market to be the heaviest users. Average monthly service
revenue per customer was $99 in 1993, $105 in 1992 and $100 in 1991. Management
anticipates that average local minutes of use and average monthly revenue per
customer will continue to decline as USM adds more customers and as the growth
rate of USM's customer base exceeds the growth rate of inbound roamer revenue.
Service revenues from local customers' usage of USM's systems increased
52.6% ($40.5 million) in 1993 and 53.2% ($26.8 million) in 1992. The revenue
increases were primarily the result of the 73.1% and 55.5% customer growth,
respectively, in majority-owned markets, offset somewhat by the decrease in
average monthly local minutes of use. The decrease in average minutes of use
resulted in a decrease in average monthly retail revenue per customer, to $49
in 1993 from $52 in 1992 and $55 in 1991. Inbound roaming revenues, earned when
other systems' customers travel through USM's service areas increased 67.7%
($31.6 million) in 1993 and 110% ($24.5 million) in 1992. The increase is
attributable to an increase in the number of customers from other systems using
USM's systems as well as an increased number of USM-managed systems and cell
sites within those systems. Pass-through roamer revenue, earned when USM's
customers use systems other than their local systems,increased 27.0% ($5.2
million) in 1993 and 67.4% ($7.8 million) in 1992, due to USM's customer growth.
Monthly roamer revenue per customer averaged $43, $45 and $37 in 1993, 1992 and
1991, respectively. Long-distance revenues increased 45.7% ($4.4 million) in
1993 and 77.3% ($4.2 million) in 1992 as the number of customers and the volume
of long-distance calls increased.
Equipment sales revenue reflects the sale of 83,000 cellular telephone
units in 1993 compared to 44,400 in 1992 and 29,400 in 1991. The sale of
cellular telephone units at discounted rates, a widespread industry practice,
were the result of USM's use of marketing programs aimed at increasing customers
and service revenues. The average revenue per telephone unit sold was $127 in
1993, $208 in 1992 and $255 in 1991. The average revenue per unit decline
partially reflects USM's decision to reduce sales prices on cellular telephones
to stimulate customer growth as well as reduced manufacturers' prices. Also,
during the second half of 1993, USM used specific promotions which were based on
increased equipment discounting. The success of these promotions led to both an
increase in units sold and a decrease in average equipment sales revenue per
unit. USM will continue to discount equipment prices in its systems, as it has
done in the past, to maintain its market position, to meet competitive prices
and to increase the number of customers.
OPERATING EXPENSES increased 44.8% ($79.1 million) in 1993 and 52.0% ($60.5
million) in 1992. The increases in expenses were primarily due to increased
customer activations, acquisitions, starting up operations in new markets and
increased depreciation and amortization expense related to increases in fixed
assets and license costs. The acquisition of controlling interests and the
start-up of operations in new markets increased operating expenses 19.0% ($33.6
million) in 1993 and 32.7% ($38.1 million) in 1992.
System operations expenses increased 39.0% ($18.9 million) in 1993 and
57.3% ($17.6 million) in 1992 as a result of increases in customer usage
expenses and costs associated with operating USM's increased number of cellular
systems. Costs are expected to continue to increase as the number of cell sites
within these systems increases. Customer usage expenses represent charges from
other telecommunications service providers for local interconnection to the
landline network, toll charges and roamer expenses from USM's customers' use of
systems other than their local systems. Customer usage expenses grew 36.2%
($13.5 million) in 1993 and 72.0% ($15.7
<PAGE>
million) in 1992 primarily due to the increase in roamer expenses. Maintenance,
utility and cell site expenses grew 48.8% ($5.4 million) in 1993 and 21.8% ($1.9
million) in 1992 reflecting growth in the number of cells to 522 in 1993 from
320 in 1992 and 186 in 1991, growth in the number of switches in service, and
the effects of acquisitions and start-up markets.
Marketing and selling expenses increased 41.9% ($12.8 million) in 1993 and
69.7% ($12.6 million) in 1992. Marketing and selling expenses primarily consist
of salaries, commissions and expenses of field sales personnel, agent
commissions, promotional expenses and local advertising and public relations
expenses. These expenses increased in 1993 and 1992 primarily due to the
increased number of customer activations and, in 1992, also due to the use of
various marketing programs which increased promotional expense. Excluding the
effects of acquisitions and divestitures, USM added 86,600 and 50,600 net new
customers in 1993 and 1992, respectively.
Cost of equipment sold reflects the increased unit sales related to the
increase in gross customer activations and second half 1993 promotional sales
discussed above, offset somewhat by falling manufacturers' prices. The average
cost of a telephone unit sold was $309 in 1993, $390 in 1992 and $462 in 1991.
General and administrative expenses increased 46.5% ($23.6 million) in 1993
and 46.6% ($16.2 million) in 1992. These expenses include the cost of operating
USM's local business offices and its corporate expenses. The increases result
from the expanding number of consolidated markets, due to both acquisitions and
the start-up of operations in new markets, as well as the growth in the customer
base in existing markets. USM is using its clustering concept to combine local
operations wherever feasible in order to reduce its administrative expenses.
Depreciation expense increased 54.6% ($9.1 million) in 1993 and 88.4% ($7.8
million) in 1992, reflecting increases in average fixed asset balances of 55.6%
and 77.3%, respectively. Amortization expense, primarily amortization of license
costs, increased 48.6% ($6.3 million) in 1993 and 24.7% ($2.6 million) in 1992
due to increases in license costs. The increase in 1992 was offset somewhat by a
change in the amortization period for license costs, from 20 to 40 years,
beginning January 1, 1992.
OPERATING LOSS was $8.7 million in 1993, $12.7 million in 1992 and $16.8
million in 1991. Operating margin, while still negative, improved to (3.5%) in
1993 from (7.7%) in 1992 and (16.9%) in 1991. The improvement in the 1993
operating loss was primarily due to improved results in the more established
markets and increased revenues from growth in the customer base, offset somewhat
by the start-up and acquisition of operations in new markets and increased
losses on equipment sales. The improvement in the 1992 operating loss is
primarily due to the improved operating results of the more established markets.
The Company expects service revenues to continue to grow in 1994 as USM
begins operations in new markets, as customers are added to USM's existing
markets and as it realizes a full year of revenue from customers added in 1993.
Additionally, the Company expects expenses to continue to increase significantly
in 1994 as a full year of expenses are recognized for markets and cell sites
added in 1993 and as USM initiates service in new markets in 1994. At least 14
additional markets are expected to be added to consolidated operations during
1994. Accordingly, the Company expects that the costs of constructing and
developing the new systems may exceed revenue growth during the next few
quarters. As a result, operating losses maybe generated over the next few
quarters.
CELLULAR INVESTMENT INCOME includes USM's and TDS's share of the net
incomes or losses of cellular markets in which they have a minority interest and
for which they follow the equity method of accounting, net of amortization of
license costs relating to these minority interests.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cellular Investment Income
(Loss), Net of License
Cost Amortization
Cellular Markets
Managed by USM $ (307) $ (976) $ (1,817)
Managed by Others 16,011 10,200 8,641
------------------------------------------
$ 15,704 $ 9,224 $ 6,824
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
TDS's share of USM's net income (loss) before the cumulative effect of an
accounting change was $(21.2) million in 1993. $5.1 million in 1992 and $(20.1)
million in 1991. The net income (loss) excludes the USM minority shareholders'
share of such income (loss). The net income (loss) from cellular telephone
operations does not include federal income tax expense or benefits from the
inclusion of USM in TDS's consolidated federal tax return. In accordance with a
tax allocation agreement, TDS does not reimburse USM currently for income tax
benefits and credits. Instead, such benefits and credits are being carried
forward until they can be used by USM.
<PAGE>
TDS owned an aggregate of 59,548,450 shares of common stock of USM at
December 31, 1993, representing over 85% of the combined total of USM's
outstanding Common and Series A Common Shares and over 97% of their combined
voting power. Assuming USM's Common Shares are issued in all instances in which
USM has the choice to issue its Common Shares or other consideration and
assuming all issuances of USM's common stock to TDS and third parties for
completed and pending acquisitions and redemptions of USM and TDS Preferred
Stock had been completed at December 31, 1993, TDS would have owned
approximately 79.5% of the total outstanding common stock of USM and controlled
over 95% of the combined voting power of both classes of its common stock. In
the event TDS's ownership of USM falls below 80% of the total value of all of
the outstanding shares of USM's stock, TDS and USM would be deconsolidated for
federal income tax purposes. TDS and USM have the ability to defer or prevent
deconsolidation, if deferring or preventing deconsolidation would be
advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's
Common Shares in connection with certain acquisitions.
RADIO PAGING OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS)
<S> <C> <C> <C>
SERVICE OPERATIONS
Revenues $ 64,384 $ 48,582 $ 41,021
------------------------------------------
Costs and expenses
Cost of services 15,836 12,147 9,852
Selling and advertising 11,131 10,419 10,229
General and
administrative 24,785 20,585 19,543
Depreciation 11,182 9,335 8,186
Amortization 2,210 1,077 861
------------------------------------------
65,144 53,563 48,671
------------------------------------------
Service
Operating (Loss) (760) (4,981) (7,650)
------------------------------------------
EQUIPMENT SALES
Revenue 10,979 6,134 2,952
Cost of equipment sold 10,940 6,601 3,052
------------------------------------------
Equipment Sales
Income (Loss) 39 (467) (100)
------------------------------------------
OPERATING (LOSS) $ (721) $ (5,448) $ (7,750)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Radio paging revenues
as a percent of
total revenues 12.7% 12.0% 12.4%
Additions to property
and equipment $ 24,813* $ 15,501* $ 13,322*
Identifiable assets $ 74,923 $ 57,080 $ 41,726
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Pagers in service 460,900 322,200 236,800
Average monthly revenue
per customer $ 13.65 $ 14.93 $ 15.28
Transmitters in service 685 532 484
Churn rate per month 2.9% 2.9% 3.2%
Marketing cost per net
customer addition $ 80 $ 127 $ 290
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<FN>
*Includes noncash amounts (in thousands) of $2,177, $1,128 and $522,
respectively.
</TABLE>
Certain 1992 and 1991 amounts have been reclassified to conform to current year
presentation.
SERVICE REVENUES increased 32.5% ($15.8 million) in 1993 and 18.4% ($7.6
million) in 1992, primarily as a result of growth in the number of pagers in
service, offset somewhat by a decline in average monthly revenue per unit.
Pagers in service increased 43.0% (138,700, including 10,700 from acquisitions)
in 1993 and 36.1% (85,400, including 10,000 from an acquisition) in 1992.
Average monthly revenue per unit was $13.65 in 1993, $14.93 in 1992 and $15.28
in 1991. This decline reflects the industry trend of declining average monthly
revenue per unit, which APP expects to continue. However, APP's average monthly
revenue per unit has been consistently above the industry average. Declining
average monthly revenue per unit is related to competitive factors and a shift
toward resellers and customers purchasing pagers through retail operations.
Average monthly revenue per unit for customer-owned pagers and pagers served
through resellers is lower than for leased pagers because the customers do not
pay monthly fees to lease pagers and because resellers purchase paging services
at wholesale rates. Growth in the customer base increased revenues by $21.8
million in 1993 and $8.7 million in 1992, while the decline in average monthly
revenue per unit (8.6% in 1993 and 2.3% in 1992) reduced revenues by $6.0
million in 1993 and $1.1 million in 1992. Increased use of lower revenue but
higher margin distribution channels and price competition contributed to the
decline in average monthly revenue per unit in 1993 and 1992.
SERVICE OPERATING EXPENSES increased 21.6% ($11.6 million) in 1993 and
10.1% ($4.9 million) in 1992 primarily as a result of the costs of serving new
customers added through both internal growth and acquisitions and the costs of
system expansion. Cost of services increased 30.4% ($3.7 million) in 1993 and
23.3% ($2.3 million) in 1992. The additional costs of providing service to the
increased customer base, which include alphanumeric transcription, nationwide
and local reseller and telephone expenses, increased cost of services
approximately $3.0 million in 1993 and $1.6 million in 1992. The remainder of
the increases in cost of services were due primarily to the costs of upgrading
and expanding APP's transmission systems to improve reliability and coverage.
APP had 685 transmitters in service at year-end 1993, 532 at year-end 1992 and
484 at year-end 1991.
Selling and advertising expense increased 6.8% ($712,000) in 1993 and 1.9%
($190,000) in 1992. Selling and advertising expense increased at a slower rate
than the rate of growth in pagers in service due to improved productivity of
sales personnel and increased use of lower-cost distribution channels (such as
resellers and retail outlets). Cost per gross additional customer added,
excluding acquisitions, was $42 in 1993, $62 in 1992 and $88 in 1991.
General and administrative expense increased 20.4% ($4.2 million) in 1993
and 5.3% ($1.0 million) in 1992. Additional employees added in 1993 to serve the
growing customer base increased these expenses $1.6 million. Bad debt expense
increased $1.1 million 1993 due to APP's increased use of retail distribution
and the increase in the customer base. The 1992 increase reflects additional
personnel costs incurred for employees added to serve the growing customer base,
largely offset by decreases in 1992 due to the elimination of one-time personnel
costs
<PAGE>
related to a 1991 strategic exchange of customers and related economies of scale
resulting from the exchange. Certain amounts formerly included as general and
administrative expenses in prior years have been reclassified as equipment sales
revenues and cost of equipment sold to conform to 1993's presentation.
Depreciation and amortization charges increased 28.6% ($3.0 million) in
1993 and 15.1% ($1.4 million) in 1992, reflecting the increased investment in
pagers and related equipment. APP's gross fixed assets balance grew 19.7% in
1993 and 16.6% in 1992, primarily due to increases in terminals and transmitters
added to improve service quality and coverage and increases in pagers due to the
growth in customers.
EQUIPMENT SALES REVENUE increased 79.0% ($4.8 million) in 1993 and 108%
($3.2 million) in 1992 due to APP's increased emphasis on selling pagers to
customers, particularly through retail stores and resellers. Cost of equipment
sold increased 65.7% ($4.3 million) in 1993 and 116% ($3.5 million) in 1992.
While APP generally plans to break even on equipment sales, it may at times, in
selected locations, discount paging equipment due to competitive pressures,
sales promotions or sales of discontinued pagers. In June of 1993, APP elected
to cease national retailer distribution of pagers through its wholly owned
subsidiary, APN. The decision to cease operations at APN resulted in a pretax
charge of $1.0 million, included in other income, net in the Consolidated
Statements of Income.
OPERATING LOSS was $721,000 in 1993, $5.4 million in 1992 and $7.8 million
in 1991. Operating margin, while still negative, improved to (1.0)% in 1993 from
(10.0%) in 1992 and (17.6%) in 1991. The improvement in operating loss reflects
a) rapid growth in revenues, offset by a continuing decline in average monthly
revenue per unit and APP's increased use of lower revenue but higher margin
distribution channels, and b) increased operating expenses due to growth in the
number of customers served, tempered by APP's efforts to reduce costs through
process improvements and economies of scale. The lower revenue distribution
channels, while reducing the rate of revenue growth, are associated with lower
customer acquisition costs.
The Company expects service revenues to continue to grow in 1994 as
customers are added to APP's existing service areas and as it realizes a full
year of revenue from customers added in 1993. The industry trend of declining
average monthly revenue per unit is expected to continue in 1994. However, APP's
average monthly revenue per unit has consistently been above the industry
average and the Company expects this to continue. The Company expects expenses
to continue to increase in 1994 as the customer base grows and as APP continues
to upgrade and expand its transmission systems to further improve reliability
and coverage.
PARENT AND SERVICE COMPANY OPERATIONS
OTHER INCOME, NET includes the operating income of TDS's computer, engineering
and printing service companies and costs of corporate operations. Additionally,
1993's amount includes the $1.0 million charge to cease operations at APN, as
discussed previously.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Additions to property
and equipment $ 7,386* $ 20,555* $ 7,359*
Identifiable assets $ 79,202 $ 56,756 $ 38,726
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<FN>
*Includes noncash amounts (in thousands) of $(426), $7,994 and $54,
respectively.
</TABLE>
<PAGE>
INFLATION
Management believes that inflation effects TDS's business to no greater extent
than the general economy.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," which became effective in
January 1994, requiring employers to recognize the obligation to provide
benefits to former or inactive employees after employment but before retirement.
Based on a study of the provisions of SFAS No. 112, the Company estimates that
implementation of the new standard will result in a charge to income (to be
treated as the cumulative effect of an accounting change) estimated to be
approximately $725,000 net-of-tax.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
The FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," in May 1993, which became effective in January 1994. SFAS
No. 115 addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Those investments are to be classified in one of three
categories: a) held-to-maturity securities, reported at amortized cost; b)
trading securities, reported at fair value; and c) available-for-sale
securities, reported at fair value with unrealized gains and losses excluded
from earnings and reported in a separate component of shareholders' equity.
Based on a review of the provisions of SFAS No. 115, management believes that
implementation will not have a material effect on results of operations or
financial condition.
FINANCIAL RESOURCES AND LIQUIDITY
TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid
growth has caused financing requirements for construction, expansion and
acquisition programs to exceed internally generated cash flow in recent years.
Accordingly, TDS and USM have obtained substantial funds from external sources
to finance construction and development of cellular telephone systems and to
fund acquisitions during the past three years. Continued requirements for
construction, expansion and acquisition activities will require substantial
additional funds from external sources.
CASH FLOWS FORM OPERATING ACTIVITIES, as presented in the Consolidated
Statements of Cash Flows, totalled $160.2 million in 1993, $115.4 million in
1992 and $77.8 million in 1991. Cash flows from operating activities increased
38.9% ($44.8 million) in 1993 and 48.2% ($37.5 million) in 1992. The increase in
cash flows represents primarily improved operating results in all three business
segments and increases in operating payables. Consolidated operating cash flows
(operating income plus depreciation and amortization) totalled $187.7 million in
1993, $146.1 million in 1992 and $112.4 million in 1991. The increase in
operating cash flows in 1993 reflects the increase in the operating cash flows
of all three business segments. The increase in 1992's operating cash flows
represents primarily increases in telephone and cellular cash flows. Cash flows
for other operating activities (investment and other income, interest and income
tax expense, and changes in working capital and other assets and liabilities)
required $27.5 million in 1993, $30.7 million in 1992 and $34.6 million in 1991.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating cash flow
(Operating income
plus depreciation
and amortization)
Telephone $ 138,672 $ 124,164 $ 108,667
Cellular telephone 36,371 16,934 2,438
Radio paging 12,671 4,964 1,297
-------------------------------------------
187,714 146,062 112,402
Other operating
activities (27,518) (30,703) (34,564)
-------------------------------------------
$ 160,196 $ 115,359 $ 77,838
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES totalled $131.0 million in 1993, $83.2
million in 1992 and $108.4 million in 1991. Sales of debt securities and common
stock by TDS and common stock by USM provided most of the external financing
requirements during 1993. Sales of common stock by TDS provided most of the
Company's external financing requirements during 1992. Sales of debt securities
by TDS and common stock by USM provided most of the external financing
requirements during 1991. TDS has used short-term debt to finance its cellular
telephone and radio paging operations, for acquisitions and for general
corporate purposes. Proceeds from the sale of the long-term debt and equity
securities from time to time have retired such short-term debt.
TDS sold 1.3 million Common Shares for cash during 1993. The $65.6 million
net proceeds were used to retire short-term bank debt totalling $58.9 million
and for general corporate purposes. TDS sold 2.0 million Common Shares at $35
per share through a public offering during 1992. The $68.2 million net proceeds
from this offering were used to retire short-term bank debt totalling $54.0
million and for general corporate purposes.
During 1993, the Company sold $92.5 million under its Medium-Term Note
("MTN") program, most of which was used to retire short-term debt. During 1991,
the Company sold $100 million under this MTN program. Approximately $93.0
million of the proceeds was used to retire short-term debt.
During 1993, USM sold approximately 1.1 million of its Common Shares to
parties other than TDS pursuant to a rights offering. TDS used the $37 million
proceeds to retire existing short-term debt. In 1991, USM sold 2.0 million
Common Shares to the public at an offering price of $18 and an additional
368,000 Common Shares at $18 per share to one of its major shareholders pursuant
to a Common Stock Purchase Agreement. The net proceeds of over $40 million were
used to repay short-term debt. TDS and USM have also issued TDS Common Shares,
TDS Preferred Shares and USM Common Shares to third parties to acquire telephone
companies and cellular interests.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
TDS Telecom and USM have also used long-term debt to finance their
construction and development activities. Telephone subsidiaries borrowed $28.2
million in 1993, $14.4 million in 1992 and $8.1 million in 1991 under the Rural
Electrification Administration and the Rural Telephone Bank long-term federal
government loan programs. Financing under these programs comprises 98.6% of
total outstanding telephone subsidiary long-term debt at an average annual
interest rate of 5.3%. USM financed cellular system equipment and construction
costs totalling $36.6 million in 1992 and $17.5 million in 1991 under two vendor
financing arrangements. Loans under these programs bear interest approximating
the prime rate and have terms of seven to eight years.
Consolidated equity capital increased to 62.3% of total capitalization at
December 31, 1993, compared to 54.5% at the end of 1990, primarily as a result
of equity offerings and stock issuances in connection with acquisitions. TDS
targets a ratio of equity to total capital in the range of 55% to 60%.
CASH FLOWS FROM INVESTING ACTIVITIES required cash totalling $276.3 million
in 1993, $194.8 million during 1992 and $192.6 million during 1991. Such cash
flows primarily consist of additions to property, plant and equipment requiring
the use of cash and cash flows for acquisitions and for investments in cellular
telephone partnerships. Expenditures for property, plant and equipment additions
totalled $198.7 million in 1993, $148.6 million during 1992 and $151.8 million
during 1991 as summarized in the following table:
PROPERTIES AND EQUIPMENT ADDITION
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
TELEPHONE
Central offices $ 30,287 $ 24,447 $ 28,034
Outside plant 39,861 31,765 27,848
Other 12,085 11,145 11,974
-------------------------------------------
82,233 67,357 67,856
-------------------------------------------
CELLULAR TELEPHONE
Switching office and
cell site equipment 73,471 47,412 50,140
Other 20,617 11,420 15,897
-------------------------------------------
94,088 58,832 66,037
-------------------------------------------
RADIO PAGING
Pagers 13,990 11,621 7,732
Terminals and
transmitters 7,009 2,597 3,413
Other 3,814 1,283 2,177
-------------------------------------------
24,813 15,501 13,322
-------------------------------------------
OTHER 7,386 20,555 7,359
-------------------------------------------
208,520 162,245 154,574
-------------------------------------------
Less noncash amounts (9,777) (13,626) (2,819)
-------------------------------------------
As shown on
consolidated
statements of
cash flows $ 198,743 $ 148,619 $ 151,755
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
TDS Telecom installed 54 digital switches in 1993, 18 in 1992 and 51 in
1991 and made substantial improvements in outside plant facilities during each
year. TDS Telecom now serves over 96% of its access lines with digital
switching. USM added three switching offices and 138 cell sites in 1993, three
switching offices and 107 cell sites during 1992 and seven switching offices and
67 cell sites during 1991. In addition to substantial expenditures for pagers in
the past three years, APP added 153 new transmitters in 1993, 107 in 1992 and
185 transmitters during 1991 to improve signal quality and expand the coverage
areas of its paging systems.
During the past three years, TDS purchased telephone, cellular and paging
interests as part of its ongoing acquisition program. During 1993, the Company
completed the purchase of four telephone companies (which also own cellular
interests representing 416,000 population equivalents), one paging company,
and cellular interests representing 3.8 million population equivalents,
including controlling interests in 25 cellular markets and several minority
cellular interests. Some of the entities acquired during 1993 were subject to
acquisition agreements prior to 1993. During 1992, the Company completed the
purchase of five telephone companies, two paging companies and cellular
interests representing 2.6 million population equivalents including controlling
interests in 13 cellular markets and several minority interests. During 1991,
the Company completed the purchase of seven telephone companies and cellular
interests representing 4.0 million population equivalents including controlling
interests in 32 cellular markets and several minority interests. The
consideration paid for these acquisitions is shown in the following table.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash $ 58.8 $ 27.6 $ 20.3
Long-term Debt -- -- 3.5
TDS Common Shares
(6.8 million, 3.7 million
and 4.4 million, respectively) 277.1 134.5 147.0
TDS Series A Common
Shares (199,000) -- .1 --
TDS Preferred Shares (30,000
and 231,000, respectively) 3.0 -- 23.1
TDS Common Shares
Issuable (94,000 and 59,000,
respectively) 4.5 -- 1.9
USM Common Shares
(157,000, 130,000 and
260,000, respectively) 4.7 2.8 3.8
USM Common Shares
Issuable in the future,
primarily in 1994 or later
(140,000, 778,000 and
5.2 million, respectively) 3.0 16.7 109.9
Subsidiary preferred stock
(29,000) 2.9 -- --
--------------------------------------
Total Consideration $ 354.0 $ 181.7 $ 309.5
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
ANTICIPATED REQUIREMENTS for 1994 reflect the Company's construction,
expansion and acquisition programs. Telephone, cellular telephone, radio paging
and other property, plant and equipment additions are anticipated to aggregate
approximately $305 million for 1994. The telephone plant additions budget totals
approximately $110 million in 1994, including about $45 million for new digital
switches and other switching facilities and $47 million for improvements to
outside plant facilities. The cellular capital additions budget totals $160
million for 1994 including anticipated expenditures for both enhancements to
existing systems and construction of new systems. Planned expenditures for
enhancements of existing majority-owned cellular systems, including additional
radio channel capacity as well as new cell sites, total about $140 million.
Anticipated expenditures for construction of switching offices and digital
expansion total $7 million. Radio paging property and equipment additions,
primarily the purchase of pagers, are anticipated to total about $25 million in
1994. Other fixed asset expenditures are estimated to total $10 million in 1994.
Investments in cellular partnerships, primarily minority-owned and managed
partnerships, are expected to total $5 million in 1994.
TDS's active acquisition program may require substantial external financing
during 1994. The Company maintains shelf registration of its Common Shares for
use in connection with acquisitions. The following table shows outstanding
Common and Series A Common Shares, Common Shares reserved for pending
acquisitions, and Common Shares registered under the shelf registration.
<TABLE>
<CAPTION>
Common and Series A Common Shares
- -------------------------------------------------------------------------------
(SHARES IN THOUSANDS)
<S> <C>
Shares outstanding December 31, 1993 50,385
Shares issuable 304
Shares reserved for pending acquisitions
under definitive agreements 3,540
------
Total shares outstanding and committed 54,229
- -------------------------------------------------------------------------------
Unissued shares previously registered for
acquisitions, including shares reserved
under definitive agreements 6,706
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, the Company had agreements awaiting regulatory
approvals to acquire controlling interests in two telephone companies (which
also own cellular interests representing approximately 90,000 population
equivalents) for an aggregate consideration of $53.2 million. Completion of
these pending acquisitions will require the issuance of approximately 1.1
million TDS Common Shares.
TDS and/or USM have entered into definitive agreements at December 31,
1993, to acquire controlling interests in nine cellular markets plus a minority
interest representing an aggregate of approximately 1.2 million population
equivalents for an aggregate consideration estimated to be $128.4 million. If
all of these acquisitions are completed as planned, TDS and/or USM will issue
approximately 2.4 million TDS Common Shares, 49,000 USM Common Shares and will
pay approximately $6.2
<PAGE>
million in cash. Any cellular interests acquired by TDS in these transactions
are expected to be assigned to USM, and at the time this occurs, USM will
reimburse TDS for TDS's consideration delivered and costs incurred in such
acquisitions in the form of USM Common Shares and notes payable. In addition to
the agreements discussed above, the Company has pending agreements to acquire
interests representing 302,000 population equivalents in three cellular markets.
The consideration for these acquisitions will be determined based on future
appraisals of the fair market value of the interests to be acquired.
TDS and USM plan to continue to acquire additional cellular interests in
markets that strengthen USM's position, while at the same time considering the
disposition of interests in some markets that do not fit well with USM's long-
term plans. TDS and USM are currently negotiating agreements for the acquisition
of additional cellular interests. TDS is also currently negotiating agreements
for the acquisition of additional telephone and paging companies.
TDS is a party to legal proceeding before the FCC involving its cellular
license in a Wisconsin Rural Service Area. Pending the resolution of the issues
in the Wisconsin proceeding, further FCC grants to TDS and its subsidiaries will
be conditioned on the outcome of that proceeding. TDS's and USM's ability to
sell or exchange properties with third parties while such proceeding is pending
may be affected. See Note 14 of Notes to Consolidated Financial Statements,
Legal Proceedings (LaStar Application), for a discussion of the proceeding
involving the Wisconsin Rural Service Area.
LIQUIDITY. Management believes that TDS has sufficient internal and
external resources to finance the anticipated requirements of its business
development, construction and acquisition programs. TDS and its subsidiaries
have cash and temporary investments totalling $73.4 million and longer-term
investments in marketable non-equity securities totalling $64.6 million at
December 31, 1993. These cash and other investments are primarily the result of
telephone operations' internally generated cash. While certain regulated
telephone subsidiaries' debt agreements place limits on intercompany
dividend payments, these restrictions are not expected to affect the Company's
ability to meet its cash obligations.
TDS and its subsidiaries also have access to a variety of external capital
sources. The TDS Telecom telephone subsidiaries had $93.9 million in unadvanced
loan funds from federal government programs at year-end to finance the telephone
construction program. These loan commitments have a weighted average annual
interest rate of 6.1%.
TDS and its subsidiaries had $117.3 million of bank lines of credit for
general corporate purposes at December 31, 1993, all of which were committed.
Unused amounts of such lines totalled $111.0 million, all of which were
committed. These line of credit agreements provide for borrowings at negotiated
rates up to the prime rate.
TDS and USM also have access to debt and equity capital markets, including
shelf registration statements to issue common stock and preferred stock for
acquisitions. TDS's shelf registration statement for Common Shares for
acquisitions had 6.7 million unissued shares at December 31, 1993, including 2.5
million shares reserved under definitive agreements. TDS filed a $300 million
universal shelf registration statement in September 1993 which may be used from
time to time to issue debt securities and/or Common Shares for cash. As of
December 31, 1993, $282.6 million remained unused on the universal shelf. In
February 1994, APP issued 3.5 million Common Shares in an initial public
offering at a price of $14.00 per share. The $45.6 million proceeds (after
underwriting discount) were used to reduce TDS's short-term debt and for general
corporate purposes.
The Company plans to continue financing its telephone construction program
primarily using internally generated cash supplemented by long-term financing
from federal government programs. Internally generated cash financed 60.1% of
telephone property, plant and equipment additions in 1993, 76.4% in 1992 and
88.3% in 1991. Financing from federal government programs provided 39.9% of
telephone construction in 1993, 23.6% in 1992 and 11.7% in 1991.
Management believes that TDS's internal cash flows and funds available from
cash and cash investments provide substantial financial flexibility. TDS also
has substantial lines of credit and longer-term financing commitments to meet
its short- and longer-term financing needs. Moreover, TDS and USM have access to
public and private capital markets and anticipate issuing debt and equity
securities when capital requirements (including acquisitions), financial market
conditions and other factors warrant.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended or at December 31, 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 590,744 $ 456,896 $ 354,681 $ 294,574 $ 239,803
Operating Income 69,733 54,065 40,661 47,124 26,906
Net Income before Extraordinary Item and
Cumulative Effect of Accounting Changes 33,896 38,520 21,113 27,208 11,051
Extraordinary Item -- (769) -- -- --
Cumulative Effect of Accounting Changes -- (6,866) (5,035) -- --
Net Income 33,896 30,885 16,078 27,208 11,051
Net Income Available to Common $ 31,510 $ 28,648 $ 14,390 $ 26,047 $ 9,768
Weighted Average Common Shares (000s) 47,266 39,074 33,036 30,415 27,543
Earnings per Common Share:
Before Extraordinary Item and Cumulative
Effect of Accounting Changes $ .67 $ .91 $ .59 $ .86 $ .35
Extraordinary Item -- (.02) -- -- --
Cumulative Effect of Accounting Changes -- (.17) (.15) -- --
Net Income $ .67 $ .72 $ .44 $ .86 $ .35
Pretax Profit on Revenues 10.2% 14.9% 10.2% 14.8% 7.9%
Effective Income Tax Rate
(Before Extraordinary Item and
Cumulative Effect of Accounting Changes) 43.9% 43.6% 41.4% 37.6% 41.8%
Dividends per Common
and Series A Common Share $ .34 $ .32 $ .30 $ .28 $ .26
Cash and Cash Equivalents
and Temporary Investments 73,385 58,145 53,346 65,824 57,296
Property, Plant and Equipment (Net) 1,738,298 1,275,516 997,187 624,541 514,020
Total Assets 2,259,182 1,696,486 1,368,145 940,289 771,181
Notes Payable 6,309 46,816 41,283 70,571 1,465
Long-term Debt (including current portion) 537,566 426,885 395,960 270,066 269,762
Redeemable Preferred Shares
(including current portion) 27,367 27,967 28,779 6,965 11,258
Common Stockholders' Equity 1,224,285 877,419 645,290 429,666 361,321
Construction Expenditures $ 208,520 $ 162,245 $ 154,574 $ 111,002 $ 81,750
Current Ratio 1.1 .9 .9 .8 1.5
Common Equity per Share $ 24.15 $ 21.27 $ 18.42 $ 14.17 $ 12.22
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Telephone $268,122 $238,095 $211,231
Cellular telephone 247,259 164,085 99,477
Radio paging 75,363 54,716 43,973
-----------------------------------------------------
590,744 456,896 354,681
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Telephone 189,012 165,877 145,989
Cellular telephone 255,915 176,790 116,308
Radio paging 76,084 60,164 51,723
-----------------------------------------------------
521,011 402,831 314,020
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 69,733 54,065 40,661
- --------------------------------------------------------------------------------------------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income 8,082 7,708 8,100
Minority share of cellular (income) losses (475) (3,703) 2,783
Cellular investment income,
net of license cost amortization 15,704 9,224 6,824
Gain on sale of cellular interests 4,970 31,396 3,407
Other income, net (155) 2,207 3,275
-----------------------------------------------------
28,126 46,832 24,389
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST AND INCOME TAXES 97,859 100,897 65,050
Interest expense 37,466 32,610 28,993
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 60,393 68,287 36,057
Income tax expense 26,497 29,767 14,944
- --------------------------------------------------------------------------------------------------
NET INCOME BEFORE EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 33,896 38,520 21,113
Extraordinary Item -- (769) --
Cumulative Effect of Accounting Changes -- (6,866) (5,035)
- --------------------------------------------------------------------------------------------------
NET INCOME 33,896 30,885 16,078
Preferred Dividend Requirement (2,386) (2,237) (1,688)
- --------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON $ 31,510 $ 28,648 $ 14,390
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES (000s) 47,266 39,074 33,036
EARNINGS PER COMMON SHARE:
Before Extraordinary Item and
Cumulative Effect of Accounting Changes $ .67 $ .91 $ .59
Extraordinary Item -- (.02) --
Cumulative Effect of Accounting Changes -- (.17) (.15)
-----------------------------------------------------
Net Income $ .67 $ .72 $ .44
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON AND SERIES A
COMMON SHARE $ .34 $ .32 $ .30
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 33,896 $ 30,885 $ 16,078
Add (Deduct) adjustments to reconcile
net income to net cash provided by
operating activities
Extraordinary item -- 769 --
Cumulative effect of accounting
changes -- 6,866 5,035
Depreciation and amortization 127,509 98,986 76,841
Deferred taxes 5,846 6,999 2,829
Equity income (20,015) (13,265) (9,404)
Minority share of cellular
income (losses) 475 3,703 (2,783)
Gain on sale of cellular interests (4,970) (31,396) (3,407)
Other noncash expense 5,336 10,128 2,120
Change in accounts receivable (11,262) (10,057) (10,934)
Change in accounts payable 11,308 6,984 (1,392)
Change in accrued taxes 4,661 1,087 (965)
Change in other assets and liabilities 7,412 3,670 3,820
-----------------------------------------------------
160,196 115,359 77,838
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 122,275 59,294 125,334
Repayment of long-term debt (37,969) (40,517) (19,654)
Premium on retirement of long-term debt -- (1,117) --
Change in notes payable (40,533) 5,507 (30,294)
Common stock issued 69,644 72,201 2,146
Minority partner capital (distributions)
contributions (1,528) 1,690 1,640
Redemption of preferred shares (220) (407) (226)
Dividends paid (17,830) (13,902) (11,294)
Sale of stock by a subsidiary 37,154 407 40,742
----------------------------------------------------
130,993 83,156 108,394
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (198,743) (148,619) (151,755)
Investments in and advances to
cellular minority partnerships (14,595) (16,981) (26,124)
Distributions from partnerships 11,943 9,676 4,637
Proceeds from investment sales 6,750 7,343 8,595
Other investments (35,054) (16,934) (16,807)
Acquisitions, excluding cash acquired (51,579) (30,117) (17,653)
Change in temporary investments 4,945 864 6,529
----------------------------------------------------
(276,333) (194,768) (192,578)
- -------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 14,856 3,747 (6,346)
CASH AND CASH EQUIVALENTS--
Beginning of period 40,810 37,063 43,409
----------------------------------------------------
End of period $ 55,666 $ 40,810 $ 37,063
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED BALANCE SHEETS-ASSETS
<TABLE>
<CAPTION>
December 31, 1993 1992
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 55,666 $ 40,810
Temporary investments 17,719 17,335
Construction funds 1,473 709
Accounts receivable
Due from customers, net 37,802 28,644
Other, principally connecting companies 42,994 35,865
Materials and supplies, at average cost 13,870 9,681
Other 10,032 10,334
--------------------------------
179,556 143,378
- -------------------------------------------------------------------------------------------------
INVESTMENTS
Cellular limited partnership interests 101,210 87,060
Cellular license acquisition costs, net of amortization 92,277 80,132
Marketable equity securities 19,368 19,557
Other 115,532 84,652
--------------------------------
328,387 271,401
- -------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Telephone
In service and under construction, substantially
at original cost 846,491 749,251
Less accumulated depreciation 322,301 280,181
--------------------------------
524,190 469,070
Franchise and other costs in excess of the
underlying book value of subsidiaries,
net of amortization 114,658 97,248
--------------------------------
638,848 566,318
--------------------------------
Cellular Telephone
In service and under construction 306,118 193,681
License acquisition costs 816,621 505,522
--------------------------------
1,122,739 699,203
Less accumulated depreciation and amortization 108,636 64,616
--------------------------------
1,014,103 634,587
--------------------------------
Radio Paging
In service 84,282 67,858
Less accumulated depreciation and amortization 31,337 26,220
--------------------------------
52,945 41,638
--------------------------------
Other
In service 57,228 54,415
Less accumulated depreciation and amortization 24,826 21,442
--------------------------------
32,402 32,973
--------------------------------
1,738,298 1,275,516
- -------------------------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES 12,941 6,191
--------------------------------
$2,259,182 $1,696,486
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED BALANCE SHEETS-
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1993 1992
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock $ 24,859 $ 22,707
Notes payable 6,309 46,816
Accounts payable 82,878 58,193
Advance billings and customer deposits 17,273 13,720
Accrued interest 8,968 6,314
Accrued taxes 7,995 3,070
Other 15,249 13,422
---------------------------------
163,531 164,242
- --------------------------------------------------------------------------------------------------
DEFERRED LIABILITIES AND CREDITS
Investment tax credits 6,285 7,120
Income taxes 59,842 46,949
Postretirement benefits obligation other than pensions 14,213 14,414
Other 10,639 7,026
---------------------------------
90,979 75,509
- --------------------------------------------------------------------------------------------------
LONG-TERM DEBT, excluding current portion 514,442 404,982
- --------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion 25,632 27,163
- --------------------------------------------------------------------------------------------------
MINORITY INTEREST in subsidiaries 223,480 132,938
- --------------------------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES 16,833 14,233
- --------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share;
authorized 100,000,000 shares; issued and outstanding
43,503,584 and 34,383,483 shares, respectively 43,504 34,383
Series A Common Shares, par value $1 per share;
authorized 25,000,000 shares; issued and outstanding
6,881,001 and 6,863,819 shares, respectively 6,881 6,864
Common Shares issuable, 304,328 shares 15,189 --
Capital in excess of par value 1,069,022 761,706
Retained earnings 89,689 74,466
---------------------------------
1,224,285 877,419
---------------------------------
$ 2,259,182 $ 1,696,486
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
COMMON SHARES
Balance beginning of period $ 34,383 $ 28,319 $ 23,680
Add
Acquisitions 7,477 3,720 4,449
Employee stock ownership plans 158 155 37
Dividend reinvestment plan 26 29 26
Sales of Common Shares 1,320 2,000 --
Conversion of Preferred Shares 140 160 127
--------------------------------------------------------
Balance end of period $ 43,504 $ 34,383 $ 28,319
- -----------------------------------------------------------------------------------------------------
SERIES A COMMON SHARES
Balance beginning of period $ 6,864 $ 6,645 $ 6,637
Add
Acquisitions -- 199 --
Dividend reinvestment plan 17 20 8
--------------------------------------------------------
Balance end of period $ 6,881 $ 6,864 $ 6,645
- -----------------------------------------------------------------------------------------------------
COMMON SHARES ISSUABLE
Balance beginning of period $ -- $ 1,936 $ --
Add (Deduct)
Acquisitions 15,189 -- 1,936
Shares issued pursuant
to acquisition agreements -- (1,936) --
--------------------------------------------------------
Balance end of period $ 15,189 $ -- $ 1,936
- -----------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE
Balance beginning of period $ 761,706 $550,096 $345,576
Add (Deduct)
Acquisitions 299,146 132,980 143,903
Employee stock ownership plans 2,578 4,053 1,324
Dividend reinvestment plans 1,835 1,605 972
Sales of Common Shares 64,271 66,160 --
Capital stock expense (333) (284) (211)
Conversion of Preferred shares 1,972 5,309 2,031
(Loss) gain on sale of subsidiary stock (62,153) 1,787 56,501
--------------------------------------------------------
Balance end of period $1,069,022 $761,706 $550,096
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance beginning of period $ 74,466 $ 58,294 $ 53,773
Add net income 33,896 30,885 16,078
--------------------------------------------------------
108,362 89,179 69,851
--------------------------------------------------------
Deduct
Dividends
Common and Series A Common Shares 16,287 12,466 9,841
Preferred Shares 2,386 2,247 1,716
--------------------------------------------------------
18,673 14,713 11,557
--------------------------------------------------------
Balance end of period $ 89,689 $ 74,466 $ 58,294
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Telephone and Data Systems, Inc. and its
subsidiaries ("TDS" or the "Company") conform to generally accepted accounting
principles. The accounting records of the telephone subsidiaries are maintained
in accordance with the uniform systems of accounts prescribed by the regulatory
bodies under whose jurisdiction the subsidiaries operate.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TDS, its
majority-owned subsidiaries since acquisition and the cellular telephone
partnerships in which TDS has a majority general partnership interest. All
material intercompany items have been eliminated.
TDS includes as investments in subsidiaries the value of the consideration
given and all direct and incremental costs relating to acquisitions accounted
for as purchases. All costs relating to unsuccessful negotiations for
acquisitions are expensed. TDS includes as investments in cellular licenses all
direct and incremental costs incurred in participating in the Federal
Communications Commission ("FCC") lottery process to obtain cellular licenses.
Such costs are being amortized in accordance with Company policy.
CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of three months to twelve months are classified as
temporary investments. Temporary investments are stated at cost, which
approximates market.
Cash and cash equivalents and temporary investments consist of the
following:
<TABLE>
<CAPTION>
December 31, 1993 1992
- ------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
General funds $30,966 $21,238
Government agency securities 8,158 5,021
Tax-exempt municipal bonds 1,000 9,353
Certificates of deposit 8,761 6,033
Money-market preferred stock -- 16,500
Commercial paper 24,500 --
-----------------
$73,385 $58,145
- ------------------------------------------------------------
</TABLE>
INVESTMENTS
Investments in cellular limited partnership interests consists of amounts
invested in cellular entities in which TDS holds a minority interest. The
Company follows the equity method of accounting, which recognizes TDS's
proportionate share of the income and losses accruing to it under the terms of
its partnership or shareholder agreements, for its long-term investments ($87.9
million and $71.3 million at December 31, 1993 and 1992, respectively). Income
and losses from these entities are reflected in the consolidated income
statements on a pretax basis.
The cost method of accounting is followed for those minority interests
which TDS is holding for sale of exchange ($13.3 million and $15.8 million at
December 31, 1993 and 1992, respectively). TDS's unaudited proportionate share
of the income or (loss) of such cellular investments which are accounted for
under the cost method and are therefore not included in the consolidated income
statements were approximately $979,000 in 1993, $840,000 in 1992 and $(199,000)
in 1991. TDS's proportionate share of all such losses since the inception of
operations or acquisition was $1.8 million at December 31, 1993.
Cellular license acquisition costs consist of costs incurred in acquiring
FCC licenses or minority interests which have been awarded FCC licenses to
provide cellular service. These costs include amounts paid to license applicants
and owners of interest in cellular entities awarded licenses; amounts paid for
legal, engineering, and consulting services; amounts incurred by TDS in
acquiring these interests; and goodwill. These costs are capitalized and had
been amortized through charges to expense over 20 years upon commencement of
operations. Effective January 1, 1992, the Company prospectively changed its
amortization period for license costs from 20 years to 40 years to conform with
industry practices. Amortization amounted to $1.6 million in 1993, $607,000 in
1992 and $1.0 million in 1991. Accumulated amortization of cellular license
costs was $4.4 million and $3.2 million at December 31, 1993 and 1992,
respectively. Cellular license costs with an unamortized financial reporting
basis of approximately $16 million have no tax basis because the associated
purchase transactions were structured to be tax-free. This basis difference is
goodwill and no deferred taxes have been provided.
Marketable equity securities are stated at the lower of cost or market
value. At December 31, 1993, the aggregate market value of such securities
exceeded their cost by $207,000.
Other investments consist of the following:
<TABLE>
<CAPTION>
December 31, 1993 1992
- ----------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minority telephone interests $ 32,238 $ 31,924
Marketable non-equity
securities, at cost which
approximates market 64,556 35,814
Rural Telephone Bank Stock,
at cost 4,863 4,419
Long-term notes receivable 7,764 6,768
Other 6,111 5,727
-----------------
$115,532 $ 84,652
- ----------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The equity method of accounting is followed for investments in which TDS
holds common stock ownership of at least 20% or can influence policies of the
affiliated company. Earnings from these investments are reflected in the
consolidated income statements net of applicable tax effects. At December 31,
1993, the cumulative share of income from investments accounted for under the
equity method was $58.7 million, of which $16.7 million was undistributed. Other
investments are stated at cost. Amortization of excess cost relating to
minority telephone interests totalled $545,000 in 1993, $485,000 in 1992 and
$306,000 in 1991.
Shares of Rural Telephone Bank ("RTB") Class B stock are purchased as a
condition of obtaining long-term financing from the RTB. Holders of Class B
stock are entitled to patronage dividends in the form of additional Class B
stock. Such stock must be held until the related RTB loan is repaid.
PROPERTY, PLANT AND EQUIPMENT
TELEPHONE plant in service and under construction is stated at the original
cost of construction including the capitalized costs of certain taxes, payroll-
related expenses, and an allowance for funds used during construction ("AFUDC").
AFUDC, a noncash item of nonoperating income, totalled $698,000 in 1993,
$559,000 in 1992 and $430,000 in 1991. The composite weighted average rates
were 9.2% in 1993, 8.6% in 1992 and 9.4% in 1991. The amount of such allowance
has varied principally as a result of changes in the level of construction work
in progress and in the cost of capital.
Renewals and betterments of units of property are added to telephone plant
in service. The original cost of depreciable property retired is removed from
plant in service and, together with removal costs less any salvage realized, is
charged to accumulated depreciation. Repairs and renewals of minor items of
property are included in plant operations expense. No gain or loss is recognized
on ordinary retirements of depreciable telephone property.
Telephone franchise and other costs include the costs in excess of the
underlying book value of acquired telephone companies. Costs in excess of the
underlying book value relating to acquisitions initiated before November 1,
1970, aggregating $6.5 million, are not being amortized. At December 31, 1993,
costs aggregating $125.1 million relating to acquisitions since November 1, 1970
are being amortized on a straight-line basis over a 40-year period. Amortization
amounted to $3.0 million in 1993, $2.4 million in 1992 and $2.3 million in 1991.
Accumulated amortization of excess cost was $16.9 million and $13.9 million at
December 31, 1993 and 1992, respectively.
CELLULAR TELEPHONE property and equipment is stated at cost. Costs incurred
in acquiring FCC licenses or interests in entities which have filed for or have
been awarded FCC licenses to provide cellular service have been capitalized.
These costs include amounts paid for legal, engineering, and consulting
services; amounts paid to license applicants and owners of interest in cellular
entities awarded licenses; amounts incurred by TDS in acquiring these interests;
and goodwill. These costs had been amortized on a straight-line basis over 20
years upon commencement of operations. Effective January 1, 1992, the Company
prospectively changed its amortization period for license costs from 20 years to
40 years to conform with industry practices. Amortization amounted to $17.3
million in 1993, $10.9 million in 1992 and $8.9 million in 1991. Cellular
license costs with an unamortized financial reporting basis of approximately
$242 million have no tax basis because the associated purchase transactions were
structured to be tax-free. This basis difference is goodwill and no deferred
taxes have been provided. Costs incurred prior to the commencement of cellular
service in cellular telephone markets have been capitalized and are amortized
over five years upon commencement of operations.
RADIO PAGING property and equipment is stated at cost. Costs relating to
the acquisition and development of radio paging licenses have been capitalized
and are being amortized over five to ten years upon commencement of operations.
OTHER property and equipment is stated at cost. Certain costs relating to
the development of computer software for internal use are capitalized and are
amortized over the estimated five-year life of the software.
DEPRECIATION is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- ----------------------------------------------------------
<S> <C> <C> <C>
Telephone 7.3% 7.2% 6.7%
Cellular Telephone 10.5 10.5 10.4
Radio Paging 17.4 17.2 17.1
Other 12.9 12.8 10.1
- ----------------------------------------------------------
</TABLE>
REVENUE RECOGNITION
TDS's revenues are recognized when earned. Telephone network access and
long-distance services are furnished jointly with other companies, primarily
AT&T Communications, Inc, and the Bell Operating Companies. Compensation for
interstate access services is based on tariffed access charges to interstate
long-distance carriers as filed by the National Exchange Carrier Association
with the FCC on behalf of TDS. Such compensation amounted to 31% of telephone
revenues in 1993, 28% in 1992 and 26% in 1991. Compensation for intrastate toll
and access service is based on tariffed access charges, cost separation
studies, nation-wide average schedules or special settlement arrangements with
intrastate long-distance carriers. Network access and long-distance revenues
based on cost separation studies represent estimates pending completion and
acceptance of final cost studies. Management believes that recorded amounts
represent reasonable estimates of the final amounts.
PENSION PLAN
Telephone and Data Systems, Inc. Employees' Pension Trust I (the "Pension
Trust"), a qualified non-contributory defined contribution pension plan,
provides pension benefits for most of the employees of TDS, its telephone
subsidiaries and its service companies. Under this plan, pension benefits and
costs are calculated separately for each participant and are funded currently.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employees of certain of the telephone subsidiaries not covered by the Pension
Trust are covered under other pension plans or receive direct pension payments.
Total pension costs were $3.3 million in 1993, $2.4 million in 1992 and $2.4
million in 1991.
OTHER POSTRETIREMENT BENEFITS
The Company adopted Statements of Financial Accounting Standards No. 106
("SFAS 106"), "Employers's Accounting for Postretirement Benefits Other than
Pensions" effective January 1, 1992. SFAS 106 requires companies to accrue
postretirement benefits during the employment years. The Company provides health
care benefits and life insurance coverage which were expensed as paid in 1991.
Such payments totalled $401,000, $302,000 and $241,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
The Company sponsors two defined benefit post-retirement plans that cover
most of the employees of TDS, its telephone subsidiaries and its service
companies. One plan provides medical benefits and the other provides life
insurance benefits. Both plans are contributory, with retiree contributions
adjusted annually. The accounting for the medical plan anticipates future cost-
sharing changes to the written plan that are consistent with the Company's
intent to increase retiree contributions by the health care cost trend rate.
During 1992 the Company established a Medical Benefit Fund (the "Fund") within
the Pension Trust, under Internal Revenue Code Section 401(h). The Fund was
established to pay for part of the cost of the medical benefits. An amount equal
to 25% of the contribution to the pension plan will be contributed to the Fund
annually. The Company established a Voluntary Employees' Beneficiary Association
during 1993 to fund the costs of the life insurance benefits.
The following table sets forth the plans' combined funded status reconciled
with the amount shown in the Company's consolidated balance sheet at
December 31, 1993 (dollars in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $ 4,384
Fully eligible active plan participants 2,400
Other active plan participants 9,277
------
16,061
Plan assets at fair value 2,184
------
Accumulated postretirement benefit
obligation in excess of plan assets 13,877
Unrecognized net gain from past experience
different from that assumed and from
changes in assumptions 336
------
Accrued postretirement benefit cost
at December 31, 1993 $ 14,213
- --------------------------------------------------------------------------------
</TABLE>
The Company's medical and life insurance plans are underfunded. The
accumulated postretirement benefit obligations for the health care plan and the
life insurance plan are $13.7 million and $2.4 million, respectively. Plan
assets for the health care plan and the life insurance plan totalled $1.9
million and $243,000, respectively, at December 31, 1993.
The Company's accumulated postretirement benefit for both plans as of
January 1, 1992 totalled approximately $12.9 million. Of this amount, $1.6
million was capitalized to telephone plant by the Company's regulated
operations. The remaining $11.3 million, net of related income tax benefits of
$4.4 million, was recorded as the cumulative effect of a change in accounting
principle for the year ended December 31, 1992. The Consolidated Statement of
Income for 1991 was not restated. The effect of the change in 1992 is shown
below (dollars in thousands, except per share amounts):
<TABLE>
<S> <C>
Net Income before extraordinary item and
cumulative effect of change $ (830)
Cumulative effect of change (6,866)
--------
Net Income $(7,696)
- --------------------------------------------------------------------------------
Earnings per share before extraordinary
item and cumulative effect of change $ (.02)
Cumulative effect of change (.17)
--------
Earnings per Common Share $ (.19)
- --------------------------------------------------------------------------------
</TABLE>
Net postretirement cost for 1993 and 1992 includes the following
components:
<TABLE>
<CAPTION>
December 31, 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost $ 806 $ 652
Interest cost on accumulated
post-retirement benefit
obligation 1,378 1,094
Actual return on plan assets (64) --
Net amortization and deferral (49) --
-----------------
Net postretirement cost $ 2,071 $ 1,746
- --------------------------------------------------------------------------------
</TABLE>
For measurement purposes, an 11.6% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1993; the rate was
assumed to decrease over nine years to 6.1% and to remain at 6.1% thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. Increasing the assumed health care costs trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1993, by $2.9 million and the aggregate
of the service and interest cost components of postretirement expense for the
year then ended by $432,000.
The weighted average discount rate and rate of compensation increase used
in determining the accumulated postretirement benefit obligation were 7.0% and
5.0%, respectively. The trust that holds the plan assets is subject to federal
income taxes at a 39.6% marginal tax rate.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Financial Accounting Standards Board issued SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which became effective in January 1994,
requiring employers to recognize the obligation to provide benefits to former or
inactive employees after employment but before retirement. Based on a study of
the provisions of SFAS No. 112, the Company estimates that implementation of the
new standard will result in a charge to income in 1994 (to be treated as the
cumulative effect of an accounting change) estimated to be approximately
$725,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GAIN ON SALE OF CELLULAR INTERESTS
Gains in 1993 reflect primarily the sale of two minority cellular
interests. USM received $6.8 million cash consideration on the sales.
Gains in 1992 reflect the sales and exchange of minority- and
majority-owned cellular interests as follows: (a) USM transferred its
controlling interests in two Rural Services Areas ("RSAs"), its minority
interests in two Metropolitan Statistical Areas ("MSAs") and approximately $2.9
million in cash in exchange for controlling interests in two other MSAs and a
minority interest in a combined MSA/RSA system. The exchange of the controlling
interests in the RSAs has been recorded using book values, with no gain or loss
recognized on the exchange. The exchange of the minority interests in the two
MSAs has been recorded at the fair market value of approximately $15.7 million.
A gain of $11.4 million, representing the excess of the fair market value of
the MSA interests traded over the book value of such interests, was included in
income for 1992. (b) USM sold a majority interest in an MSA in exchange for
certain marketable equity securities then valued at $18.2 million. A gain of
$17.1 million was recognized on the sale. (c) USM sold a minority interest in an
MSA for $3.8 million in cash. A gain of $2.9 million was recognized on the sale.
Gains in 1991 reflect primarily sales of cellular minority interests.
Approximately $2.9 million of the gain in 1991 equals the income tax liability
associated with the sale.
EXTRAORDINARY ITEM
During 1992 the Company retired at a premium $20.8 million of its Senior Notes.
The notes carried interest rates of 9.75% to 13.75% and were due in 1996 through
2004. The transaction resulted in an extraordinary loss of $769,000 ($.02 per
share), net of income tax benefits of $491,000.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1991, USM changed its method of accounting for sales
commissions from capitalizing and amortizing these costs over 36 months to
expensing as incurred. Also in 1991, two of USM's equity-method investees made a
similar accounting change.
The ($5.0 million) cumulative effect of both USM's and its equity-method
investees' changes on prior years after reduction for the minority USM
shareholders' share of $1.9 million and income tax benefits of $3.4 million is
included in income for the twelve months ended December 31, 1991. The effect of
the changes in 1991 was to decrease net income and earnings per share before the
cumulative effect of accounting changes by $463,000 and $.01, respectively, and
to decrease net income and earnings per share by $5.5 million and $.16,
respectively.
EARNINGS PER COMMON SHARE
Earnings per Common Share were computed by dividing Net Income Available to
Common, less (in 1992) an amount due to a subsidiary's issuable securities ("the
minority income adjustment") by the weighted average number of Common Shares,
Series A Common Shares and dilutive common equivalent shares outstanding during
the year. The minority income adjustment, $546,000 in 1992 reflects the
additional minority share of the subsidiary's income computed as if all of the
subsidiary's issuable securities were outstanding. Dilutive common stock
equivalents consist of Common Shares issuable upon conversion of dilutive series
of Preferred Shares and Common Share options. The calculation of Earnings per
Common Share assuming full dilution had no effect.
Preferred dividend requirements include all dividends paid on Preferred
Shares which are not dilutive common stock equivalents. For the year ended
December 31, 1993, the preferred dividend requirement on all outstanding
Preferred Shares was $2.4 million.
SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures for interest and income
taxes paid, acquisitions and other noncash transactions. TDS paid interest of
$34.4 million, $32.4 million and $26.1 million and income taxes of $17.3
million, $20.2 million and $13.4 million during 1993, 1992 and 1991,
respectively.
TDS has acquired operating telephone and paging companies, certain cellular
licenses and operating companies and certain other assets since January 1, 1991.
In conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant
and equipment $ 78,252 $ 33,987 $ 70,784
Cellular licenses 312,656 157,966 257,017
Minority interest (14,115) 132 1,000
Increase (decrease)
in equity method
investment in
cellular interests (4,690) (8,159) (3,922)
Long-term debt (23,930) (2,492) (18,759)
Deferred credits (5,300) (754) (2,043)
Other assets and
liabilities, excluding
cash and cash
equivalents 3,821 3,548 559
Common Shares
issued and issuable (281,553) (134,612) (150,288)
Preferred Shares issued (3,000) -- (23,059)
USM stock issued
and issuable (7,653) (19,499) (113,636)
Subsidiary preferred
stock issued (2,909) -- --
-----------------------------
Decrease in cash due
to acquisitions $ 51,579 $ 30,117 $ 17,653
- --------------------------------------------------------------------------------
</TABLE>
TDS issued Common Shares aggregating $2.1 million in 1993, $5.5 million in 1992
and $2.2 million in 1991 for TDS Preferred Shares and subsidiary preferred stock
converted into Common Shares. TDS issued Common Shares in 1993 aggregating $40.3
million for certain cellular acquisitions completed in prior years. The
consideration specified in the original acquisition agreements was USM Common
shares. The Company also added $7.1 million in other property and equipment
financed with long-term obligations in 1992.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2
INCOME TAXES
TDS files a consolidated federal income tax return. Effective January 1,
1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS 109
requires companies to record all deferred tax liabilities or assets for the
deferred tax consequences of all temporary differences. Additionally, the
statement requires that deferred tax balances be adjusted to reflect new tax
rates when they are enacted into law. The cumulative effect of the
implementation of SFAS 109 on years prior to 1993 had no material effect on
net income or earnings per share. Income tax expense for 1993 reflects the new
method of accounting; income tax expense for prior years has not been restated.
Income tax provisions charged to net income before extraordinary items and
the cumulative effect of accounting changes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 15,562 $ 17,564 $ 10,294
State 4,521 5,008 2,593
Deferred:
Federal 6,696 8,344 3,236
State 1,510 851 523
Amortization of
deferred investment
tax credits (1,792) (2,000) (1,702)
-----------------------------
Total income tax
expense $ 26,497 $ 29,767 $ 14,944
- --------------------------------------------------------------------------------
</TABLE>
In August of 1993, the Revenue Reconciliation Act of 1993 increased the
1993 statutory federal corporate income tax rate from 34 percent to 35 percent.
As a result of this change, federal tax expense increased by $568,000.
Effective with the adoption of SFAS 109 in 1993, deferred income taxes were
provided for the temporary differences between the amount of the Company's
assets and liabilities for financial reporting purposes and their tax bases. The
Company's current deferred tax assets totalled $2.6 million as of December 31,
1993, which primarily represents the deferred tax effects of unearned revenues.
The temporary differences that gave rise to the noncurrent deferred tax assets
and liabilities as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Deferred Income Taxes
------------------------
Assets Liabilities
- --------------------------------------------------------------------------------
<S> <C> <C>
Property, plant and equipment $ -- $ 65,141
Alternative minimum tax credit
carryforwards 19,553 --
State operating loss
carryforwards 14,610 --
Postretirement benefits 5,251 --
Partnership investments -- 9,722
Licenses -- 7,313
Marketable equity securities -- 6,797
Minority Share of USM income 5,823
Effects of corporations not
included in consolidated
federal return -- 3,878
Other 10,281 2,159
-------------------
49,695 100,833
Less valuation allowance (8,704) --
-------------------
Total $ 40,991 $100,833
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1993 TDS had $19.5 million of federal alternative minimum
tax credit carryforwards available to offset regular income tax payable in
future years, and $211 million of state net operating loss carryforwards
expiring between 1999 and 2008. Income tax benefits of $1.4 million associated
with Company employee stock purchase plans and certain stock option arrangements
were recorded directly to Common Stockholders' Equity in 1993. Investment tax
credits resulting from investments in telephone plant and equipment have been
deferred and are being amortized over the service lives of the related property.
A valuation allowance of $6.5 million has been established upon the
adoption of SFAS 109 since it is more likely than not that a portion of the
state operating loss carryforwards will expire before they can be utilized.
During 1993, the valuation allowance increased $2.2 million due primarily to
the increase in state operating loss carryforwards.
The statutory federal income tax rate is reconciled to TDS's effective
income tax rate before an extraordinary item and the cumulative effect of
accounting changes below.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income tax rate 35.0% 34.0% 34.0%
State income taxes,
net of federal benefit 6.2 5.5 5.7
Amortization of license
acquisition costs and costs
in excess of book value 4.8 3.6 7.0
Amortization of deferred
investment tax credits (3.0) (2.7) (4.4)
Effects of corporations not
included in consolidated
federal tax return 1.9 1.8 1.1
Minority share of
USM income (loss) -- .5 (4.0)
Deferred tax rate differential (.7) (.7) (1.1)
Gain on sale of
cellular interest -- .5 4.0
Other differences, net (.3) 1.1 (.9)
-----------------------------------
Effective income tax rate 43.9% 43.6% 41.4%
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total income tax provision for the years ended December 31, 1992 and
1991, including the extraordinary item and cumulative effect of accounting
changes, was $25.5 million and $11.6 million, respectively. The effective
income tax rate, including the extraordinary item and cumulative effect of
accounting changes, was 45.7% in 1992 and 41.9% in 1991.
Upon the adoption of SFAS 109, TDS's telephone subsidiaries recorded
additional deferred income tax liabilities related primarily to temporary
differences not deferred under rate-making policy. Deferred income tax
balances were also adjusted to recognize the current federal income tax rate of
35%. Deferred income tax assets were recorded to recognize unamortized
investment tax credits as a temporary difference. A corresponding regulatory
asset or liability has been established to offset these deferred income tax
adjustments. The unamortized regulated asset and liability balances as of
December 31, 1993, are $6.7 million and $7.9 million, respectively. These
amounts are being amortized over the lives of the related temporary differences.
NOTE 3
BUSINESS SEGMENT INFORMATION
TDS's operations are classified into three principal segments: Telephone,
Cellular Telephone and Radio Paging operations. See Management's Discussion and
Analysis of Results of Operations and Financial Condition, specifically "Results
of Operations" for certain required financial information regarding TDS's
business segments.
NOTE 4
ACQUISITIONS
During 1993 and 1992, TDS and its subsidiaries completed the following business
combinations.
<TABLE>
<CAPTION>
Consideration
------------------------------
TDS and USM
Common Stock, TDS
Preferred Shares,
Cash, Notes and and Subsidiary
Long-term Debt Preferred Stock
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Acquisitions During 1993
Majority interest in four
telephone companies $34,396 $ 32,821
Cellular interest 19,538 262,346
Paging interests 4,896 --
Acquisitions During 1992
Five telephone
companies $ 279 $ 15,844
Cellular interests 22,674 138,267
Paging interest 4,650 --
- --------------------------------------------------------------------------------
</TABLE>
Assuming that these acquisitions which were accounted for as purchases had
taken place on January 1, 1992, unaudited pro forma results of operations from
continuing operations would have been as follows:
<TABLE>
Year Ended December 31, 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Operating revenues $608,020 $503,992
Net income before extraordinary
item and cumulative effect
of accounting changes 29,393 30,765
Earnings per share before
extraordinary item and
cumulative effect of
accounting changes $ .49 $ .42
- --------------------------------------------------------------------------------
</TABLE>
NOTE 5
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash and Cash Equivalents, Temporary Investments,
Marketable Non-Equity Securities and Short- and Long-term Debt approximate fair
value. The following assumptions were used by the Company for its fair value
estimates for financial instruments:
Cash and Cash Equivalents and Short-term Debt: based on face
amounts.
Temporary Investments and Marketable Non-Equity Securities: based on quoted
market prices.
Long-term Debt: estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying value of the Company's Redeemable Preferred Shares, $27.4
million, is less that its fair value, estimated to be $33.4 million. The fair
value was estimated using discounted cash flow analyses based on the Company's
current dividend yield on issues of its non-convertible preferred shares, and,
for convertible series, the net present value of the common stock to be issued
upon conversion (valued at the December 31, 1993 quoted market price).
It was not practicable to estimate the fair value of the Company's cost
method investments in other companies because of the lack of quoted market
prices. The carrying amounts at December 31, 1993 represent the original cost of
the investments, which management believes is not impaired.
NOTE 6
NOTES PAYABLE
TDS has used short-term debt to finance its investments in cellular
telephone and radio paging operations, for acquisitions, and for general
corporate purposes. Long-term debt and equity financing from time to time have
retired such short-term debt. Proceeds from the sale of medium-term debt retired
$91.4 million of short-term debt in 1993 and $7.5 million in 1992. Proceeds of
TDS's sales of Common Shares retired $58.9 million of short-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
term debt in 1993 and $54 million of short-term debt in 1992. Proceeds from a
USM rights offering (see Note 7) reduced $29.6 million of short-term debt in
1993.
TDS and its subsidiaries had $117 million of bank lines of credit for
general corporate purposes at December 31, 1993, all of which were committed.
Unused amounts of such lines totalled $111 million, all of which were committed.
These line-of-credit agreements provide for borrowings at negotiated rates up to
the prime rate.
Information concerning notes payable is shown in the table below.
<TABLE>
<CAPTION>
December 31 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance
at end of period $ 6,309 $46,816 $41,283
Weighted average
interest rate at
end of period 3.6% 4.3% 5.8%
Maximum amount
outstanding during
the period 49,851 $71,803 $80,035
Average amount
outstanding during
the period(1) $32,270 $31,053 $42,959
Weighted average
interest rate during
the period (1) 3.9% 4.5% 6.6%
- --------------------------------------------------------------------------------
<FN>
(1) The average was computed based on month-end balances.
</TABLE>
NOTE 7
SALE OF STOCK BY A SUBSIDIARY
In 1993, USM sold 5.9 million Common Shares and 5.5 million Series A Common
Shares at a price of $33 per share pursuant to a rights offering. Approximately
4.8 million of the Common Shares and all of the Series A Common Shares were
issued to TDS in exchange for a reduction in the amount of debt USM owes TDS of
approximately $341 million.
In 1991, USM sold 2.0 million Common Shares at a public offering price of
$18 per share. Immediately prior to the public offering, $110 million of USM's
debt to TDS was converted into additional USM Common Shares, also at $18 per
share. USM issued Common Shares during 1993, 1992 and 1991 in connection with
acquisitions and employee stock purchase plans. In addition, certain 1993, 1992
and 1991 acquisitions require USM to deliver Common Shares in the future.
The USM Common Share transactions were recorded at fair market values which
were substantially either less than or in excess of TDS's book value investment
in USM. The (decrease) increase in TDS's book value investment (as a result of
these issues and commitments to issue Common Shares) totalled ($62.2 million) in
1993, $1.8 million in 1992 and $56.5 million in 1991, and was (debited) credited
to capital in excess of par value.
NOTE 8
LONG-TERM DEBT
Long-term debt as of December 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
December 31 1993 1992
- ------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S>
Telephone and Data Systems,
Inc. (Parent) Medium-term
notes, 8% to 10%, due <C> <C>
through 2023 $ 200,000 $ 107,500
Senior notes, 8.875% to 14% -- 10,970
Purchase contracts, 8% to 14%,
due through 2003 4,272 4,417
Subordinated debentures,
8.0% to 14.5%, due through
2008 2,364 3,154
---------------------------------
206,636 126,041
Less current portion 1,604 3,935
---------------------------------
Total parent debt 205,032 122,106
- ---------------------------------------------------------------
Subsidiaries
REA, RTB and FFB Mortgage
Notes, due through 2030
2% 30,141 29,698
4% to 6% 162,714 135,390
6.05% to 9% 59,846 52,661
9.025% to 11% 6,994 7,183
---------------------------------
259,695 224,932
Vendor financing,
approximating prime 62,931 64,866
Other long-term notes,
6% to 13%, due
through 2003 8,304 11,046
---------------------------------
330,930 300,844
Less current portion 21,520 17,968
---------------------------------
Total subsidiaries'
debt 309,410 282,876
- ---------------------------------------------------------------
Total long-term debt $ 514,442 $ 404,982
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
The Company sold $92.5 million and $7.5 million of senior unsecured debt
securities in 1993 and 1992, respectively, under its Medium-Term Note Program.
The proceeds were used principally to retire short-term debt, as well as for
working capital and general corporate purposes.
The mortgage notes issued under certain loan agreements with the Rural
Electrification Administration ("REA"), Rural Telephone Bank ("RTB") and Federal
Financing Bank ("FFB"), agencies of the United States of America, are to be
repaid in equal monthly or quarterly installments covering principal and
interest beginning six months to three years after dates of issue and expiring
through 2030.
Substantially all telephone plant is pledged under REA and RTB mortgage
notes and various other obligations of the subsidiaries.
USM has financing arrangements with an equipment vendor for cellular system
equipment and construction costs. The borrowings are collateralized by a secured
interest in some or all of the assets of USM's operating subsidiaries.
Borrowings have terms of seven to eight years at interest rates approximating
the prime rate (6.0% at December 31, 1993).
The annual requirements for principal payments on long-term debt are
approximately $23.1 million, $23.2 million, $21.0 million, $19.9 million and
$20.2 million for the years 1994 through 1998, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9
PREFERRED SHARES
TDS Cumulative Voting Preferred Shares, authorized 5,000,000 shares, have a
stated value of $100 per share. The Preferred Shares are issuable in series by
the Board of Directors who establish the terms of the issue. Those issues which
contain mandatory redemption features or which are redeemable at the option of
the holder are classified as Redeemable Preferred Shares. Those issues which are
not redeemable or which are redeemable at the option of TDS are classified as
Nonredeemable Preferred Shares.
REDEEMABLE PREFERRED SHARES
Redeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares with redemption features as described below. Dividends
on Series MM through QQ are payable in additional shares of each of those
series. All other dividends are payable in cash. At December 31, 1993, Series
W,X and DD are convertible into TDS Common Shares as shown in the following
table.
<TABLE>
<CAPTION>
Outstanding Amount Outstanding
Dividend Conversion Preferred December 31,
Series Rate Ratio Shares 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT DIVIDEND RATES)
<S> <C> <C> <C> <C> <C>
H $7.00 -- 1,594 $ 174 $ 211
N 8.00 -- 5,495 550 628
O 9.00 -- 709 71 71
W 7.50 9/1 8,500 850 850
X 6.00 7.88/1 1,700 170 170
CC 6.00 5.25/1 -- -- 14
DD 7.00 5.25/1 12,000 1,200 2,400
HH 6.00 -- 2,627 263 367
II 6.00 -- 6,738 674 674
JJ 6.00 -- 6,738 674 674
KK 6.00 -- 6,735 674 674
LL 6.00 -- 6,735 674 674
MM 4.00 -- 9,425 942 906
NN 4.00 -- 9,058 905 870
OO 4.00 -- 55,895 5,589 5,371
PP 4.00 -- 48,582 4,858 4,669
QQ 4.00 -- 90,992 9,099 8,744
------------------------------------------
273,523 27,367 27,967
Less current portion 1,735 804
----------------
$25,632 $27,163
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Series H Preferred Shares are required to be redeemed at $119 per share and
are stated on the balance sheets at redemption price. Series N through LL
Preferred Shares are redeemable at the option of the holder at $100 per share
plus accrued and unpaid dividends. Series MM through QQ Preferred Shares are
redeemable at the option of the holder into (at TDS's option) a specified number
of USM Common Shares, a number of TDS Common Shares having a market value equal
to the specified number of USM Common Shares, or a combination of USM and TDS
Common Shares. The annual requirements for redemption of Redeemable Preferred
Shares are $1.7 million, $10.8 million, $11.4 million, $1.2 million and $249,000
for the years 1994 through 1998, respectively.
The following is a schedule of the Redeemable Preferred Shares' activity.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period $27,967 $28,779 $ 6,965
Add:
Acquisitions -- -- 23,059
Stock dividends 834 802 68
Less:
Redemption of preferred (220) (407) (106)
Conversion of preferred (14) -- --
Expiration of
redemption feature (1,200) (1,207) (1,207)
--------------------------------------------------
Balance, end of period $ 27,367 $ 27,967 $ 28,779
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
NONREDEEMABLE PREFERRED SHARES
Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. Outstanding
Nonredeemable Preferred Shares are redeemable at the option of TDS (except
Series S, which is not redeemable) at $100 per share, plus accrued and unpaid
dividends. At December 31, 1993, Series V through RR Preferred Shares are
convertible into TDS Common Shares as shown in the following table.
<TABLE>
<CAPTION>
Outstanding Amount Outstanding
Dividend Conversion Preferred December 31,
Series Rate Ratio Shares 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT DIVIDEND RATES)
<S> <C> <C> <C> <C> <C>
A $6.00 -- 1,395 $ 139 $ 139
B 7.00 -- 1,955 195 195
D 6.00 -- 646 65 65
G 7.00 -- 1,368 137 137
S 7.00 -- 1,209 121 121
U 8.50 -- 1,100 110 110
V 7.50 9/1 3,100 310 370
AA 7.00 9/1 -- -- 1,259
BB 9.00 9/1 19,000 1,900 1,900
CC 6.00 5.25/1 -- -- 22
DD 7.00 5.25/1 48,000 4,800 3,600
EE 6.00 4.5/1 14,304 1,431 1,515
GG 5.00 2.3/1 46,400 4,640 4,800
RR 7.50 2.06/1 29,851 2,985 --
-----------------------------------------
168,328 $16,833 $14,233
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The following is a schedule of the Nonredeemable Preferred Shares'
activity.
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning
of period $ 14,233 $ 13,183 $ 13,134
Add:
Acquisitions 3,000 -- --
Reclassification
from Redeemable
Preferred Shares 1,200 1,207 1,207
Less:
Conversion of preferred (1,600) (157) (1,158)
------------------------------------------
Balance, end of period $16,833 $14,233 $13,183
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10
RESTRICTION ON COMMON STOCK DIVIDENDS
Under TDS's loan agreements at December 31, 1993, all of the consolidated
retained earnings were available for the payment of cash dividends on shares of
TDS common stock.
Certain regulated telephone subsidiaries may not transfer funds to the
parent in the form of cash dividends, loans or advances until certain financial
requirements of their mortgages have been met. Of the $209 million underlying
retained earnings of all TDS subsidiaries at December 31, 1993, $99 million was
available for the payment of dividends on the subsidiaries' common stock. Of
the $1.5 billion underlying net assets of the TDS subsidiaries at
December 31, 1993, $1.1 billion was available for transfer to TDS.
NOTE 11
COMMON STOCK
COMMON SHARES ISSUABLE
Certain telephone and cellular acquisition agreements require TDS to
deliver Common Shares in 1994. In connection with these agreements, TDS expects
to deliver these Common Shares during the first quarter of 1994.
EMPLOYEE AND SHAREHOLDER STOCK PLANS
The following table summarizes Common and Series A Common Shares issued for
the employee stock ownership plans and dividend reinvestment plans described
below.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Common Shares
Employee
stock purchase plan 31,065 44,399 945
Tax-deferred
savings plan 29,760 31,539 23,312
Employee stock
options and stock
appreciation rights 96,877 78,195 12,938
Dividend
reinvestment plan 26,070 29,468 25,569
--------------------------------------
183,772 183,601 62,764
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Series A Common Shares
Dividend
reinvestment plan 17,182 20,525 7,206
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 125,000 Common Shares for sale
to the employees of TDS and its subsidiaries at $44.73 per share in connection
with the 1993 Employee Stock Purchase Plan.
TAX-DEFERRED SAVINGS PLAN. TDS has reserved 218,569 Common Shares for issue
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, USM Common Shares or four other nonaffiliated funds. Employer
matching contributions, equal to 20% of employee contributions up to a certain
limit, are made in TDS Common Shares.
EMPLOYEE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. TDS has reserved 574,342
Common Shares for options granted to key employees. TDS has established certain
plans that provide for the grant of stock options and stock appreciation rights
to officers and employees. The options are exercisable over a specified period
not in excess of ten years. The options expire from 1994 to 2003, or the date of
the employee's termination of employment, if earlier. The following table
summarizes the status of the plans.
<TABLE>
<CAPTION>
Weighted
Number Average
Stock Options of Shares Option Prices
- -------------------------------------------------------------------------------
<S> <C> <C>
Outstanding January 1, 1991
(174,593 exercisable) 532,963 $11.68
Granted 24,000 $32.24
Exercised (11,925) $ 9.52
----------------------------
Outstanding December 31, 1991
(233,542 exercisable) 545,038 $12.63
Granted 1,125 $32.36
Exercised (128,439) $13.15
----------------------------
Outstanding December 31, 1992
(174,751 exercisable) 417,724 $12.52
Granted 11,125 $35.54
Exercised (133,414) $ 9.62
----------------------------
Outstanding December 31, 1993
(104,411 exercisable) 295,435 $14.70
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Stock appreciation rights ("SARs") allow the grantee to receive an amount in
cash or Common Shares, or a combination thereof, equivalent to the difference
between the exercise price and the fair market value of the Common Shares on the
exercise date. The following table summarizes the SARs outstanding at $4.43 to
$36.60 per share. These rights expire March 1997, or the date of the employee's
termination of employment, if earlier.
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding beginning
of period 22,076 20,725 24,024
Granted 9,410 9,828 10,015
Exercised (22,386) (8,477) (13,314)
------------------------------------------
Outstanding end of period 9,100 22,076 20,725
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Compensation expense, measured on the difference between the year-end market
price of the Common Shares and option prices, was $644,000 in 1993, $553,000 in
1992 and $378,000 in 1991.
DIVIDEND REINVESTMENT PLANS. TDS has reserved 205,597 Common Shares for issue
under the Automatic Dividend Reinvestment and Stock Purchase Plan and 244,337
Series A Common Shares for issue under the Series A Common Share Automatic
Dividend Reinvestment Plan. These plans enable holders of TDS's Common Shares
and Preferred Shares to reinvest cash dividends in newly issued Common Shares
and holders of Series A Common Shares to reinvest cash dividends in newly issued
Series A Common Shares. The purchase price of the shares is 95% of the market
value, based on the average of the daily high and low sales prices for TDS's
Common Shares on the American Stock Exchange for the ten trading days preceding
the date on which the purchase is made.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONVERTIBLE PREFERRED SHARES
TDS has reserved 2,401,399 Common Shares for the possible conversion of its
convertible Preferred Shares (See Note 9). TDS issued 139,689 Common Shares in
1993, 160,166 in 1992 and 126,917 in 1991 for shares of TDS and subsidiary
preferred stock converted.
SERIES A COMMON SHARES
The holders of Common Shares and the outstanding Preferred Shares are entitled
to one vote per share. The holders of Series A Common Shares are entitled to ten
votes per share. Series A Common Shares are convertible, on a share-for-share
basis, into Common Shares. TDS has reserved 6,881,001 Common Shares for possible
issuance upon such conversion.
PUBLIC OFFERING
TDS issued 1.3 million Common Shares for cash under its shelf registration
statements in 1993. Proceeds aggregated $65.6 million. TDS sold 2.0 million
Common Shares at $35.50 per share in connection with a public offering in 1992.
Proceeds to TDS were $34.08 per share, or $68.2 million.
NOTE 12
COMMITMENTS
The primary purpose of TDS's construction and expansion program is to provide
for normal growth, to upgrade telephone service, to expand into new
communication areas, and to take advantage of service-enhancing and cost-
reducing technological developments. Telephone construction expenditures are
estimated to be approximately $110 million during 1994. Property and equipment
expenditures for cellular telephone operations are estimated to be approximately
$160 million during 1994. Radio paging fixed asset expenditures are estimated to
be approximately $25 million during 1994. Other fixed asset expenditures are
estimated to be approximately $10 million during 1994. Investments in cellular
partnerships, primarily in minority-owned and managed systems, are expected to
total $5 million in 1994.
The Company has an ongoing acquisition program to acquire telephone companies
and cellular telephone interests. For a discussion of pending acquisitions, see
Management's Discussion and Analysis of Results of Operations and Financial
Condition, specifically "Financial Resources and Liquidity."
TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 1993, 1992 and 1991, rent expense for term
leases was $7.8 million, $6.7 million and $6.5 million, respectively, and rent
expense under cancelable and short-term leases was $5.4 million, $3.1 million
and $3.1 million, respectively. At December 31, 1993, the aggregate minimum
rental commitments under noncancelable operating leases for the years 1994
through 1998 are approximately $7.9 million, $7.0 million, $6.2 million, $5.3
million and $4.9 million, respectively.
NOTE 13
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited results of operations of the telephone and cellular
companies in which TDS's investments are accounted for by the equity method.
<TABLE>
<CAPTION>
December 31, 1993 1992
- --------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Current assets $ 186,931 $ 147,100
Due from affiliates 34,159 18,993
Property and other 570,594 535,015
---------------------------------------
$ 791,684 $ 701,108
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Equity
Current liabilities $ 136,636 $ 97,952
Due to affiliates 35,591 41,614
Deferred credits 6,777 5,839
Long-term debt 84,781 97,470
Partners' capital
and stockholders' equity 527,899 458,233
-----------------------------------------
$ 791,684 $ 701,108
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Year Ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Results of Operations
Revenues $ 765,983 $ 599,548 $ 491,233
Costs and expenses (568,458) (446,149) (338,708)
Other income
(expense) (8,045) 3,086 1,231
Interest expense (9,046) (8,288) (2,231)
Income taxes (3,596) (4,593) (3,707)
Cumulative effect of
accounting changes 432 (1,495) (4,658)
-----------------------------------------
Net income $ 177,270 $ 142,109 $ 143,160
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14
LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain landline or cellular telephone systems. The
more significant proceedings involving the Company are described in the
following paragraphs.
LA STAR APPLICATION. Star Cellular Telephone Company, Inc. ("Star
Cellular"), an indirect wholly owned subsidiary of USM, is a 49% owner of La
Star Cellular Telephone Company ("La Star"), an applicant for a construction
permit for a cellular system in St. Tammany Parish in the New Orleans MSA. In
June 1992, the FCC affirmed an Administrative Law Judge's order which had
granted the mutually exclusive application of New Orleans CGSA, Inc. ("NOCGSA")
and dismissed La Star's application. The ground for the FCC's action was its
finding that Star Cellular, and not the 51% owner, SJI Cellular Inc. ("SJI"), in
fact controlled La Star. La Star, TDS and USM have appealed that order to the
United States Court of Appeals of the District of Columbia Circuit and those
appeals are pending.
In a footnote to its decision, the FCC stated, in part, that "Questions
regarding the conduct of SJI and [USM] in this case may be revisited in light of
the relevant findings and conclusions here in future proceedings where the other
interests of these parties have decisional significance." Certain adverse
parties have attempted to use the footnote in the La Star decision in a number
of unrelated, contested proceedings which TDS and USM have pending before the
FCC. In addition, since the La Star proceeding, FCC authorizations in
uncontested FCC proceedings have been granted subject to any subsequent action
the FCC may take concerning the La Star footnote.
On February 1, 1994, in a proceeding involving a license originally issued
to TDS for a Rural Service Area in Wisconsin, the FCC instituted a hearing to
determine whether in the La Star case USM had misrepresented facts to, lacked
candor in its dealing with or attempted to mislead the FCC and, if so, whether
TDS possesses the requisite character qualifications to hold that Wisconsin
license. The FCC stated that, pending resolution of the issues in the Wisconsin
proceeding, further grants to TDS and its subsidiaries will be conditioned on
the outcome of that proceeding. TDS was granted interim authority to continue to
operate the Wisconsin system pending completion of the hearing.
An adverse finding in the Wisconsin hearing could result in a variety of
possible sanctions, ranging from a fine to loss of the Wisconsin license, and
could, as stated in the FCC order, be raised and considered in other proceedings
involving TDS and its subsidiaries. TDS and USM believe they acted properly in
connection with the La Star application and that the findings and record in the
La Star proceeding are not relevant in any other proceeding involving their FCC
license qualifications.
TOWNES TELECOMMUNICATIONS, INC., ET. AL. V. TDS, ET. AL. Plaintiffs Townes
Telecommunications, Inc. ("Townes"), Tatum Telephone Company ("Tatum Telephone")
and Tatum Cellular Telephone Company ("Tatum Cellular") filed a suit in the
District Court of Rusk County, Texas, against both TDS and USM as defendants.
Plaintiff Townes alleges that it entered into an oral agreement with defendants
which established a joint venture to develop cellular business in certain
markets. Townes alleges that defendants usurped a joint venture opportunity and
breached fiduciary duties to Townes by purchasing interests in nonwireline
markets in Texas RSA #11 and the Tyler (Texas) MSA on their own behalf rather
than on behalf of the alleged joint venture. In its Fifth Amended Original
Petition Townes seeks unspecified damages not to exceed $33 million for
usurpation, breach of fiduciary duty, civil conspiracy, breach of contract and
tortious interference. Townes also seeks imposition of a constructive trust on
defendants' profits from Texas RSA #11 and the Tyler (Texas) MSA and transfer of
those interests to the alleged joint venture. In addition, Townes seeks
reasonable attorneys' fees equal to one-third of the judgment, along with
prejudgment interest. Plaintiffs Tatum Telephone and Tatum Cellular seek a
declaration that transfers by defendants of a 49% interest in Tatum Cellular
violated a five-year restriction on alienation of Tatum Cellular shares
contained in a written shareholders' agreement. Tatum Telephone and Tatum
Cellular seek to void the transfers. All plaintiffs together seek as much as
$200 million in punitive damages.
Defendants have asserted meritorious defenses to each of the plaintiffs'
claims and are vigorously defending this case. Discovery in ongoing. A jury
trial is this case is set to commence on April 25, 1994.
<PAGE>
CONSOLIDATED QUARTERLY INCOME INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1993
Operating Revenues $126,702 $144,781 158,650 $160,611
Operating Income 15,376 20,735 21,162 12,460
Net Income 6,803 8,967 11,887 6,239
Net Income Available to Common $6,207 $8,371 $11,290 $5,642
Weighted Average Common Shares (000s) 44,261 46,469 48,302 50,045
Earnings per Common Share $.14 $.18 $.23 $.11
1992
Operating Revenues $100,737 $111,189 $118,604 $126,366
Operating Income 14,305 15,039 14,038 10,683
Net Income Before Extraordinary Item and
Cumulative Effect of Accounting Change 13,159 6,992 6,626 11,743
Extraordinary Item -- -- -- (769)
Cumulative Effect of Accounting Change (6,866) -- -- --
Net Income 6,293 6,992 6,626 10,974
Net Income Available to Common $5,955 $6,432 $6,065 $10,416
Weighted Average Common Shares (000s) 36,877 39,479 40,027 40,637
Earnings per Common Share:
Before Extraordinary Item and Cumulative
Effect of Accounting Change $.35 $.16 $.15 $.26
Extraordinary Item -- -- -- (.02)
Cumulative Effect of Accounting change (.19) -- -- --
Net Income $.16 $1.6 $.15 $.24
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Telephone and Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Telephone and
Data Systems, Inc. (an Iowa Corporation) and Subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of income, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1993. 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 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
misstatements. 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 Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in "Changes in Accounting Principle" in Note 1 of the Notes to
Consolidated Financial Statements, the method of accounting for cellular sales
commissions was changed effective January 1, 1991. As discussed in "Other
Postretirement Benefits" in Note 1, the method of accounting for postretirement
benefits other than pensions was changed effective January 1, 1992. As discussed
in Note 2 of the Notes to Consolidated Financial Statements, the method of
accounting for income taxes was changed effective January 1, 1993.
As discussed in Note 14 of the Notes to Consolidated Financial Statements,
the Company is a defendant in a lawsuit involving a joint venture opportunity, a
shareholders' agreement and other related matters. The ultimate outcome from the
litigation cannot presently be determined. Accordingly, no provision for any
liability which may result has been made in the consolidated financial
statements.
/s/ Arthur Andersen & Co.
Chicago, Illinois
February 8, 1994
<PAGE>
EXHIBIT 21
TELEPHONE AND DATA SYSTEMS, INC.
LIST OF SUBSIDIARY COMPANIES
AS OF DECEMBER 31, 1993
TELEPHONE COMPANIES
TDS Telecommunications Corporation
CENTRAL REGION - MID-CENTRAL DIVISION
Arcadia Telephone Company
Chatham Telephone Company
Communications Corporation of Indiana
Communication Corporation of Michigan
Communications Corporation of Southern Indiana
Continental Telephone Company
Home Telephone Company, Inc.
The Home Telephone Company of Pittsboro, Inc.
Island Telephone Company
Little Miami Communications Corporation
Oakwood Telephone Company
Shiawassee Telephone Company
The Vanlue Telephone Company
Wolverine Telephone Company
CENTRAL REGION - MID-WEST DIVISION
Badger Telecom, Inc.
Black Earth Telephone Company, Inc.
Bonduel Telephone Company
Burlington, Brighton and Wheatland Telephone Company
Central State Telephone Company
Danube Telephone Company
EastCoast Telecom, Inc.
Grantland Telecom, Inc.
KMP Telephone Company
Mid-State Telephone Company
Midway Telephone Company
Mt. Vernon Telephone Company
Riverside Telecom, Inc.
Scandinavia Telephone Company
Stockbridge & Sherwood Telephone Company, Inc.
Tenney Telephone Company
Waunakee Telephone Company, Inc.
Winsted Telephone Company
1
<PAGE>
TELEPHONE COMPANIES (Cont.)
CENTRAL REGION - WESTERN DIVISION
Arizona Telephone Company
Asotin Telephone Company
Cleveland County Telephone Company, Inc.
Decatur Telephone Company
Delta County Tele-Comm, Inc.
Happy Valley Telephone Company
Home Telephone Company
Hornitos Telephone Company
Lake Livingston Telephone Company, Inc.
Mid-America Telephone Company, Inc.
New London Telephone Company
Oklahoma Communication Systems, Inc.
Orchard Farm Telephone Company
Potlatch Telephone Company
The Stoutland Telephone Company
Strasburg Telephone Company
Troy Telephone Company, Inc.
Winterhaven Telephone Company
Wyandotte Telephone Company
NORTHEAST REGION
Chichester Telephone Company, Inc.
Edwards Telephone Company, Inc.
Hartland & St. Albans Telephone Company
The Island Telephone Company
Kearsarge Telephone Company
Ludlow Telephone Company
Mahanoy & Mahantango Telephone Company
Meriden Telephone Company, Inc.
Northfield Telephone Company
Oriskany Falls Telephone Corporation
Perkinsville Telephone Company, Inc.
Port Byron Telephone Company
Somerset Telephone Company
Sugar Valley Telephone Company
Warren Telephone Company
West Penobscot Telephone & Telegraph Company
2
<PAGE>
TELEPHONE COMPANIES (Cont.)
SOUTHEAST REGION
Amelia Telephone Corporation
Barnardsville Telephone Company
Blue Ridge Telephone Company
Butler Telephone Company, Inc.
Camden Telephone & Telegraph Company
Calhoun City Telephone Company, Inc.
Concord Telephone Exchange, Inc.
Goshen Telephone Company
Grove Hill Telephone Corporation
Humphreys County Telephone Company
Leslie County Telephone Company
Lewisport Telephone Company
McClellanville Telephone Company, Inc.
New Castle Telephone Company
Norway Telephone Company
Oakman Telephone Company, Inc.
Peoples Telephone Company
Quincy Telephone Company
St. Stephen Telephone Company
Salem Telephone Company, Inc.
Saluda Mountain Telephone Company
Service Telephone Company, Inc.
Southeast Mississippi Telephone Company, Inc.
Tellico Telephone Company, Inc.
Tennessee Telephone Company
Virginia Telephone Company
Williston Telephone Company
MANAGEMENT SERVICE COMPANIES
Tennessee Telecommunications Service Corporation
Central Region - TSSD, Inc.
3
<PAGE>
SERVICE COMPANIES
American Communications Consultants, Inc.
American Portable Telecommunications, Inc.
American Radio Communications, Inc
CellVest
CommVest, Inc.
Integrated Communications Services, Inc.
National Telephone & Telegraph Company
Nortelco
Rudevco, Inc.
Suttle Press, Inc.
TCC, Incorporated
TDS Computing Services, Inc.
TDS Oklahoma Holdings, Inc.
TDS Realestate Investment Corporation
Tel Radio Communications Properties, Inc.
Telecommunications Technologies Fund, Inc.
CABLE TV COMPANIES
TDS Cable Communications Company
Carolina Cable T.V. Co., Inc.
Comvideo Systems, Inc.
Condon TV Systems, Inc.
Kearsarge Cable Communications, Inc.
Lewisport Cable TV
Volunteer TV Cable Company
Warren Cable Company
4
<PAGE>
RADIO PAGING COMPANIES
American Paging, Inc.
A. P. of Pennsylvania, Inc.
American Paging, Inc. (of Arizona)
American Paging, Inc. (of California)
American Paging, Inc. (of Connecticut)
American Paging, Inc. (of District of Columbia)
American Paging, Inc. (of Florida)
American Paging, Inc. (of Georgia)
American Paging, Inc. (of Illinois)
American Paging, Inc. (of Indiana)
American Paging, Inc. (of Kentucky)
American Paging, Inc. (of Louisiana)
American Paging, Inc. (of Maryland)
American Paging, Inc. (of Massachusetts)
American Paging, Inc. (of Minnesota)
American Paging of Missouri, Inc.
American Paging, Inc. (of New Mexico)
American Paging, Inc. (of New York)
American Paging, Inc. (of North Carolina)
American Paging, Inc. (of Ohio)
American Paging, Inc. (of Oklahoma)
American Paging, Inc. (of Rhode Island)
American Paging, Inc. (of South Carolina)
American Paging, Inc. (of Tennessee)
American Paging, Inc. (of Texas)
American Paging, Inc. (of Utah)
American Paging, Inc. (of Virginia)
American Paging, Inc. (of Wisconsin)
American Paging Network, Inc.
APIXUS, LLC.
Texas Paging Transmission, Inc.
5
<PAGE>
CELLULAR COMPANIES
United States Cellular Corporation
United States Cellular Investment Company
United States Cellular Investment Co. of Allentown
USCIC of Amarillo, Inc.
USCIC of Arecibo, Inc.
United States Cellular Investment Company of Baton Rouge
United States Cellular Investment Company of Binghamton, Inc.
USCIC of Brownsville, Inc.
United States Cellular Investment Company of Eau Claire, Inc.
Universal Cellular for Eau Claire MSA, Inc.
United States Cellular Investment Company of Fresno, Inc.
United States Cellular Investment Company of Ft. Smith
United States Cellular Investment Company of Galveston
United States Cellular Investment Company of Green Bay, Inc.
United States Cellular Investment Company of Huntsville, Inc.
United States Cellular Investment Company of Iowa City
USCIC of Jackson, Inc.
United States Cellular Investment Company of Lafayette
United States Cellular Investment Corporation of Los Angeles
United States Cellular Investment Company of Madison, Inc.
USCIC of McAllen, Inc.
USCIC of Midland, Inc.
United States Cellular Investment Co. of Nashville
USCIC of New Orleans, Inc.
USCIC of Ocala, Inc.
United States Cellular Investment Co. of Oklahoma City, Inc.
United States Cellular Investment Company of Portsmouth, Inc.
United States Cellular Investment Company of Raleigh-Durham
USCIC of Reno, Inc.
United States Cellular Investment Company of Rockford
United States Cellular Investment Company of Santa Cruz
United States Cellular Investment Company of Sarasota
USCIC of Seattle, Inc.
United States Cellular Investment Company of St. Cloud
United States Cellllar Investment Company of Wheeling
United States Cellular Operating Company
United States Cellular Operating Company of Atlantic City, Inc.
United States Cellular Operating Company of Bangor
United States Cellular Operating Company of Biloxi
United States Cellular Operating Company of Cedar Rapids
6
<PAGE>
CELLULAR COMPANIES (CONT'D)
United States Cellular Operating Company of Columbia
USCOC of Cumberland, Inc.
United States Cellular Operating Company - Des Moines
United States Cellular Operating Company of Dubuque
United States Cellular Operating Company of Evansville, Inc.
United States Cellular Operating Company of Ft. Pierce
USCOC of Gainesville, Inc.
USCOC of Iowa City, Inc.
United States Cellular Operating Company of Joplin
United States Cellular Operating Company of Knoxville
United States Cellular Operating Company of LaCrosse, Inc.
United States Cellular Operating Company - Lawton, Inc.
United States Cellular Operating Company of Lewiston-Auburn
United States Cellular Operating Company
of Manchester-Nashua, Inc.
United States Cellular Operating Company of Medford
Cellular Operating Company of Owensboro
United States Cellular Operating Company of Peoria
USCOC of Portland, Inc.
United States Cellular Operating Company of Poughkeepsie, Inc.
United States Cellular Operating Company - Quad Cities
United States Cellular Operating Company of Richland
United States Cellular Operating Company of Rochester
United States Cellular Operating Company of Tulsa, Inc.
USCOC of Victoria, Inc.
United States Cellular Operating Company of Vineland, Inc.
United States Cellular Operating Company of Waterloo
United States Cellular Operating Company of Wausau, Inc.
United States Cellular Operating Company of Wichita Falls, Inc.
United States Cellular Operating Company of Williamsport
United States Cellular Operating Company of Yakima
USCC Real Estate Corporation
ILP, Inc.
7
<PAGE>
CELLULAR COMPANIES - JOINT VENTURES
Canton Cellular Telephone Company
Capitol Cellular, Inc.
Carolina Cellular, Inc.
Cellular America Telephone Company
Central Cellular Telephones, Ltd.
Central Florida Cellular Telephone Company, Inc.
Chibardun Cellular Telephone Corporation
CR Communications, Inc.
CSII of Baton Rouge, Inc.
Davenport Cellular Telephone Company, Inc.
DRGP, Inc.
Dutchess County Cellular Telephone Company, Inc.
Four D, LTD.
Huntsville Cellular Telephone Corp., Inc.
Joplin Cellular Telephone Company
LaCrosse Cellular Telephone Company, Inc.
Lar-Tex Cellular Telephone Company, Inc.
Lavaca Cellular Telephone Company
Leaf River Valley Cellular Telephone Company
Mississippi Cellular Telephone Company
Star Cellular Communications, Inc.
Star Cellular Telephone Company, Inc.
Texahoma Cellular Telephone Corporation
Tri-States Cellular Telephone Company
Tulsa General Partners, Inc.
Vineland Cellular Telephone Company, Inc.
CELLULAR COMPANIES - RSA CORPORATIONS
USCOC of Arkansas RSA #1, Inc.
Arkansas RSA #9, Inc.
Block B Cellular Corporation
California Rural Service Area #1, Inc.
California RSA #2, Inc.
California RSA #9, Inc.
USCIC of Colorado RSA #3, Inc.
Florida RSA #2, Inc.
Florida RSA #8, Inc.
Florida RSA #10, Inc.
USCOC of Georgia RSA #1, Inc.
Georgia RSA #11, Inc.
Georgia RSA #13, Inc.
8
<PAGE>
CELLULAR COMPANIES - RSA CORPORATIONS (CONT'D)
USCOC of Georgia RSA #14, Inc.
USCOC of Hawaii 3, Inc.
Idaho Invco of RSA #1, Inc.
USCOC of Idaho RSA #5, Inc.
USCOC of Idaho RSA #6, Inc.
USCOC of Illinois RSA #1
Illinois RSA #3, Inc.
USCOC of Illinois RSA #4, Inc.
USCOC of Indiana RSA #2, Inc.
USCOC of Iowa RSA #1, Inc.
Iowa RSA #2, Inc.
Indiana RSA #4, Inc.
Indiana RSA #5, Inc.
USCOC of Indiana RSA #7, Inc.
Iowa RSA #3, Inc.
Iowa RSA #9, Inc.
Iowa RSA #12, Inc.
Iowa 13, Inc.
Kansas RSA #5, Inc.
Kentucky RSA #2, Inc.
Kentucky Invco of RSA #3, Inc.
Kentucky RSA #3, Inc.
Maine RSA #1, Inc.
Maine RSA #4, Inc.
MaryPennWest Invco of RSA #3, Inc.
Michigan RSA #4, Inc.
Minnesota Invco of RSA #5, Inc.
Minnesota Invco of RSA #7, Inc.
Minnesota Invco of RSA #8, Inc.
Minnesota Invco of RSA #9, Inc.
Minnesota Invco of RSA #10, Inc.
Minnesota Invco of RSA #11, Inc.
Mississippi RSA #9, Inc.
USCOC of Missouri RSA #1, Inc.
USCOC of Missouri RSA #3, Inc.
USCOC of Missouri RSA #4, Inc.
USCOC of Missouri RSA #5, Inc.
USCOC of Missouri RSA #13, Inc.
Missouri #15 Rural Cellular, Inc.
Missouri RSA #17, Inc.
9
<PAGE>
CELLULAR COMPANIES - RSA CORPORATIONS (CONT'D)
NH #1 Rural Cellular, Inc.
USCOC of New York RSA #1, Inc.
USCOC of North Carolina RSA #13, Inc.
North Carolina RSA #4, Inc.
North Carolina RSA #5, Inc.
North Carolina RSA No. 6, Inc.
USCOC of North Carolina RSA #7, Inc.
USCOC of North Carolina RSA #14, Inc.
North Carolina RSA #9, Inc.
North Carolina RSA #12, Inc.
North Carolina RSA #14, Inc.
Ohio RSA #1, Inc.
USCOC of Ohio RSA #7, Inc.
Ohio RSA #9, Inc.
Oklahoma RSA #6, Inc.
Oklahoma Opco of RSA #8, Inc.
Oklahoma #9 Rural Cellular, Inc.
USCOC of Oklahoma RSA #10, Inc.
Oregon Invco of RSA # 2 West, Inc.
Oregon RSA #2, Inc.
Oregon RSA #3, Inc.
USCOC of Oregon RSA #5, Inc.
Oregon RSA #6, Inc.
Pennsylvania Invco of RSA #5, Inc.
Pennsylvania Invco of RSA #6, Inc.
USCOC Pennsylvania RSA #9, Inc.
USCOC of South Carolina RSA #4, Inc.
TDS U2B Acquisition Corp.
Tennessee RSA #3, Inc.
Tennessee RSA #4 Sub 2, Inc.
Tennessee RSA #6 B, Inc.
Texas RSA #4, Inc.
Texas RSA #5, Inc.
Texas Invco of RSA #6, Inc.
Texas RSA #11, Inc.
Texas Invco of RSA #17, Inc.
Texas #20 Rural Cellular, Inc.
Virginia Invco of RSA #2, Inc.
10
<PAGE>
CELLULAR COMPANIES - RSA CORPORATIONS (CONT'D)
USCOC of Virginia RSA #4, Inc.
Virginia RSA #4, Inc.
Virginia RSA #5, Inc.
Virginia RSA #7, Inc.
USCOC of Washington-4, Inc.
Washington RSA #5, Inc.
Washington RSA #6, Inc.
Western Colorado Cellular, Inc.
USCOC of West Virginia RSA #2, Inc.
West Virginia RSA #4, Inc.
West Virginia RSA #5, Inc.
USCOC of Wisconsin RSA #6, Inc.
Wisconsin Invco of RSA #7, Inc.
Wisconsin RSA #8, Inc.
CELLULAR COMPANIES - RSA JOINT VENTURES
Camden Cellular Telephone Company, Inc.
Community Cellular Telephone Company
Farmers Cellular Telephone Company, Inc.
Farmers Mutual Cellular Telephone Company, Inc.
Hancock Cellular Telephone Company, Inc.
Hardy Cellular Telephone Company
Hill City Cellular Telephone Company
Humphreys County Cellular, Inc.
Jefferson Cellular Telephone Company, Inc.
Laurel Highland Cellular Telephone Company
McDaniel Cellular Telephone Company
Minford Cellular Telephone Company
Peace Valley Cellular Telephone Company
Pine Island Cellular Telephone Company
Randolph Cellular Telephone Company
Scott County Cellular Telephone Company
South Canaan Cellular Telephone Company
Spruce Knob Cellular Telephone Company
Venus Cellular Telephone Company, Inc.
Walnut Hill Cellular Telephone Company
West Side Cellular Telephone Company
11
<PAGE>
CELLULAR COMPANIES - PARTNERSHIPS
Allentown SMSA Limited Partnership
Amarillo Cellular Telephone Company, L.P.
Baton Rouge MSA Limited Partnership
Binghamton MSA Limited Partnership
Boise City MSA Limited Partnership
Brown County MSA Cellular Limited Partnership
Cellular Mobile Systems of St. Cloud
Cellular 7 Partnership
Crook County RSA Limited Partnership
Davenport Cellular Telephone Company
Eau Claire Cellular Telephone Limited Partnership
Evansville Cellular Telephone Company
Fort Myers Cellular Telephone Company
Fort Smith MSA Limited Partnership
Fresno MSA Limited Partnership
Galveston Cellular Partnership
Georgia R.S.A. #8 Partnership
Georgia R.S.A. #11 Partnership
Georgia R.S.A. #12 Partnership
GTE Mobilenet of Texas RSA #17 Limited Partnership
Hiawathaland Cellular Limited Partnership
Huntsville SMSA Limited Partnership
Idaho RSA No. 1 Limited Partnership
Indiana RSA No. 4 Limited Partnership
Indiana RSA No. 5 Limited Partnership
Iowa RSA No.9 Limited Partnership
Iowa RSA No.12 Limited Partnership
Kentucky RSA #3 Cellular General Partnership
JHP Partnership
Joplin Cellular Telephone Company, L.P.
La Crosse Cellular Telephone Company, Inc.
Lafayette Cellular Telephone Company
Lake Champlain Cellular Partnership
LaStar Cellular Telephone Company
Lewiston CellTellCo Partnership
Los Angeles SMSA Limited Partnership
Madison SMSA Limited Partnership
Maine RSA No. 4 Limited Partnership
Marshall Cellular Partnership
Medford MSA Limited Partnership
12
<PAGE>
CELLULAR COMPANIES - PARTNERSHIPS (Cont.)
Minnesota RSA 9 Limited Partnership
Minnesota RSA 10 Limited Partnership
Missouri RSA No. 6 Partnership
Nashville/Clarksville MSA Limited Partnership
New York RSA #4 Limited Partnership
Northeast Cellular Telephone Company, L.P.
Ohio RSA No. 1 Limited Partnership
Oklahoma City SMSA Limited Partnership
Oklahoma RSA 3 Limited Partnership
Oklahoma RSA 5 West Partnership
Oklahoma RSA Independent 5 General Partnership
Oklahoma RSA 7 Limited Partnership
Oklahoma Independent RSA 7 General Partnership
Oklahoma RSA No. 8 Limited Partnership
Oregon RSA No. 2 Limited Partnership
Oregon RSA No. 3 Limited Partnership
Pennsylvania RSA 1 Limited Partnership
Pennsylvania RSA 5 Partnership
Pennsylvania RSA No. 6 (I) Limited Partnership
Pennsylvania RSA No. 6 (II) Limited Partnership
Pennsylvania RSA No. 9 Limited Partnership
Raleigh-Durham MSA Limited Partnership
Reno Cellular Telephone Company
Rochester Cellular Telephone Company, L.P.
Rockford MSA Limited Partnership
Saco River Cellular Telephone Company
Sarasota Cellular Telephone Company
Savannah MSA Cellular Partnership
Seattle SMSA Limited Partnership
SEG-Cellular Limited Partnership
Spokane MSA Limited Partnership
Tennessee RSA No. 3 Limited Partnership
Texas RSA No. 2 Limited Partnership
Texas RSA No. 5 - North Limited Partnership
Texas RSA No. 6 Limited Partnership
Tri-States Cellular Partnership
United States Cellular Operating Company of Bangor
United States Cellular Operating Company of Columbia
United States Cellular Telephone Company (Lawton), L.P.
United States Cellular Telephone Company (Asheville), L.P.
13
<PAGE>
CELLULAR COMPANIES - PARTNERSHIPS (Cont.)
United States Cellular Telephone Company (Greater Knoxville)
United States Cellular Telephone Company (Greater Tulsa)
Vermont Ind. Cellular Telephone G.P.
Virginia RSA No. 2 Limited Partnership
Ward Butte Joint Venture
Waterloo-Cedar Falls CellTelCo
Wausau Cellular Telephone Company Limited Partnership
Western Colorado Cellular of Colorado Limited Partnership
West Virginia RSA No. 4 Limited Partnership
Wheeling Cellular Telephone Company
Wichita Falls Cellular Telephone Company, L.P.
Wisconsin #7 Limited Partnership
Yakima MSA Limited Partnership
Yakima Valley Paging Limited Partnership
14
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of Telephone and Data Systems, Inc., of our report
dated February 8, 1994, on the consolidated financial statements of Telephone
and Data Systems, Inc. and Subsidiaries (the "Company") included in the
Company's 1993 Annual Report to Shareholders, to the inclusion in this Form 10-K
of our report dated February 8, 1994, on the financial statement schedules of
the Company, and to the inclusion in this Form 10-K of our compilation report
dated February 11, 1994, on the combined financial statements of the Los Angeles
SMSA Limited Partnership, the Nashville/Clarksville MSA Limited Partnership, and
the Baton Rouge MSA Limited Partnership, and to the incorporation of such
reports into the Company's previously filed S-8 Registration Statements, File
No. 33-1192, File No. 33-4420, File No. 33-35172, and File No. 33-50747, and
into the Company's previously filed S-3 Registration Statements, File No.
33-8564, File No. 33-8857, File No. 33-8858, File No. 33-28348 and File No.
33-68456, and into the Company's previously filed S-4 Registration Statements,
File No. 33-45570, File No. 33-65986 and File No. 33-68988.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
March 24, 1994
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of Telephone and Data
Systems, Inc., of our report, which includes explanatory paragraphs relating to
contingencies, dated February 4, 1994, on our audits of the financial statements
of the Los Angeles SMSA Limited Partnership as of December 31, 1993 and 1992,
and for each of the three years in the period ended December 31, 1993; such
financial statements are not included separately in this Form 10-K.
COOPERS & LYBRAND
Newport Beach, California
March 24, 1994
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of Telephone and Data
Systems, Inc., of our reports dated February 11, 1994, February 11, 1993 and
February 10, 1992, on our audits of the financial statements of the
Nashville/Clarksville MSA Limited Partnership as of December 31, 1993, 1992 and
1991, and for the years ended December 31, 1993, 1992 and 1991; such financial
statements are not included separately in this Form 10-K.
COOPERS & LYBRAND
Atlanta, Georgia
March 22, 1994
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of Telephone and Data
Systems, Inc., of our reports dated February 11, 1994, February 11, 1993 and
February 10, 1992, on our audits of the financial statements of the Baton Rouge
MSA Limited Partnership as of December 31, 1993, 1992 and 1991, and for the
years ended December 31, 1993, 1992 and 1991; such financial statements are not
included separately in this Form 10-K.
COOPERS & LYBRAND
Atlanta, Georgia
March 22, 1994
<PAGE>
EXHIBIT 99.1
INCORPORATED PORTIONS OF
ITEMS AS EXPECTED TO BE INCLUDED IN THE
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
AND PROXY STATEMENT OF
TELEPHONE AND DATA SYSTEMS, INC.
ELECTION OF DIRECTORS
The Company's Board of Directors is divided into three classes. Each
year, one class is elected to serve for three years. At the Annual Meeting of
Shareholders in 1994, three Class I directors will be elected for a term of
three years or until their successors are elected and qualified. The nominees
for election as Class I directors are identified in the tables below. The
Company has no knowledge that any of the nominees will refuse or be unable to
serve, but if any of the nominees becomes unavailable for election, the holders
of the proxies reserve the right to substitute another person of their choice as
nominee when voting at the Annual Meeting.
NOMINEES
CLASS I DIRECTORS-TERMS TO EXPIRE IN 1997
The following persons, if elected at the Annual Meeting of
Shareholders in 1994, will serve as Class I directors for three years or until
their successors are elected and qualified:
NOMINEE FOR ELECTION BY HOLDERS OF
COMMON SHARES AND HOLDERS OF PREFERRED SHARES
(SERIES A, B, D, G, H AND N)
<TABLE>
<CAPTION>
Position with TDS Served as
Name Age and Principal Occupation Director since
---- --- ------------------------ --------------
<S> <C> <C> <C>
Donald R. Brown 63 Director of the Company and 1979
Senior Vice President -
Southeast Region of TDS
Telecommunications Corporation
</TABLE>
NOMINEES FOR ELECTION BY HOLDERS OF SERIES A
COMMON SHARES AND HOLDERS OF PREFERRED SHARES
(SERIES O, S, U, V, W, X, BB, DD, EE, GG, HH, II, JJ,
KK, LL, MM, NN, OO, PP, QQ AND RR)
<TABLE>
<CAPTION>
Position with TDS Served as
Name Age and Principal Occupation Director since
---- --- ------------------------ --------------
<S> <C> <C> <C>
Robert J. Collins 58 Director of the Company and 1974
Vice President - Northeast
Region of TDS Telecommunications
Corporation
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C><C> <C>
Rudolph E. Hornacek 66 Vice President-Engineering and 1968
Director of the Company
</TABLE>
Donald R. Brown was a Vice President of the Company between 1974 and
1990, and was the Wisconsin Region Manager between 1979 and 1992. Robert J.
Collins was a Vice President of the Company between 1971 and 1990, and between
1974 and 1990 was the Northeast Region Manager. In 1990, Messrs. Brown and
Collins resigned as Vice Presidents of the Company and were appointed as Vice
Presidents of TDS Telecommunications Corporation ("TDS Telecom"), a subsidiary
of the Company which operates local telephone companies. In 1992, Mr. Brown was
appointed Senior Vice President - Southeast Region.
Rudolph E. Hornacek has been Vice President-Engineering of the Company
for more than five years.
All of the nominees are current Class I directors. Mr. Brown was
elected by the holders of Common Shares and holders of Preferred Shares issued
before October 31, 1981. Messrs. Collins and Hornacek were elected by the
holders of Series A Common Shares and the holders of Preferred Shares issued
after October 31, 1981.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES.
OTHER DIRECTORS
CLASS II DIRECTORS-TERMS EXPIRE IN 1995
The following persons were elected at the Annual Meeting of
Shareholders on May 15, 1992, to serve as Class II directors for three years or
until their successors are elected and qualified:
<TABLE>
<CAPTION>
Position with TDS Served as
Name Age and Principal Occupation Director since
---- --- ------------------------ --------------
<S> <C> <C> <C>
James Barr III 54 Director of the Company and 1990
President of TDS Telecommunications
Corporation
LeRoy T. Carlson, Jr. 47 President and Director of the 1968
Company (chief executive officer)
Donald C. Nebergall 65 Director and Consultant to the Company 1977
and other companies
Murray L. Swanson 52 Executive Vice President-Finance and 1983
Director of the Company
(chief financial officer)
</TABLE>
James Barr III was appointed President and chief executive officer of
TDS Telecom in 1990. Prior to that, Mr. Barr served as a Sales Vice President
for American Telephone and Telegraph Company from 1985 through 1989. Mr. Barr
is also a director of American Paging, Inc. (AMEX Symbol "APP"), a subsidiary of
the company which provides radio paging services.
LeRoy T. Carlson, Jr., has been the President and chief executive
officer for more than five years. Mr. Carlson is also Chairman and a director
of APP and United States Cellular Corporation (AMEX symbol "USM"), a subsidiary
of the Company which operates and invests in cellular telephone
-2-
<PAGE>
companies and properties. Mr. Carlson is the son of LeRoy T. Carlson and the
brother of Walter C.D. Carlson.
Donald C. Nebergall served as the Vice President of The Chapman
Company, a registered investment advisory company located in Cedar Rapids, Iowa,
from 1986 to 1988. Prior to that, he was the Chairman of Brenton Bank & Trust
Company, Cedar Rapids, Iowa, from 1982 to 1986, and was its President from 1972
to 1982. He has been a consultant to the Company and other companies since
1988.
Murray L. Swanson has been Executive Vice President-Finance and chief
financial officer for more than five years. Mr. Swanson is also a director of
USM and APP.
Mr. Barr was elected by the holders of Common Shares and Preferred
Shares issued before October 31, 1981. Messrs. Carlson, Nebergall and Swanson
were elected by the holders of Series A Common Shares and Preferred Shares
issued after October 31, 1981.
CLASS III DIRECTORS-TERMS EXPIRE IN 1996
The following persons, were elected at the Annual Meeting of
Shareholders on May 14, 1993, to serve as Class III directors for three years or
until their successors are elected and qualified:
<TABLE>
<CAPTION>
Position with TDS Served as
Name Age and Principal Occupation Director since
---- --- ------------------------ --------------
<S> <C> <C> <C>
Lester O. Johnson 81 Director of the Company, 1968
Architect in private practice
LeRoy T. Carlson 77 Chairman and Director of the Company 1968
Walter C.D. Carlson 40 Director of the Company, 1981
Partner, Sidley & Austin,
Chicago, Illinois
Herbert S. Wander 59 Director of the Company, 1968
Partner, Katten, Muchin & Zavis,
Chicago, Illinois
</TABLE>
All of the Class III Directors have had the principal occupations
indicated for more than five years. LeRoy T. Carlson is the father of Walter
C.D. Carlson and LeRoy T. Carlson, Jr. Messrs. LeRoy T. Carlson and Walter C.D.
Carlson are also directors of USM.
Mr. Johnson was elected by the holders of Common Shares and the
holders of Preferred Shares issued before October 31, 1981. Messrs. L. Carlson,
W. Carlson and Wander were elected by the holders of Series A Common Shares and
holders of Preferred Shares issued after October 31, 1981.
COMMITTEES AND MEETINGS
The Board of Directors of the Company held six meetings during 1993.
All of the directors attended at least 75% of the meetings of the Board of
Directors.
The Board of Directors does not have formal nominating or compensation
committees.
-3-
<PAGE>
The Audit Committee of the Board of Directors, among other things,
determines audit policies, reviews external and internal audit reports and
reviews recommendations made by the Company's internal auditing staff and
independent public accountants. The members of the Audit Committee are: Donald
C. Nebergall (Chairman), Walter C.D. Carlson, Lester O. Johnson and Herbert S.
Wander. The committee met three times during 1993. All committee members
attended at least 75% of the meetings of the Audit Committee.
EXECUTIVE OFFICERS
In addition to the executive officers identified in the tables
regarding the election of directors, set forth below is a table identifying
current officers of the Company and its subsidiaries who may be deemed to be
executive officers of the Company for disclosure purposes under the rules of the
Securities and Exchange Commission.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
H. Donald Nelson . . . . . . . . 60 President of United States Cellular
Corporation
John R. Schaaf . . . . . . . . . 48 President of American Paging, Inc.
George L. Dienes . . . . . . . . 63 Vice President - Corporate Development
C. Theodore Herbert. . . . . . . 58 Vice President - Human Resources
Ronald D. Webster. . . . . . . . 44 Vice President and Treasurer
Gregory J. Wilkinson . . . . . . 43 Vice President and Controller
Michael G. Hron. . . . . . . . . 49 Secretary
</TABLE>
H. Donald Nelson is a director of and has served as the President and
chief executive officer of USM for more than five years.
John R. Schaaf was appointed President of APP in 1991. Prior to that,
Mr. Schaaf was Vice President-Operations of APP for more than five years.
George L. Dienes has been Vice President - Corporate Development for
more than five years.
C. Theodore Herbert has been Vice President - Human Resources of the
Company for more than five years.
Ronald D. Webster was appointed a Vice President of the Company in
1993. He has been the Treasurer of the Company for more than five years.
Gregory J. Wilkinson was appointed a Vice President of the Company in
1993. He has been the Controller of the Company for more than five years.
Michael G. Hron has been the Secretary of the Company for more than
five years. He has been a partner at the law firm of Sidley & Austin since
1989. Prior to that time he was a member of the law firm of Pope, Ballard,
Shepard & Fowle, Ltd. for more than five years.
All of TDS's executive officers devote substantially all of their time
to the Company or its subsidiaries, except for Michael G. Hron who is a
practicing attorney.
-4-
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by TDS during
1993 to the chief executive officer of TDS and the four most highly compensated
executive officers of the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation(1) Long Term Compensation Awards
------------------------ --------------------------------------------------------
Securities Underlying All Other
Name and Principal Position Year Salary(2) Bonus(3) Options/SARs(4) Compensation(5)
- --------------------------- ---- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
LeRoy T. Carlson 1993 $265,000 $45,000 -- $23,875
Chairman 1992 $245,000 $60,000 -- $28,218
1991 $225,000 $50,000 -- N/A
LeRoy T. Carlson, Jr. 1993 $316,000 $56,250 -- $15,461
President 1992 $290,000 $75,000 -- $12,072
(chief executive officer) 1991 $265,000 $60,000 -- N/A
Murray L. Swanson 1993 $207,000 $42,750 -- $28,553
Executive Vice President-Finance 1992 $207,000 $45,600 -- $21,967
(chief financial officer) 1991 $191,000 $57,000 -- N/A
James Barr III (6) 1993 $227,500 $42,656 -- $24,704
President of TDS 1992 $202,500 $55,200 -- $17,804
Telecommunications Corporation 1991 $180,000 $49,500 -- N/A
H. Donald Nelson (7) 1993 $206,375 $35,360 600 $4,714
President of United States 1992 $191,375 $62,500 600 $3,072
Cellular Corporation 1991 $176,167 $58,000 7,624 N/A
<FN>
(1) Does not include the discount amount under any dividend reinvestment plan or any employee stock purchase plan since such plans
are generally available to all eligible shareholders or salaried employees, respectively. Does not include the value of any
perquisites, which are less than $50,000 and less than 10% of the aggregate of the salary and bonus for each named executive
officer.
(2) Represents the dollar value of base salary (cash and non-cash) earned by the named executive officer during the fiscal year
identified, except for Murray L. Swanson, whose 1993 annual salary has not yet been determined. When it is determined, it will
be retroactive to the beginning of 1993.
(3) Represents the dollar value of bonus (cash and non-cash) earned by the named executive officer for 1992 and 1991. The bonuses
for 1993 have not yet been determined. However, an advance payment was authorized to all named executive officers of up to 75%
of the actual bonus for 1992 (or the actual bonus for 1991 in the case of Murray L. Swanson, since his 1992 actual bonus had
not yet been finally determined). See "Executive Officer Compensation Report."
(4) Represents the number of TDS Common Shares subject to stock options ("Options") and/or stock appreciation rights ("SARs")
awarded during the fiscal year identified, except for H. Donald Nelson, in which case the amount represents the number of USM
shares subject to Options and/or SARs awarded during the fiscal year identified. Unless otherwise indicated by footnote, the
awards represent Options without tandem SARs.
(5) Pursuant to transition rules, only 1993 and 1992 amounts are reported in this column. Includes contributions by the Company
for the benefit of the named executive officer under the Employees' Pension Trust ("EPT"), including earnings accrued under a
related supplemental benefit agreement, the TDS Tax-Deferred Savings Plan ("TDSP"), the dollar value of any insurance premiums
paid during the covered fiscal year with respect to term life insurance for the benefit of the named executive ("Life
Insurance"), and all other compensation, as indicated below:
</TABLE>
<TABLE>
<CAPTION>
LeRoy T. Carlson LeRoy T. Carlson, Jr. Murray L. Swanson James Barr III H. Donald Nelson
<S> <C> <C> <C> <C> <C>
EPT $ 8,071 $ 13,320 $ 24,535 $ 22,577 $ --
TDSP 532 977 899 600 1,542
Life Insurance 15,272 1,164 3,119 1,527 3,172
-------- --------- --------- ---------- --------
$ 23,875 $ 15,461 $ 28,553 $ 24,704 $ 4,714
-------- --------- --------- ---------- --------
-------- --------- --------- ---------- --------
</TABLE>
-5-
<PAGE>
(6) The Summary Compensation Table does not include the reimbursement of moving
expenses incurred by James Barr III, at the request of the Company, in the
amount of $30,290 in 1991.
(7) All of Mr. Nelson's compensation is paid by USM and is approved by the
Chairman of the Board of Directors of USM.
GENERAL INFORMATION REGARDING OPTIONS AND SARS
The following tables show, as to the executive officers who are named
in the Summary Compensation Table, information regarding Options and/or SARs.
The number of shares subject to the Options and/or SARs and the exercise prices
have been adjusted for stock splits in 1988.
INDIVIDUAL OPTION/SAR GRANTS IN 1993
<TABLE>
<CAPTION>
Potential
Realizable Value at
Number of Assumed Annual Rates
Securities of Stock Price
Underlying % of Total Appreciation for
Options/ Options/SARs Option Term(5)
SARs Granted to Exercise Market Expiration ------------------------
Name Granted(1) Employees(2) Price(3) Price(4) Date 0% 5% 10%
---- ---------- ------------ -------- -------- ----------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
H. Donald Nelson...... 600 9.3% $15.67 $21.25 11/1/97 $ 3,350 $ 6,675 $10,650
- ------------
<FN>
(1) Represents number of USM shares underlying Options/SARs which were
awarded for H. Donald Nelson during the fiscal year. No Options or
SARs were awarded in 1993 to any of the other executive officers named
in the Summary Compensation Table. On February 1, 1991, H. Donald
Nelson received an award of Options for USM shares which could vary,
based on performance, between 80% and 120% of the targeted amount of
9,000 shares. Therefore, options for 7,200 shares or 80% of the
targeted amount were deemed to be awarded on the grant date. The
minimum amount scheduled to become exercisable is 1,200 USM shares in
each year on February 1, 1992 through February 1, 1997. Each year
during such period an additional number of USM shares, up to an
additional 600 shares, may be awarded based on performance for the
prior year. The amount over 1,200 shares per year which is awarded
based on performance is shown above as a grant in that year. Since
the maximum of options for 1,800 shares was awarded in 1993, 600
shares are shown as a grant in that year.
(2) Represents the percent of total USM shares underlying Options/SARS
awarded to all USM employees during the fiscal year.
(3) Represents the exercise price of the Options which is equal to the
average market price of Common Shares for the 20 consecutive trading
days ending on the grant date of February 1, 1991.
(4) Represents the fair market value of USM Common Shares on the award
date, based on the closing price on the American Stock Exchange.
(5) Represents the potential realizable value of each grant of Options,
assuming that the market price of USM Common Shares appreciates in
value from the award date to the end of the Option term at the
indicated annualized rates.
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN 1993, AND DECEMBER 31, 1993 OPTION/SAR VALUE
<TABLE>
<CAPTION>
1993 As of December 31, 1993
---------------------------- ------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS/SARS (3) THE-MONEY OPTIONS/SARS(4)
SHARES ACQUIRED VALUE ------------------------------- ---------------------------
NAME ON EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
LeRoy T. Carlson Options 13,500(5) $310,703 -0- -0- $-0- $-0-
LeRoy T. Carlson, Jr. Options 38,250(6) $1,337,730 25,500 63,750 $939,101 $2,347,753
Murray L. Swanson Options 3,375(7) $107,587 -0- 13,500 $-0- $582,221
James Barr III Options -- -- 6,000 14,000 $68,625 $160,125
H. Donald Nelson Options -- -- 3,424 5,400 $64,688 $102,020
SARs -- -- 12,000 24,000 234,750 469,500
------ ------ ----------- -----------
Total for H. Donald Nelson -- -- 15,424 29,400 $ 299,438 $ 571,520
------ ------ ----------- -----------
------ ------ ----------- -----------
<FN>
(1) Represents the number of TDS Common Shares received upon exercise or, if no
shares were received, the number of TDS Common Shares with respect to which
the Options or SARs were exercised, except for H. Donald Nelson, in which
case the information is presented with respect to USM shares.
</TABLE>
-6-
<PAGE>
(2) Represents the aggregate dollar value realized upon exercise, based on the
difference between the exercise price and the average of the high and low
price of the shares on the date of exercise as reported in the American
Stock Exchange ("AMEX") Composite Transactions by THE WALL STREET JOURNAL.
(3) Represents number of TDS Common Shares subject to Options and/or SARs,
except for H. Donald Nelson, in which case the information is presented
with respect to USM shares.
(4) Represents the aggregate dollar value of in-the-money, unexercised Options
and SARs held at the end of the fiscal year, based on the difference
between the exercise price and $51.4375, the average of the high and low
price of TDS Common Shares or, with respect to H. Donald Nelson, $34.5625,
the average of the high and low price of USM Common Shares, on December 31,
1993, as reported in the AMEX Composite Transactions by THE WALL STREET
JOURNAL.
(5) Options for a total of 13,500 Common Shares were exercised. A total of
5,387 Common Shares received upon exercise were used to pay the exercise
price and 2,801 Common Shares were used to pay withholding taxes.
(6) Options for a total of 38,250 Common Shares were exercised. A total of
11,727 Common Shares received upon exercise were used to pay the exercise
price and 9,040 Common Shares were used to pay withholding taxes.
(7) Options for a total of 3,375 Common Shares were exercised. A total of 724
Common Shares received upon exercise were used to pay the exercise price
and 651 Common Shares were used to pay withholding taxes.
SUPPLEMENTAL BENEFIT AGREEMENTS
The Telephone and Data Systems, Inc. Employees' Pension Trust
(the "Pension Plan") is a defined contribution plan designed to provide
retirement benefits for eligible employees of the Company and certain of
its affiliates which adopt the Pension Plan. Annual employer contributions
based upon actuarial assumptions are made under a formula designed to fund
a target pension benefit for each participant commencing generally upon the
participant's attainment of retirement age. The amounts of the annual
contributions are included above in the Summary Compensation Table under
"All Other Compensation."
In 1980, TDS entered into a nonqualified supplemental benefit
agreement with LeRoy T. Carlson which, as amended, requires TDS to pay a
supplemental retirement benefit to Mr. Carlson, in the amount of $47,567
plus interest at a rate equal to 1/4% under the prime rate for the period
from May 15, 1981 (the date of Mr. Carlson's 65th birthday) to May 31,
1991, in five annual installments beginning June 1, 2001, plus interest at
9 1/2% compounded semi-annually from June 1, 1991. The agreement was
entered into because certain amendments made to the Pension Plan in 1974
had the effect of reducing the amount of retirement benefits which
Mr. Carlson would receive under the Pension Plan. The payments to be made
under the agreement, together with the retirement benefits under the
Pension Plan, were designed to permit Mr. Carlson to receive approximately
the same retirement benefits he would have received if the Pension Plan had
not been amended. All of the interest accrued under this agreement is
included above in the Summary Compensation Table under "All Other
Compensation" and identified in footnote 5 thereto as contributions under
the Employees' Pension Trust (EPT).
In 1988, USM entered into a nonqualified supplemental benefit
agreement with H. Donald Nelson which requires USM to pay a supplemental
retirement benefit to Mr. Nelson. The agreement was entered into because
Mr. Nelson's employment with TDS was terminated upon the completion of the
initial public offering of USM Common Shares in May 1988 and, as a result,
he was no longer eligible to participate in the Pension Plan. Under the
supplemental benefit agreement, USM is obligated to pay Mr. Nelson an
amount equal to the difference between the retirement benefit he will
receive from the Pension Plan and that which he would have received had he
continued to work for TDS. USM will pay any such benefit at the same time
as Mr. Nelson receives payments from the Pension Plan. At the time of Mr.
Nelson's withdrawal from the TDS Pension Plan, he had 5 years of credited
service. If he had continued as an active participant, he would have
received credit for 16 years of service upon retirement at age 65. If Mr.
Nelson had continued to be employed by TDS, and had remained employed
through age 65, he would have been eligible to receive an estimated annual
benefit upon retirement of approximately $50,000 under the TDS Pension
Plan. Currently, Mr. Nelson's annual benefit under the TDS Pension Plan is
expected to be approximately $15,000. Accordingly, Mr. Nelson
-7-
<PAGE>
is expected to receive an estimated annual benefit of approximately $35,000
under the supplemental benefit agreement. Such estimates are based on Mr.
Nelson's base salary, which is included in the cash compensation table
above, and calculations of certain projections to age 65. The actual
benefits payable to Mr. Nelson upon retirement will be based upon the facts
that exist at the time and will be determined actuarially pursuant to the
TDS Pension Plan. Since the nature of this agreement is a defined benefit
arrangement, no amounts related thereto are included above in the Summary
Compensation Table.
SALARY CONTINUATION AGREEMENT
The Company has entered into an agreement with LeRoy T. Carlson
whereby it will employ Mr. Carlson until he elects to retire. Mr. Carlson
is to be paid at least $60,000 per annum until his retirement. The
agreement also provides that upon his retirement, Mr. Carlson will be
retained by the Company as a part-time consultant (for not more than 60
hours in any month) until his death or disability. Upon his retirement,
Mr. Carlson will receive $75,000 per annum as a consultant, plus increments
beginning in 1985 equal to the greater of three percent of his consulting
fee or two-thirds of the percentage increase in the consumer price index
for the Chicago metropolitan area. If Mr. Carlson becomes disabled before
retiring, the Company can elect to discontinue his employment and retain
him in accordance with the consulting arrangement described above. Upon
Mr. Carlson's death (unless his death follows his voluntary termination of
his employment or the consulting arrangement), his widow will receive until
her death an amount equal to that which Mr. Carlson would have received as
a consultant. The Company may terminate payments under the agreement if
Mr. Carlson becomes the owner of more than 21% of the stock, or becomes an
officer, director, employee or paid agent of any competitor of the Company
within the continental United States. No amounts were accrued or payable
under this agreement in 1993, 1992 or 1991, and no amounts related thereto
are included above in the Summary Compensation Table.
COMPENSATION OF DIRECTORS
In 1993, each of Walter C.D. Carlson, Lester O. Johnson, Donald C.
Nebergall and Herbert S. Wander earned $18,000 as director's fees and
$1,500 for services on the audit committee, and Lester O. Johnson was
reimbursed $959 for expenses incurred in attending meetings. In addition
to the life insurance reported for the named executive officers reported in
the Summary Compensation Table above, the Company paid directors' life
insurance premiums in 1993 on behalf of each of the following directors in
the indicated amounts: Donald R. Brown ($1,888); Walter C.D. Carlson
($159); Robert J. Collins ($483); Rudolph E. Hornacek ($2,198); Lester O.
Johnson ($10,640); Donald C. Nebergall ($869); and Herbert S. Wander
($801). Donald C. Nebergall also received $149,323 in reimbursement of
certain expenses and for consulting services provided to the Company in
1993.
DIRECTOR INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS
LeRoy T. Carlson, Chairman of TDS, and LeRoy T. Carlson, Jr.,
President (chief executive officer) of TDS, are members of the Board of
Directors of TDS and of USM, and LeRoy T. Carlson, Jr., is a member of the
Board of Directors of APP. LeRoy T. Carlson, Jr., Chairman of USM and APP,
makes the executive officer compensation decisions for USM and APP. LeRoy
T. Carlson and LeRoy T. Carlson, Jr. also serve as directors and officers
of numerous direct or indirect subsidiaries of the Company and USM.
ISSUANCE OF TDS SHARES ON BEHALF OF USM.
The Company issues TDS securities in connection with the acquisition
of cellular interests on behalf of USM. At the time such acquisitions are
closed, the acquired cellular interests are generally transferred to USM,
which reimburses TDS by issuing USM securities to TDS or by increasing the
balance due to TDS under a revolving credit agreement between TDS and USM
(the "Revolving Credit Agreement"). The fair market value of the USM
securities issued to TDS in
-8-
<PAGE>
connection with these transactions is calculated in the same manner and
over the same time period as the fair market value of the TDS securities
issued to the sellers in such acquisitions. During 1993, USM issued 5.5
million USM Common Shares to TDS and became indebted to TDS for an
additional $101.5 million under the Revolving Credit Agreement, to
reimburse TDS for 6.1 million TDS Common Shares issued in such
transactions.
In addition to the shares described in the preceding paragraph,
additional securities of TDS and USM were authorized for issuance in
connection with acquisitions of cellular interests that were pending at
December 31, 1993. In connection with these acquisitions, TDS expects to
issue in 1994 or later years approximately 2.4 million TDS Common Shares,
for which USM will reimburse TDS by issuing approximately 3.7 million USM
Common Shares and increasing the amount of debt under the Revolving Credit
Agreement in an amount estimated to be approximately $400,000.
OTHER RELATIONSHIPS AND RELATED TRANSACTIONS.
Walter C.D. Carlson, a director of the Company, and Michael G. Hron,
Secretary of the Company, are partners of Sidley & Austin, the principal
law firm of the Company.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, at March 7, 1994, the number of Common
Shares and Series A Common Shares beneficially owned, and the percentage of
the outstanding shares of each such class so owned by each director and
nominee for director of the Company, and by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
Name of Percent
Individual or Number of Amount and Nature of Percent of Voting
Persons in Group Title of Class Beneficial Ownership(1) of Class Power
- ----------------------- -------------- ----------------------- --------- ----------
<S> <C> <C> <C> <C>
LeRoy T. Carlson, Jr.,
Walter C.D. Carlson,
Letitia G. Carlson,
Donald C. Nebergall and
Melanie J. Heald(2) Series A Common Shares 6,238,555 90.7% 54.3%
LeRoy T. Carlson, Jr.,
C. Theodore Herbert,
Ronald D. Webster and
Michael G. Hron(3) Common Shares 945 * *
Series A Common Shares 146,576 2.1% 1.3%
LeRoy T. Carlson, Jr.,
C. Theodore Herbert,
Ronald D. Webster and
Michael G. Hron(4) Common Shares 22,252 * *
LeRoy T. Carlson(5) Common Shares 38,610 * *
Series A Common Shares 50,398 * *
LeRoy T. Carlson, Jr.(6)(12) Common Shares 42,332 * *
Murray L. Swanson(7)(12) Common Shares 23,293 * *
Series A Common Shares 2,427 * *
James Barr III(12) Common Shares 9,645 * *
H. Donald Nelson(7) Common Shares 4,888 * *
Series A Common Shares 5,101 * *
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Rudolph E. Hornacek(8) Common Shares 12,156 * *
Series A Common Shares 2,348 * *
Lester O. Johnson(9) Common Shares 2,391 * *
Series A Common Shares 90,262 1.3 *
Donald C. Nebergall(10) Common Shares 7,684 * *
Walter C.D. Carlson(11) Common Shares 66 * *
Donald R. Brown(12) Common Shares 15,061 * *
Series A Common Shares 4,551 * *
Robert J. Collins(12) Common Shares 6,619 * *
Series A Common Shares 498 * *
Other executive officers Common Shares 80,531 * *
(6 persons)(12) Series A Common Shares 702 * *
All directors and executive officers Common Shares 266,473 * *
as a group (18 persons)(12) Series A Common Shares 6,541,418 95.1% 56.9%
<FN>
________________
* Less than 1%.
1. The nature of beneficial ownership for shares in this column is sole voting
and investment power, except as otherwise set forth in these footnotes.
2. The shares listed are held by the persons named as trustees under a voting
trust which expires June 30, 2009, created to facilitate long-standing
relationships among the trustees' certificate holders. Under the terms of
the voting trust, the trustees hold and vote the Series A Common Shares
held in the trust. If the voting trust were terminated, the following
persons would each be deemed to own beneficially more than 5% of the
outstanding Series A Common Shares: Margaret D. Carlson (wife of LeRoy T.
Carlson), LeRoy T. Carlson, Jr., Walter C.D. Carlson, Prudence E. Carlson,
Letitia G. Carlson (children of LeRoy T. Carlson and Margaret D. Carlson)
and Donald C. Nebergall, as trustee under certain trusts for the benefit of
the heirs of LeRoy T. and Margaret D. Carlson and an educational
institution. In addition, Margaret D. Carlson owns 50,398 Series A Common
Shares directly and Prudence E. Carlson owns 194,148 Series A Common Shares
directly.
3. Voting and investment control is shared by the persons named as trustees of
the Telephone and Data Systems, Inc. Employees' Pension Trust I.
4. Voting and investment control is shared by the persons named as trustees of
the Telephone and Data Systems, Inc. Tax-Deferred Savings Trust. Does not
include 165,245 shares as to which the voting and investment power is
passed through to plan participants.
5. Does not include 278,647 Series A Common Shares (4.0% of class) held for
the benefit of LeRoy T. Carlson in the voting trust described in footnote
(2). Beneficial ownership is disclaimed as to 635,767 Series A Common
Shares held for the benefit of his wife in such voting trust and as to
50,398 Series A Common Shares shown in the table which are held directly by
his wife (an aggregate of 10.0% of class).
6. Does not include 1,064,593 Series A Common Shares (15.5% of class) held in
the voting trust described in footnote (2), of which 1,038,214 shares are
held for the benefit of LeRoy T. Carlson, Jr. Beneficial ownership is
disclaimed with respect to an aggregate of 26,379 Series A Common Shares
held for the benefit of his wife, his children and others in such voting
trust.
7. Includes shares held by and/or in joint tenancy with spouse or children.
8. Includes 675 Series A Common Shares held as custodian for his children.
</TABLE>
-10-
<PAGE>
<TABLE>
<S> <C>
9. Does not include 244,622 Series A Common Shares (3.6% of class) held for
the benefit of Lester O. Johnson and his wife in the voting trust described
in footnote (2).
10. Includes 7,379 Common Shares held as trustee under a trust for the benefit
of an educational institution and the heirs of LeRoy T. and Margaret D.
Carlson. Does not include 998,805 Series A Common Shares (14.5% of class)
held as trustee under trusts for the benefit of the heirs of LeRoy T. and
Margaret D. Carlson and an educational institution, or 30 Series A Common
Shares held for the benefit of Donald C. Nebergall, which are included in
the voting trust described in footnote (2).
11. Does not include 1,064,430 Series A Common Shares (15.5% of class) held in
the voting trust described in footnote (2), of which 1,039,774 shares are
held for the benefit of Walter C.D. Carlson. Beneficial ownership is
disclaimed with respect to an aggregate of 24,656 Series A Common Shares
held for the benefit of his wife and children in such voting trust.
12. Includes the following number of Common Shares that may be purchased
pursuant to stock options and/or stock appreciation rights which are
currently exercisable or exercisable within 60 days: Mr. Swanson, 3,375
shares; Mr. LeRoy T. Carlson, Jr., 38,250 shares; Mr. Barr, 8,000 shares;
Mr. Hornacek, 8,000 shares; Mr. Brown, 7,827 shares; Mr. Collins, 1,310
shares; and all other executive officers, 48,287 shares.
</TABLE>
PRINCIPAL SHAREHOLDERS
In addition to persons listed in the preceding table and the footnotes
thereto, the following table sets forth, as of March 7, 1994, information
regarding each person who beneficially owns more than 5% of any class of voting
securities of TDS. The nature of beneficial ownership in this table is sole
voting and investment power except as otherwise set forth in footnotes thereto.
<TABLE>
<CAPTION>
Shares of Percent Percent
Shareholder's TDS Class of TDS of Voting
Name and Address Title of Class Owned Class Power
---------------- -------------- --------- -------- ---------
<S> <C> <C> <C> <C>
Eagle Asset Management Inc. Common Shares 3,255,980(1) 7.1% 2.8%
880 Carillon Parkway
St. Petersburg, Florida 33733
Putnam Investments, Inc., ET AL. Common Shares 2,478,405(2) 5.4% 2.2%
One Post Office Square
Boston, Massachusetts 02109
Goldman Sachs & Co. Preferred Shares 50,860 11.7% *
85 Broad Street
New York, New York 10004
Roland G. and Bette B. Nehring Preferred Shares 23,030 5.3% *
5253 North Dromedary Road
Phoenix, Arizona 85018
Regional Operations Group Inc. Preferred Shares 24,297 5.6% *
312 South 3rd Street
Minneapolis, Minnesota 55440
<FN>
_______________________
* Less than 1%.
(1) Based on the most recent Schedule 13G (Amendment No. 3) filed with the
Securities and Exchange Commission ("SEC"). In such Schedule 13G filing,
Eagle Asset Management, Inc. has reported sole investment power and sole
voting power with respect to all such shares.
</TABLE>
-11-
<PAGE>
<TABLE>
<S> <C>
(2) Based on a Schedule 13G filed with the SEC. The Schedule 13G reports that
Putnam Investments, Inc. and The Putnam Advisory Company, Inc. share voting
power with respect to 241,257 Common Shares, that Putnam Investments, Inc.
and Putnam Investment Management, Inc. share dispositive power with respect
to 2,128,285 Common Shares, and that Putnam Investments, Inc. and The
Putnam Advisory Company, Inc. share dispositive power with respect to
350,120 Common Shares. The Schedule 13G reports that Marsh & McLennon
Companies, Inc. is the direct or indirect parent corporation of each of
such entities.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation - Director Interlocks and Insider
Participation in Compensation Decisions."
-12-
<PAGE>
EXHIBIT 99.2
TELEPHONE AND DATA SYSTEMS, INC.
PRO FORMA FINANCIAL INFORMATION
Telephone and Data Systems, Inc. ("TDS"), together with its majority-owned
subsidiaries, TDS Telecommunications Corporation, United States Cellular
Corporation (AMEX symbol "USM") and American Paging, Inc. (AMEX Symbol "APP")
are referred to in this report as the "Company."
From January 1 through December 31, 1993, the Company acquired controlling
interests in four telephone companies, one paging company and 25 cellular
markets and several minority cellular interests representing a total of
approximately 3.8 million population equivalents. The total consideration paid
for these acquisitions was approximately $354.0 million, consisting of 6.8
million TDS Common Shares, 30,000 TDS Preferred Shares, 157,000 USM Common
Shares, 29,000 shares of subsidiary preferred stock (which are exchangeable into
approximately 73,000 TDS Common Shares), the obligation to deliver 140,000 USM
Common Shares in the future, and $58.8 million in cash.
As of December 31, 1993, the Company had pending agreements to acquire two
telephone companies and controlling interests in nine cellular markets and a
minority interest in one market representing a total of approximately 1.2
million population equivalents. The total consideration to be paid for the
acquisitions described in this paragraph, valued at the time such agreements
were entered into, is approximately $181.6 million. If these acquisitions are
completed as planned, the Company and/or USM will issue approximately 3.5
million TDS Common Shares, 49,000 USM Common Shares and will pay approximately
$6.2 million in cash.
1
<PAGE>
Pursuant to Rule 3-05 and Rule 11-01 of Regulation S-X, the completed and
pending acquisitions of businesses described in the foregoing paragraphs are not
individually significant. The following pro forma financial information is
included pursuant to Article 11 of Regulation S-X:
Item Page
- ---- ----
Telephone and Data Systems, Inc. Unaudited Condensed Pro Forma
Consolidated Financial Statements:
Unaudited Condensed Pro Forma Consolidated Balance Sheet
as of December 31, 1993
Unaudited Condensed Pro Forma Consolidated Statement of Income
for the Year Ended December 31, 1993
Notes to Unaudited Condensed Pro Forma Consolidated
Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
UNAUDITED
---------
(IN THOUSANDS)
ASSETS
COMBINED PRO FORMA
COMPLETED ADJUSTMENTS PRO FORMA
TDS AND PENDING INCREASE TDS
CONSOLIDATED (a) ACQUISITIONS (DECREASE) CONSOLIDATED
---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS $ 179,556 $ 15,628 $ (71)(1) $ 195,113
-------------- ------------ ---------- ------------
INVESTMENTS
Cellular limited partnership interests 101,210 -- (1,465)(1) 99,745
Cellular license acquisition costs, net 92,277 619 69,016 (1) 161,912
Marketable equity securities 19,368 -- -- 19,368
Other 115,532 3,515 -- 119,047
-------------- ------------ ---------- ------------
328,387 4,134 67,551 400,072
-------------- ------------ ---------- ------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant and franchise costs, net 638,848 32,424 34,512 (1) 705,784
Cellular telephone plant and
license costs, net 1,014,103 6,435 60,869 (1) 1,081,407
Radio paging, net 52,945 -- -- 52,945
Other, net 32,402 -- -- 32,402
-------------- ------------ ---------- ------------
1,738,298 38,859 95,381 1,872,538
-------------- ------------ ---------- ------------
OTHER ASSETS AND
DEFERRED CHARGES 12,941 3,371 -- 16,312
-------------- ------------ ---------- ------------
$ 2,259,182 $ 61,992 $ 162,861 $ 2,484,035
-------------- ------------ ---------- ------------
-------------- ------------ ---------- ------------
</TABLE>
The accompanying notes to condensed pro forma consolidated financial statements
are an integral part of this statement.
3
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
UNAUDITED
(IN THOUSANDS)
STOCKHOLDERS' EQUITY AND LIABILITIES
COMBINED PRO FORMA
COMPLETED ADJUSTMENTS PRO FORMA
TDS AND PENDING INCREASE TDS
CONSOLIDATED (a) ACQUISITIONS (DECREASE) CONSOLIDATED
---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES $ 163,531 $ 10,068 $ 5,588 (1) $ 179,187
---------------- ------------ ----------- ------------
DEFERRED LIABILITIES AND CREDITS 90,979 5,602 -- 96,581
---------------- ------------ ----------- ------------
LONG-TERM DEBT, excluding current portion 514,442 28,126 -- 542,568
---------------- ------------ ----------- ------------
REDEEMABLE PREFERRED STOCK,
excluding current portion 25,632 -- -- 25,632
---------------- ------------ ----------- ------------
MINORITY INTEREST in subsidiaries 223,480 -- 984 (1) 224,464
---------------- ------------ ----------- ------------
NONREDEEMABLE PREFERRED STOCK 16,833 -- -- 16,833
---------------- ------------ ----------- ------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share 43,504 124 3,416 (1) 47,044
Series A Common Shares,
par value $1 per share 6,881 -- -- 6,881
Capital in excess of par value 1,084,211 2,536 168,409 (1) 1,255,156
Retained earnings 89,689 15,536 (15,536)(1) 89,689
---------------- ------------ ----------- ------------
1,224,285 18,196 156,289 1,398,770
---------------- ------------ ----------- ------------
$ 2,259,182 $ 61,992 $ 162,861 $ 2,484,035
---------------- ------------ ----------- ------------
---------------- ------------ ----------- ------------
</TABLE>
The accompanying notes to condensed pro forma consolidated financial statements
are an integral part of this statement.
4
<PAGE>
<TABLE>
<CAPTION>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMBINED PRO FORMA
COMPLETED ADJUSTMENTS PRO FORMA
TDS AND PENDING INCREASE TDS
CONSOLIDATED ACQUISITIONS (b) (DECREASE) CONSOLIDATED
---------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $ 268,122 $ 41,764 $ -- $ 309,886
Cellular telephone 247,259 18,494 -- 265,753
Radio paging 75,363 485 -- 75,848
---------------- ------------ ----------- ------------
Total operating revenues 590,744 60,743 -- 651,487
---------------- ------------ ----------- ------------
OPERATING EXPENSES
Telephone 189,012 34,993 1,105 (3) 225,110
Cellular telephone 255,915 23,183 4,252 (3) 283,350
Radio paging 76,084 331 214 (3) 76,629
---------------- ------------ ----------- ------------
Total operating expenses 521,011 58,507 5,571 585,089
---------------- ------------ ----------- ------------
OPERATING INCOME 69,733 2,236 (5,571) 66,398
---------------- ------------ ----------- ------------
INVESTMENT AND OTHER
INCOME (EXPENSE)
Interest and dividend income 8,082 156 (351) (5) 7,887
Minority share of income (475) -- (452) (2) 588
1,515 (6)
Cellular investment income, net of
license cost amortization 15,704 -- (204) (3) 16,396
896 (4)
Gain on sale of cellular
properties and investments 4,970 -- -- 4,970
Other, net (155) 4,810 -- 4,655
---------------- ------------ ----------- ------------
28,126 4,966 1,404 34,496
---------------- ------------ ----------- ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 97,859 7,202 (4,167) 100,894
Interest expense 37,466 3,723 (351) (5) 42,088
1,250 (7)
---------------- ------------ ----------- ------------
INCOME BEFORE INCOME TAXES 60,393 3,479 (5,066) 58,806
Income tax expense 26,497 2,285 (5,778) (8) 23,004
---------------- ------------ ----------- ------------
NET INCOME 33,896 1,194 712 35,802
Preferred Dividend Requirement (2,386) -- -- (2,386)
---------------- ------------ ----------- ------------
NET INCOME AVAILABLE TO COMMON $ 31,510 $ 1,194 $ 712 $ 33,416
---------------- ------------ ----------- ------------
---------------- ------------ ----------- ------------
WEIGHTED AVERAGE
COMMON SHARES (000s) 47,266 5,680 52,946
---------------- ----------- ------------
---------------- ----------- ------------
EARNINGS PER COMMON SHARE $ .67 $ .63
---------------- ------------
---------------- ------------
</TABLE>
The accompanying notes to condensed pro forma consolidated financial statements
are an integral part of this statement.
5
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) Includes the balance sheets of the entities discussed in the second
paragraph of Item 5 of this report.
(b) Includes the income statements of the entities discussed in the second
paragraph of Item 5 of this report prior to the date of acquisition by the
Company, as well as each of the income statements of the entities for which
acquisition by the Company was completed subsequent to December 31, 1993, or is
pending as of the date of this Form 10-K.
(c) The pro forma adjustments are described in the following paragraphs:
1) Reflects TDS's acquisition of the telephone and cellular telephone
interests described in the third paragraph of Item 5 of this report. Also
reflects the elimination of the equity of these interests in purchase
transactions and the allocation of the purchase price in excess of book value
(in thousands).
<TABLE>
<S> <C>
Purchase price (aggregate) $ 181,653
Less: TDS's proportionate share of acquired companies'
equity at December 31, 1993 (17,256)
----------
Purchase price to be allocated $ 164,397
----------
----------
Purchase price in excess of book value--
Cellular operations--consolidated $ 60,869
Cellular operations--equity method 69,016
Telephone operations 34,512
----------
$ 164,397
----------
----------
</TABLE>
The pro forma allocations of the purchase prices to the acquired entities'
assets as set forth above are based upon preliminary estimates of the values of
those assets.
2) Reflects the minority shareholders' portion of acquired companies' net
income.
3) Reflects the amortization of assumed costs in excess of book value.
Excess cost amounts are primarily assumed to be amortized over 40 years.
4) Reflects the elimination of the equity-method losses of acquired
entities which are consolidated in the Pro Forma Consolidated Statements of
Income.
5) Reflects the elimination of intercompany interest income and interest
expense between the Company and an acquired entity. The acquired entity was
previously accounted for by the equity method of accounting (see Note 4).
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TELEPHONE AND DATA SYSTEMS, INC.
NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6) Reflects the minority shareholders' portion of USM's net income due to
the addition of the cellular entities and the related pro forma adjustments in
(2)-(4) above.
7) Reflects the estimated interest expense incurred as a result of
increases in Notes Payable in connection with the acquisitions included in the
Condensed Pro Forma Consolidated Statements of Income.
8) Reflects the estimated income tax effects of the pro forma adjustments
in (2)-(4) and (7) above.
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