<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8251
- --------------------------------------------------------------------------------
TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IOWA 36-2669023
- -------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or No.)
organization)
</TABLE>
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:
<TABLE>
<S> <C>
Name of each exchange
Title of each class on which registered
- ----------------------------- -----------------------------
Common Shares, $1 par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.___X___
As of February 29, 1996, the aggregate market values of the registrant's
Common Shares, Series A Common Shares and Preferred Shares held by nonaffiliates
were approximately $2.4 billion, $14.5 million and $48.1 million, respectively.
The closing price of the Common Shares on February 29, 1996, was $46.125 , 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 $46.125 times the number of Common Shares into
which it was convertible on February 29, 1996.
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 29, 1996, is 52,576,779 Common Shares, $1 par
value, and 6,893,101 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1995 Annual Report to
Shareholders, and of the registrant's Notice of Annual Meeting and Proxy
Statement for its Annual Meeting of Shareholders to be held May 17, 1996,
described in the cross reference sheet and table of contents attached hereto are
incorporated by reference into Part II of this report.
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE NUMBER
OR REFERENCE(1)
---------------
<C> <S> <C>
Item 1. Business............................................. 3
Item 2. Properties........................................... 40
Item 3. Legal Proceedings.................................... 40
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 40
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 41 (2)
Item 6. Selected Financial Data.............................. 41 (3)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 41 (4)
Item 8. Financial Statements and Supplementary Data.......... 41 (5)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 41
Item 10. Directors and Executive Officers of the Registrant... 42 (6)
Item 11. Executive Compensation............................... 42 (7)
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 42 (8)
Item 13. Certain Relationships and Related Transactions....... 42 (9)
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 43
<FN>
- ---------
(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, 1995 ("Annual Report"), and
from the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its Annual Meeting of Shareholders, to be held on May 17,
1996 (the "Proxy Statement").
(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."
(6) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation," except for the
information specified in Item 402(a)(8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TELEPHONE AND DATA SYSTEMS, INC.
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602 [LOGO]
TELEPHONE (312) 630-1900
- --------------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS
Telephone and Data Systems, Inc. (the "Company" or "TDS"), is a diversified
telecommunications service company with cellular telephone, local telephone and
radio paging operations and developing personal communications services
operations. At December 31, 1995, the Company served approximately 1.9 million
customer units in 37 states, including 710,000 cellular telephones, 425,900
telephone access lines and 784,500 pagers. For the year ended December 31, 1995,
cellular operations provided 52% of the Company's consolidated revenues;
telephone operations provided 37%; and paging operations provided 11%. 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.
The Company conducts substantially all of its cellular operations through
its 80.8%-owned subsidiary, United States Cellular Corporation [AMEX: "USM"].
USM provides cellular telephone service to 710,000 customers through 137
majority-owned and managed ("consolidated") cellular systems serving
approximately 17% of the geography and approximately 8% of the population of the
United States. Since 1985, when the Company began providing cellular service in
Knoxville, Tennessee, the Company has expanded its cellular networks and
customer service operations to cover 147 markets in 29 states as of December 31,
1995. In total, the Company now operates nine market clusters, of which five
have a total population of more than two million, and each of which has a total
population of more than one million, plus other unclustered markets. Overall,
83% of the Company's 24.5 million population equivalents are in markets which
are or will be consolidated, 1% are in managed but not consolidated markets and
16% are in markets in which the Company holds an investment interest.
The Company conducts substantially all of its telephone operations through
its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom").
TDS Telecom currently operates 100 telephone companies serving 425,900 access
lines in 28 states. TDS Telecom is expanding by offering additional lines of
telecommunications products and services to existing customers and through the
selective acquisition of local exchange telephone companies serving rural and
suburban areas. TDS Telecom has acquired 24 telephone companies and divested one
telephone company since the beginning of 1991. These net acquisitions added
73,100 access lines during this five-year period, while internal growth added
74,100 lines.
The Company conducts substantially all of its radio paging operations
through its 82.3%-owned subsidiary, American Paging, Inc. [AMEX: "APP"]. APP
offers radio paging and related services through its subsidiaries. Since the
beginning of 1991, the number of pagers in service increased from 201,200 to
784,500 at December 31, 1995, primarily from internal growth. APP provides
service through 38 sales and service operating centers in 14 states and the
District of Columbia. APP's service areas cover a total population of
approximately 75 million.
The Company conducts substantially all of its broadband personal
communications services operations through its wholly owned subsidiary, American
Portable Telecom, Inc. ("APT"). In March 1995, APT was the successful bidder for
eight broadband PCS licenses. The six primary 30 megahertz PCS licenses that are
being developed cover the Major Trading Areas of Minneapolis,
3
<PAGE>
Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus, and
account for 27.3 million population equivalents. APT has entered into a
definitive agreement to sell its license covering the Guam MTA, subject to FCC
approval, and is pursuing a sale of its license for the Alaska MTA with several
interested parties. On February 20, 1996, APT filed a registration statement for
an initial public offering of 11.0 million of its Common Shares. If the initial
public offering is completed as currently planned, TDS will own approximately
84% of the equity of APT upon completion of the offering (assuming the
Underwriters' over-allotment option to purchase 1,650,000 additional common
shares is not exercised).
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 "TDS Telecom" refer to TDS Telecommunications
Corporation and its subsidiaries; (iv) references to "APP" refer to American
Paging, Inc. and its subsidiaries; (v) references to "APT" refer to American
Portable Telecom, Inc. and its subsidiaries; (vi) 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; (vii)
references to "RSA" refer to the Rural Service Area, as used by the FCC in
designating non-MSA cellular market areas; (viii) references to cellular
"markets" or "systems" refer to MSAs, RSAs or both; (ix) references to "MTA"
refer to Major Trading Areas, as used by the FCC in designating Personal
Communications Services ("PCS") markets; (x) references to "population
equivalents" mean the population of a market, based on 1995 Donnelley Marketing
Service Estimates, multiplied by the percentage interests that the Company owns
or has the right to acquire in an entity licensed, designated to receive a
license or expected to receive a construction permit ("licensee") by the FCC to
construct or operate a cellular or a PCS system in such market; and (xi)
references to "1996 Act" refer to the Telecommunications Act of 1996.
CELLULAR TELEPHONE OPERATIONS
THE CELLULAR TELEPHONE INDUSTRY
Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle and hand-held portable cellular
telephones. Cellular technology is a major improvement over earlier mobile
telephone technologies. Cellular telephone systems are designed for maximum
mobility of the customer. Access is provided through system interconnections to
local, regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, facsimile and
data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO") which is connected to the conventional ("landline") telephone
network and potentially other MTSOs. Each conversation on a cellular phone
involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems and radio paging. PCS is expected to be
competitive with cellular service in the future in some or all of USM's markets,
and emerging technologies such as Enhanced Specialized Mobile Radio ("ESMR") and
mobile satellite communication systems may prove to be competitive with cellular
service in the future in some or all of the markets where USM has operations.
4
<PAGE>
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers are charged a separate fee
for system access, airtime, long-distance calls, and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. The system that provides the service to these roamers will generate
usage revenue. Many operators, including 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. 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. Another digital technology, Code
Division Multiple Access ("CDMA"), is expected to be deployed by USM in a
commercial trial during 1996. The Company also expects to deploy some CDMA
digital radio channels in other markets on a trial basis in the near future.
Digital radio technology offers several advantages including greater privacy,
less transmission noise, greater system capacity and potentially lower
incremental costs for additional customers. The conversion from analog to
digital radio technology is expected to be an industry-wide process that will
take a number of years.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
CELLULAR 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. From its inception
in 1983 until the last two years, USM has principally been in a start-up phase.
Until that time, USM's activities had been concentrated significantly on the
acquisition of interests in entities licensed or designated to receive a license
("licensees") from the FCC to provide cellular service and on the construction
and initial operation of cellular systems. The development of a cellular system
is capital-intensive and requires substantial investment prior to and subsequent
to initial operation. USM experienced operating losses and net losses from its
inception until the past two years. During the past two years, USM generated
operations-driven net income and has significantly increased its operating cash
flows during that time. Management anticipates increasing growth in cellular
units in service and revenues as USM continues its vigorous expansion and
development programs. Marketing and system operations expenses associated with
this expansion may reduce the rate of growth in operating cash flow and
operating income during the period of accelerated growth. In addition, USM
anticipates that the seasonality of revenue streams and operating expenses may
affect USM's operating and net results over the next several quarters.
While USM produced operating income and net income during 1994 and 1995,
changes in any of several factors may reduce USM's growth in operating income
and net income over the next few years. These factors include: (i) the growth
rate in USM's customer base; (ii) the usage and pricing of cellular services;
(iii) the churn rate; (iv) the cost of providing cellular services, including
the cost of attracting new customers; (v) the introduction of competition from
PCS and other emerging technologies; and (vi) continuing technological advances
which may provide competitive alternatives to cellular service.
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 operating clusters of
markets in the following areas: Iowa, Wisconsin/Illinois, Missouri, Eastern
North Carolina/South Carolina, Virginia, West Virginia/Pennsylvania/Maryland,
Oregon/California, Washington/Oregon/Idaho, Indiana/Kentucky, Eastern
Tennessee/Western North Carolina, Oklahoma/
5
<PAGE>
Missouri/Kansas, Texas/Oklahoma, Maine/New Hampshire/Vermont, Florida/Georgia
and Southwestern Texas. See "USM'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.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. During the last five years, USM has expanded its size,
particularly in contiguous or adjacent markets, 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 mid-sized and
rural markets and has been based on obtaining interests with rights to manage
the underlying market.
The Company has increased its population equivalents by 63% from
approximately 15.0 million at December 31, 1990, to approximately 24.5 million
at December 31, 1995. Markets managed or to be managed by USM have increased
from 88 markets at December 31, 1990, to 140 markets at December 31, 1995. As of
December 31, 1995, 84% of the Company's population equivalents represented
interests in markets USM manages or expects to manage compared to 77% at
December 31, 1990.
Recently, the pace of acquisitions has slowed as industry-wide consolidation
has reduced the number of markets available for acquisition. USM's population
equivalents grew at a compound annual rate of over 10% over the last five years,
but decreased by 4% from 1994 to 1995 due to the increased number of completed
and pending divestitures.
USM plans to acquire additional cellular interests through acquisitions or
exchanges in markets that further strengthen its 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. While
USM believes that it will be successful in making additional acquisitions or
exchanges, there can be no assurance that USM, or TDS for the benefit of USM,
will be able to negotiate additional acquisitions or exchanges on terms
acceptable to it or that regulatory approvals, where required, will be received.
USM plans to retain minority interests in certain cellular markets which it
believes will earn a favorable return on investment. Other minority interests
may be exchanged for interests in markets which enhance USM's market clusters or
may be sold for cash or other consideration. USM also continues to evaluate the
disposition of certain managed interests which are not essential to its
corporate development strategy.
USM, or TDS for the benefit of USM, has historically negotiated acquisitions
of cellular interests from third parties primarily in consideration for USM's or
TDS's equity securities. Cellular interests acquired by TDS in these
transactions have been assigned to USM. At that time, USM reimbursed TDS for the
value of TDS securities issued in such transactions, generally by issuing Common
Shares to TDS or by increasing the balance due TDS under USM's Revolving Credit
Agreement in amounts equal to the value of TDS securities delivered at the time
the acquisitions were completed. The fair market value of the USM securities
issued to TDS in connection with these transactions was equal to the fair market
value of the TDS securities delivered in the transactions and was determined at
the time the transactions were completed.
In the past two years, USM, or TDS for the benefit of USM, has also
negotiated divestitures and exchanges of cellular interests with third parties.
The consideration received from these divestitures of non-strategic markets has
primarily been cash, which has been used to reduce debt or for general corporate
purposes. The exchanges have included the divestiture of controlling interests
in non-strategic markets in exchange for controlling interests in markets which
further enhance USM's clusters.
COMPLETED ACQUISITIONS. During 1995, USM, or TDS for the benefit of USM,
completed the acquisition of controlling interests in ten markets and several
minority interests representing approximately 1.5 million population equivalents
for an aggregate consideration of $136.4 million. The consideration consisted of
1.9 million TDS Common Shares, 422,000 USM Common Shares and $ 41.9 million in
cash. USM reimbursed TDS for TDS securities issued and cash paid in the
acquisitions through an increase of $14.6 million in the debt to TDS under the
Revolving Credit Agreement, the issuance to TDS of 2.7 million USM Common Shares
and 456,000 USM Common Shares to be issued to TDS in the future.
6
<PAGE>
COMPLETED DIVESTITURES AND EXCHANGES. During 1995, USM completed the
divestiture of controlling interests in six markets and minority interests in
six other markets representing approximately 1.1 million population equivalents
for an aggregate consideration of $129.3 million, primarily cash. Also during
1995, USM completed six separate exchange transactions which resulted in the
acquisition of controlling interests in twelve markets, representing 2.0 million
population equivalents, and the divestiture of ten markets plus three market
partitions, representing 2.1 million population equivalents.
PENDING ACQUISITIONS, DIVESTITURES, AND EXCHANGES. At December 31, 1995,
USM, or TDS for the benefit of USM, had entered into agreements to purchase a
controlling interest in one market and several minority interests in another
market, to exchange a controlling interest in one market for a controlling
interest in another market, to sell controlling interests in seven markets, one
minority interest and one market partition and to settle litigation related to
an investment interest which was sold in 1995 for aggregate consideration
estimated to be approximately $150 million in cash and $20 million of notes
receivable due in three years. All of these pending transactions are expected to
be completed during 1996.
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.
The Company has had voting control of USM since USM's incorporation. TDS
owned an aggregate of 67,052,931 shares of common stock of USM at December 31,
1995, representing over 80% of the combined total of USM's outstanding Common
and Series A Common Shares and over 95% 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, 1995, TDS would have owned over 80% of the total
outstanding common stock of USM and controlled over 95% of the combined voting
power of both classes of its common stock.
CELLULAR INTERESTS AND CLUSTERS
USM operates clusters of adjacent cellular systems in nearly all of its
markets, enabling its customers to benefit from larger service areas than
otherwise possible. Where USM offers wide-area coverage, its customers enjoy
uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering also has
provided to USM certain economies in its capital and operating costs. These
economies are made possible through increased sharing of facilities, personnel
and other costs and have resulted in a reduction of USM's per customer cost of
service. The extent to which USM benefits from these revenue enhancements and
economies of operation is dependent on market conditions, population size of
each cluster and engineering considerations.
USM anticipates that it will continue to pursue strategic acquisitions and
exchanges which will complement its established market clusters. From time to
time, USM may also consider exchanging or selling its interests in markets which
do not fit well with its long-term strategies.
7
<PAGE>
USM owned or had the right to acquire interests in cellular telephone
systems in 201 markets at December 31, 1995, representing 24.5 million
population equivalents. The following table summarizes the growth in USM's
population equivalents in recent years and the development status of these
population equivalents.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(THOUSANDS OF POPULATION EQUIVALENTS) (1)
Operational Markets:
Majority-Owned and Managed................................ 19,755 18,365 18,619 14,597 10,651
Minority-Owned and Managed (2)............................ 511 1,195 1,166 2,049 1,788
Markets to be Managed, Net of Markets to be Divested: (3)
Majority-Owned............................................ 269 2,200 1,015 1,847 3,046
Minority-Owned (2)........................................ -- -- 6 5 124
------- ------- ------- ------- -------
Total Markets Managed and to be Managed................... 20,535 21,760 20,806 18,498 15,609
Minority Interests in Markets Managed by Others............. 3,916 3,703 3,505 3,606 3,334
------- ------- ------- ------- -------
Total..................................................... 24,451 25,463 24,311 22,104 18,943
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- ---------
(1) Based on 1995 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.
8
<PAGE>
The following section details USM's cellular interests, including those it
owned or had the right to acquire as of December 31, 1995. The table presented
therein lists clusters of markets that USM manages or anticipates managing.
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.
USM'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, 1995.
The number of population equivalents represented by USM's cellular interests
may have no direct relationship to the number of potential cellular customers or
the revenues that may be realized from the operation of the related cellular
systems.
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY:
MIDWEST REGIONAL MARKET CLUSTER:
IOWA:
Des Moines, IA.......................... 422,000 100.00% 100.00% 422,000
Davenport, IA-IL........................ 359,000 97.37 97.37 350,000
Humboldt (IA 10)........................ 183,000 100.00 100.00 183,000
Cedar Rapids, IA........................ 178,000 95.66 95.66 171,000
Muscatine (IA 4)........................ 155,000 100.00 100.00 155,000
Iowa (IA 6)............................. 154,000 100.00 100.00 154,000
Waterloo-Cedar Falls, IA................ 148,000 90.31 90.31 133,000
Hardin (IA 11).......................... 111,000 100.00 100.00 111,000
Jackson (IA 5).......................... 109,000 100.00 100.00 109,000
Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000
Lyon (IA 16)............................ 104,000 100.00 100.00 104,000
Iowa City, IA........................... 101,000 100.00 100.00 101,000
Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000
Dubuque, IA............................. 88,000 72.96 72.96 64,000
Mills (IA 1)............................ 61,000 100.00 100.00 61,000
Audubon (IA 7).......................... 55,000 100.00 100.00 55,000
Union (IA 2)............................ 50,000 100.00 100.00 50,000
Monroe (IA 3)........................... 91,000 49.00 49.00 45,000
Winneshiek (IA 12) *.................... 116,000 24.50 24.50 28,000
Ida (IA 9) *............................ 64,000 16.67 16.67 11,000
----------- -----------
2,724,000 2,482,000
----------- -----------
WISCONSIN/ILLINOIS:
Peoria, IL.............................. 345,000 100.00 100.00 345,000
Jo Daviess (IL 1)....................... 317,000 100.00 100.00 317,000
Wood (WI 7)#............................ 286,000 0.00 100.00% 100.00 286,000
Adams (IL 4) *(2)....................... 214,000 100.00 100.00 214,000
Mercer (IL 3)........................... 204,000 100.00 100.00 204,000
Vernon (WI 8) *......................... 233,000 74.00 74.00 172,000
Pierce (WI 5)........................... 94,000 100.00 100.00 94,000
Wausau, WI *............................ 121,000 71.76 71.76 87,000
Trempealeau (WI 6) (2).................. 82,000 100.00 100.00 82,000
LaCrosse, WI............................ 102,000 74.57 74.57 76,000
Rochester, MN * (3)..................... 114,000 100.00 (85.33) 14.67 17,000
----------- -----------
2,112,000 1,894,000
----------- -----------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
MISSOURI:
Columbia, MO*........................... 124,000 100.00% 100.00% 124,000
Stone (MO 15)........................... 114,000 100.00 100.00 114,000
Laclede (MO 16)......................... 96,000 100.00 100.00 96,000
Washington (MO 13)...................... 91,000 100.00 100.00 91,000
Callaway (MO 6) *....................... 85,000 100.00 100.00 85,000
Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000
Shannon (MO 17) *....................... 55,000 100.00 100.00 55,000
Linn (MO 5) (4)......................... 54,000 100.00 100.00 54,000
Brown (KS 5)............................ (5) 100.00 (100.00)% 0.00 --
DeKalb (MO 4)........................... (5) 100.00 (100.00) 0.00 --
Atchison (MO 1)......................... (5) 100.00 (100.00) 0.00 --
----------- -----------
675,000 675,000
----------- -----------
TOTAL MIDWEST REGIONAL MARKET
CLUSTER.............................. 5,511,000 5,051,000
----------- -----------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
EASTERN NORTH CAROLINA/SOUTH CAROLINA:
Northampton (NC 8)...................... 286,000 100.00 100.00 286,000
Rockingham (NC 7)....................... 282,000 100.00 100.00 282,000
Harnett (NC 10)......................... 278,000 100.00 100.00 278,000
Greene (NC 13).......................... 239,000 100.00 100.00 239,000
Greenville (NC 14)...................... 238,000 100.00 100.00 238,000
Hoke (NC 11)............................ 221,000 100.00 100.00 221,000
Ashe (NC 3)............................. 159,000 100.00 100.00 159,000
Chesterfield (SC 4)..................... 211,000 100.00 100.00 211,000
Sampson (NC 12)......................... 126,000 100.00 100.00 126,000
Chatham (NC 6).......................... 155,000 81.16 81.16 126,000
Camden (NC 9)........................... 119,000 100.00 100.00 119,000
----------- -----------
2,314,000 2,285,000
----------- -----------
VIRGINIA:
Roanoke, VA............................. 234,000 100.00 100.00 234,000
Bedford (VA 4).......................... 175,000 100.00 100.00 175,000
Lynchburg, VA........................... 159,000 100.00 100.00 159,000
Charlottesville, VA..................... 142,000 82.41 11.11 93.52 133,000
Buckingham (VA 7)....................... 89,000 100.00 100.00 89,000
Tazewell (VA 2) (2)..................... 83,000 100.00 100.00 83,000
Bath (VA 5)............................. 62,000 100.00 100.00 62,000
----------- -----------
944,000 935,000
----------- -----------
WEST VIRGINIA/PENNSYLVANIA/MARYLAND:
Monongalia (WV 3) *..................... 269,000 100.00 100.00 269,000
Raleigh (WV 7) *........................ 255,000 100.00 100.00 255,000
Grant (WV 4) *.......................... 169,000 100.00 100.00 169,000
Tucker (WV 5) *......................... 131,000 100.00 100.00 131,000
Hagerstown, MD *........................ 127,000 100.00 100.00 127,000
Cumberland, MD *........................ 101,000 100.00 100.00 101,000
Bedford (PA 10) (2) *................... 49,000 100.00 100.00 49,000
Garrett (MD 1) *........................ 30,000 100.00 100.00 30,000
Greene (PA 9)........................... (5) 100.00 (100.00) 0.00 --
----------- -----------
1,131,000 1,131,000
----------- -----------
TOTAL MID-ATLANTIC REGIONAL MARKET
CLUSTER.............................. 4,389,000 4,351,000
----------- -----------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
NORTHWEST REGIONAL MARKET CLUSTER:
OREGON/CALIFORNIA:
Coos (OR 5)............................. 255,000 100.00% 100.00% 255,000
Del Norte (CA 1)........................ 208,000 100.00 100.00 208,000
Medford, OR *........................... 166,000 100.00 100.00 166,000
Mendocino (CA 9)........................ 140,000 100.00 100.00 140,000
Crook (OR 6) *.......................... 187,000 62.50 62.50 117,000
Modoc (CA 2)............................ 59,000 100.00 100.00 59,000
----------- -----------
1,015,000 945,000
----------- -----------
WASHINGTON/OREGON/IDAHO:
Clark (ID 6)............................ 290,000 100.00 100.00 290,000
Pacific (WA 6) *........................ 179,000 100.00 100.00 179,000
Richland-Kennewick-Pasco, WA *.......... 177,000 100.00 100.00 177,000
Butte (ID 5)............................ 156,000 100.00 100.00 156,000
Yakima, WA *............................ 212,000 54.55 54.55 115,000
Okanogan (WA 4)......................... 115,000 100.00 100.00 115,000
Umatilla (OR 3) *....................... 149,000 60.42 60.42 90,000
Kittitas (WA 5) (2) *................... 69,000 83.50 83.50 58,000
Hood River (OR 2) *..................... 71,000 30.32 30.32 22,000
Skamania (WA 7) *....................... 27,000 30.32 30.32 8,000
----------- -----------
1,445,000 1,210,000
----------- -----------
TOTAL NORTHWEST REGIONAL MARKET
CLUSTER.............................. 2,460,000 2,155,000
----------- -----------
INDIANA/KENTUCKY MARKET CLUSTER:
Meade (KY 3)............................ 311,000 100.00 100.00 311,000
Evansville, IN.......................... 321,000 78.13 78.13 251,000
Owen (IN 7)............................. 222,000 100.00 100.00 222,000
Elliott (KY 9).......................... 204,000 100.00 100.00 204,000
Fulton (KY 1)........................... 188,000 100.00 100.00 188,000
Clay (KY 11)............................ 171,000 100.00 100.00 171,000
Powell (KY 10).......................... 153,000 100.00 100.00 153,000
Union (KY 2)............................ 127,000 100.00 100.00 127,000
Ross (OH 9) *........................... 247,000 49.00 49.00 121,000
Owensboro, KY........................... 91,000 81.81 81.81 74,000
Warren (IN 5) *......................... 122,000 33.33 33.33 41,000
Miami (IN 4) *.......................... 180,000 0.00 14.29% 14.29 26,000
Williams (OH 1) *....................... (5) 75.00 (75.00) 0.00 0
----------- -----------
TOTAL INDIANA/KENTUCKY MARKET
CLUSTER.............................. 2,337,000 1,889,000
----------- -----------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA
MARKET CLUSTER:
Knoxville, TN *......................... 546,000 96.03 96.03 524,000
Whitfield (GA 1)........................ 217,000 100.00 100.00 217,000
Asheville, NC *......................... 206,000 100.00 100.00 206,000
Henderson (NC 4) (2) *.................. 189,000 100.00 100.00 189,000
Bledsoe (TN 7) (2) *.................... 146,000 96.03 96.03 140,000
Hamblen (TN 4) (2) *.................... 130,000 100.00 100.00 130,000
Giles (TN 6) *.......................... 156,000 80.00 80.00 125,000
Macon (TN 3) *.......................... 334,000 16.67 16.67 56,000
Yancey (NC 2) (2) *..................... 31,000 100.00 100.00 31,000
----------- -----------
TOTAL EASTERN TENNESSEE/WESTERN NORTH
CAROLINA MARKET CLUSTER.............. 1,955,000 1,618,000
----------- -----------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL
MARKET CLUSTER:
OKLAHOMA/MISSOURI/KANSAS:
Tulsa, OK *............................. 787,000 55.06 55.06 433,000
Elk (KS 15) *........................... 154,000 0.00 99.00 99.00 153,000
Joplin, MO *............................ 143,000 100.00 100.00 143,000
Seminole (OK 6)......................... 218,000 55.06 55.06 120,000
Nowata (OK 4) (2) *..................... 103,000 55.06 55.06 57,000
----------- -----------
1,405,000 906,000
----------- -----------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
TEXAS/OKLAHOMA:
Garvin (OK 9)........................... 201,000 100.00% 100.00% 201,000
Haskell (OK 10)......................... 83,000 100.00 100.00 83,000
Wichita Falls, TX *..................... 135,000 51.65 51.65 70,000
Lawton, OK *............................ 118,000 51.65 51.65 61,000
Jackson (OK 8) *........................ 96,000 51.65 51.65 50,000
Hardeman (TX 5) (2) *................... 38,000 51.65 51.65 20,000
Briscoe (TX 4) (2) *.................... 11,000 51.65 51.65 6,000
Beckham (OK 7) (2) *.................... 10,000 51.65 51.65 5,000
----------- -----------
692,000 496,000
----------- -----------
TOTAL TEXAS/OKLAHOMA/MISSOURI/KANSAS
REGIONAL MARKET CLUSTER.............. 2,097,000 1,402,000
----------- -----------
MAINE/NEW HAMPSHIRE/VERMONT MARKET
CLUSTER:
Manchester-Nashua, NH................... 349,000 87.95 87.95 307,000
Coos (NH 1) *........................... 222,000 100.00 100.00 222,000
Kennebec (ME 3)......................... 222,000 100.00 100.00 222,000
Somerset (ME 2)......................... 151,000 100.00 100.00 151,000
Bangor, ME.............................. 148,000 91.08 91.08 135,000
Addison (VT 2) (2) *.................... 107,000 100.00 100.00 107,000
Washington (ME 4) *..................... 85,000 100.00 100.00 85,000
Lewiston-Auburn, ME..................... 104,000 82.05 82.05 85,000
Oxford (ME 1)........................... 83,000 100.00 100.00 83,000
----------- -----------
TOTAL MAINE/NEW HAMPSHIRE/VERMONT
MARKET CLUSTER....................... 1,471,000 1,397,000
----------- -----------
FLORIDA/GEORGIA MARKET CLUSTER:
Tallahassee, FL......................... 275,000 100.00 100.00 275,000
Worth (GA 14)........................... 246,000 100.00 100.00 246,000
Gainesville, FL......................... 219,000 100.00 100.00 219,000
Toombs (GA 11).......................... 152,000 100.00 100.00 152,000
Fort Pierce, FL (6)*.................... 285,000 49.00 49.00 140,000
Walton (FL 10).......................... 111,000 100.00 100.00 111,000
Putnam (FL 5)........................... 70,000 100.00 100.00 70,000
Dixie (FL 6)............................ 54,000 100.00 100.00 54,000
Jefferson (FL 8)........................ 53,000 100.00 100.00 53,000
Calhoun (FL 9).......................... 40,000 100.00 100.00 40,000
----------- -----------
TOTAL FLORIDA/GEORGIA MARKET
CLUSTER.............................. 1,505,000 1,360,000
----------- -----------
SOUTHWESTERN TEXAS MARKET CLUSTER:
Corpus Christi, TX...................... 380,000 100.00 100.00 380,000
Atascosa (TX 19)........................ 224,000 100.00 100.00 224,000
Edwards (TX 18)......................... 211,000 100.00 100.00 211,000
Laredo, TX.............................. 169,000 93.74 93.74 158,000
Wilson (TX 20).......................... 137,000 100.00 100.00 137,000
Victoria, TX............................ 81,000 99.22 99.22 80,000
----------- -----------
TOTAL SOUTHWESTERN TEXAS MARKET
CLUSTER.............................. 1,202,000 1,190,000
----------- -----------
OTHER OPERATIONS:
Hawaii (HI 3)........................... 139,000 100.00 100.00 139,000
Poughkeepsie, NY........................ (5) 83.11 (83.11)% 0.00 --
Columbia (NY 6)......................... (5) 100.00 (100.00) 0.00 --
----------- -----------
139,000 139,000
----------- -----------
Total Managed Markets................. 23,066,000 20,552,000
----------- -----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY OTHERS:
Los Angeles/Oxnard, CA *................ 15,478,000 5.50% 5.50% 851,000
Nashville/Clarksville-Hopkinsville,
TN-KY *................................ 1,282,000 49.00 49.00 627,000
Baton Rouge, LA (7) *................... 565,000 52.00 (2.01)% 49.99 282,000
Seattle-Everett/Tacoma/Bremerton, WA
*...................................... 3,019,000 7.01 7.01 212,000
Biloxi/Pascagoula, MS *................. 357,000 49.00 49.00 175,000
Oklahoma City, OK *..................... 989,000 14.60 14.60 144,000
Portland, ME *.......................... 283,000 49.00 49.00 139,000
McAllen, TX............................. 476,000 26.20 26.20 125,000
Portsmouth-Dover-Rochester, NH-ME *..... 277,000 40.00 40.00 111,000
Others (Fewer than 100,000 population
equivalents
each).................................. 1,233,000
-----------
Total Population Equivalents of
Markets Managed by
Others............................... 3,899,000
-----------
Total Population Equivalents.......... 24,451,000
-----------
-----------
</TABLE>
- ------------
* Designates wireline market.
# Designates operational market managed by a third party until USM acquires a
controlling interest.
(1) Interests under these agreements are expected to be acquired or divested at
the various times specified therein following the satisfaction of customary
closing conditions.
(2) These markets have been or will be partitioned into more than one licensed
area. The 1995 population, percentage ownership and number of population
equivalents shown are for the licensed areas within the markets in which USM
owns or has the right to acquire an interest.
(3) USM has an agreement to divest a controlling interest in this market and
will retain an investment interest after the divestiture.
(4) USM has an agreement to divest a partitioned area in this market. The 1995
population, percentage ownership and number of population equivalents shown
is for the licensed area within the market which USM will own upon
completion of the divestiture.
(5) USM has agreements to divest its controlling interests in these markets. The
1995 populations of these markets are not included in the related cluster or
group totals.
(6) USM owns 80% of the entity which owns and operates this market but has only
a 49% interest in the earnings and profits.
(7) USM owns a noncontrolling limited partnership interest in this market.
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 digital cellular switching systems that
are capable of serving multiple markets through a single MTSO. USM's cellular
systems are designed to facilitate the installation of equipment which will
permit microwave interconnection between the MTSO and the 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.
13
<PAGE>
USM has continued to expand its internal network in 1995 to encompass nearly
all of its markets. This network provides automatic call delivery for USM's
customers and handoff between adjacent markets. The network has also been
extended through links with certain systems operated by several other carriers,
including GTE, US West, Ameritech, BellSouth, Centennial Cellular Corp.,
Southwestern Bell, AT&T Wireless, Vanguard Cellular Systems and others.
Additionally, USM has implemented two Signal Transfer Points which will allow it
to interconnect efficiently with network providers such as the Independent
Telephone Network and the North American Cellular Network.
During 1996, USM intends to extend the network for its customers through
interconnection with one or more network providers as well as additional "point
to point" connections required for hand-off. This expanded network will increase
the area in which customers can automatically receive incoming calls, and should
also reduce the incidence of "tumbling" electronic serial number fraud due to
the pre-call validation feature of networked systems.
USM believes that currently available technologies will allow sufficient
capacity on USM's networks to meet anticipated demand over the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. 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
USM's marketing plan is designed to continue rapid penetration of its market
clusters and to increase customer awareness of cellular service. The marketing
plan stresses the quality of USM's service offerings and incorporates rate plans
and cellular telephone equipment which are designed to meet the needs of a
variety of customer segments and their usage patterns. USM's distribution
channels include direct sales personnel, agents and retail service centers in
the vast majority of its markets. These USM-owned and managed locations are
designed to market cellular service to the consumer segment in a familiar
setting.
USM manages each cluster of markets from one administrative office with a
local staff, including sales, customer service, engineering and in some cases
installation personnel. Direct sales consultants market cellular service to
potential business customers throughout each cluster. Retail associates work out
of the retail locations and market cellular service to the consumer segment. USM
maintains an ongoing training program to improve the effectiveness of sales
consultants and retail associates by focusing their efforts on obtaining
customers and maximizing the sale of high-user packages. These packages provide
for customers to obtain a minimum amount of usage at discounted rates per
minute, at fixed prices which are charged, even if usage falls below a defined
monthly minimum amount.
USM continues to expand its relationships with agents, dealers and non-USM
retailers to obtain customers. Agents and dealers are independent business
people who obtain customers for USM on a commission basis. USM's agents are
generally in the business of selling cellular telephones, cellular service
packages and other related products. USM's dealers include car stereo companies
and other companies whose customers are also potential cellular customers. The
non-USM retailers include car dealers, major appliance dealers, office supply
dealers and mass merchants.
USM opened its own retail locations in late 1993, expanding to over 170
locations by the end of 1995. These USM-owned and operated businesses utilize
rental facilities in high-traffic areas. USM is working toward a uniform
appearance of these stores, with all having similar displays and layouts. The
retail centers' hours of business match those of the retail trade in the local
marketplace, often staying
14
<PAGE>
open on weekends and later in the evening than a typical business supplier.
Additionally, to fully serve customer needs, these stores sell accessories to
complement the phones and services USM has traditionally provided.
In addition to its own retail centers, USM actively pursues national retail
accounts, as agents for USM, which may potentially yield new customer additions
in multiple markets. Agreements have been entered into with such national
distributors as Wal-Mart, Chrysler Corporation, Ford Motor Company, General
Motors, AT&T, Radio Shack, Best Buy and Sears, Roebuck & Co. in certain of 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.
USM uses a variety of direct mail, billboard, radio, television and
newspaper advertising to stimulate interest by prospective customers in
purchasing USM's cellular service and to establish familiarity with USM's name.
Advertising is directed at gaining customers, increasing usage of 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
Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their offices such
as people in the construction, real estate, wholesale and retail distribution
businesses and professionals. Increasingly, USM is providing cellular service to
consumers and to customers who use their cellular telephones for security
purposes. Although many of USM's customers use in-vehicle cellular telephones,
most new customers are selecting portable cellular telephones, as these units
have become more compact and fully featured as well as more attractively priced.
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 95 minutes per unit each month and generated retail revenue of
approximately $44 per month during 1995, compared to 95 minutes and $47 per
month in 1994. Revenue generated by roamers, together with local, toll and other
revenues, brought USM's total average monthly service revenue per customer unit
in majority-owned and managed markets to $72 during 1995. Average monthly
service revenue per customer unit decreased approximately 9% during 1995,
related to the industry-wide trend of newer customers tending to use fewer
minutes per month, to per minute pricing decreases, off-peak incentives and to
declining contribution of inbound roaming revenue per customer. USM anticipates
that average monthly service revenue per customer unit will continue to decline
as its distribution channels provide additional customers who generate lower
revenue per local minute of use and as roaming revenues grow more slowly.
However, this effect is more than offset by USM's increasing number of
customers.
In addition to revenue from local retail customers, USM generates revenue
from roaming customers and other services. USM's roaming service 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. traveling) in a USM market where this
arrangement is in effect is able to 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.
15
<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,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Majority-owned and managed markets:
Cellular markets in operation (1).................... 137 130 116 92 67
Total population of markets in service (000s)........ 22,309 21,314 19,383 15,014 11,481
Customer Units:
at beginning of period (2)......................... 421,000 261,000 150,800 97,000 57,300
additions during period (2)........................ 426,000 250,000 165,300 88,600 59,800
disconnects during period (2)...................... 137,000 90,000 55,100 34,800 20,100
at end of period (2)............................... 710,000 421,000 261,000 150,800 97,000
Market penetration at end of period (3).............. 3.18% 1.98% 1.35% 1.00% 0.84%
Consolidated revenues.................................. $ 492,395 $ 332,404 $ 214,310 $139,929 $ 84,956
Depreciation expense................................... 57,302 39,520 25,665 16,606 8,814
Amortization expense................................... 32,156 25,934 19,362 13,033 10,455
Operating income (loss)................................ 42,755 17,385 (8,656) (12,705) (16,831)
Construction expenditures.............................. 218,506 158,453 94,088 58,832 66,037
Identifiable assets.................................... $1,890,621 $1,584,142 $1,275,569 $858,795 $612,981
</TABLE>
- ---------
(1) Represents the number of markets in which USM owned at least a 50% interest
and which it managed, including its reseller operation in 1991-1992. The
revenues and expenses of these cellular markets are included in 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.
The following table summarizes, by operating 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, 1995.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ----------------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Iowa............................................................. 2,453,000 91,000 3.71%
Wisconsin/Illinois............................................... 1,826,000 42,000 2.30
Missouri......................................................... 920,000 24,000 2.61
Eastern North Carolina/South Carolina............................ 2,314,000 63,000 2.72
Virginia......................................................... 944,000 26,000 2.75
West Virginia/Pennsylvania/Maryland.............................. 1,319,000 29,000 2.20
Indiana/Kentucky................................................. 1,916,000 57,000 2.97
Oregon/California................................................ 1,015,000 28,000 2.76
Washington/Oregon/Idaho.......................................... 1,347,000 45,000 3.34
Eastern Tennessee/Western North Carolina......................... 1,621,000 63,000 3.89
Oklahoma/Missouri/Kansas......................................... 1,251,000 69,000 5.52
Texas/Oklahoma................................................... 692,000 22,000 3.18
Maine/New Hampshire/Vermont...................................... 1,471,000 46,000 3.13
Florida/Georgia.................................................. 1,505,000 54,000 3.59
Southwestern Texas............................................... 1,202,000 32,000 2.66
Other Operations................................................. 513,000 19,000 3.70
---------- ---------- ---
22,309,000 710,000 3.18%
---------- ---------- ---
---------- ---------- ---
</TABLE>
16
<PAGE>
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 negotiates volume discounts from its cellular telephone suppliers. USM
discounts cellular telephones to meet competition or to stimulate sales by
reducing the cost of becoming a cellular customer. In these instances, where
permitted by law, customers are generally required to sign an extended service
contract with USM. USM also cooperates with cellular equipment manufacturers in
local advertising and promotion of cellular equipment.
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. Additionally,
USM maintains a repair facility in Tulsa, Oklahoma, which handles more complex
service and repair issues.
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 operations of USM are subject to FCC and state regulation. The licenses
held by the Company are granted by the FCC for the use of radio frequencies and
are an important component of the overall value of the assets of USM. The
construction, operation and transfer of cellular systems in the United States
are regulated to varying degrees by the FCC pursuant to the Communications Act
of 1934 ("Communications Act"). The FCC has promulgated regulations governing
construction and operation of cellular systems, and licensing (including renewal
of licenses) and technical standards for the provision of cellular telephone
service. See "Telephone Operations -- Telecommunications Act of 1996"
For licensing purposes, the FCC has divided the United States into separate
geographic markets (MSAs and RSAs). In each market, the allocated cellular
frequencies are divided into two equal blocks. During the application process,
the FCC reserved one block of frequencies for non-wireline applicants and
another block for wireline applicants. Subject to FCC approval, a cellular
system may be sold to either a wireline or non-wireline entity, but no entity
which controls a cellular system may own an interest in another cellular system
in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny USM's application for
approval of the proposed transfer.
When the first cell of a cellular system has been constructed, FCC rules
authorize the licensee to offer commercial service to the public. The FCC must
be notified of the construction of that cell within fifteen days of the
completion of construction. The licensee is then said to have "operating
authority." Initial operating licenses are granted for ten-year periods. The FCC
must be notified each time an additional cell is constructed which enlarges the
service area of a given market.
The FCC's rules also generally require persons or entities holding cellular
construction permits or licenses to coordinate their proposed frequency usage
with neighboring cellular licensees in order to avoid electrical interference
between adjacent systems. The height and power of base stations in the cellular
system are regulated by FCC rules, as are the types of signals emitted by these
stations. In
17
<PAGE>
addition to regulation by the FCC, cellular systems are subject to certain
Federal Aviation Administration regulations with respect to the siting and
construction of cellular transmitter towers and antennas.
The FCC has established standards for conducting comparative renewal
proceedings between a cellular licensee seeking renewal of its license and
challengers filing competing applications. The FCC has: (i) established criteria
for comparing the renewal applicant to challengers, including the standards
under which a "renewal expectancy" will be granted to the applicant seeking
license renewal; (ii) established basic qualifications standards for
challengers; and (iii) provided procedures for preventing possible abuses in the
comparative renewal process. The FCC has concluded that it will award a renewal
expectancy if the licensee has (i) provided "substantial" performance, which is
defined as "sound, favorable and substantially above a level of mediocre service
just minimally justifying renewal," and (ii) complied with FCC rules, policies
and the Communications Act. If a renewal expectancy is awarded to an existing
licensee, its license is renewed and competing applications are not considered.
USM's Tulsa and Knoxville licenses were renewed in 1995. USM's next renewal
applications are due to be filed in 1996, for Des Moines, Iowa; Peoria, Illinois
and Roanoke, Virginia.
USM conducts and plans to conduct its operations in accordance with all
relevant FCC rules and regulations and anticipates being able to qualify for a
renewal expectancy in its upcoming renewal filings. Accordingly, USM believes
that current regulations will have no significant effect on its operations and
financial condition. However, changes in the regulation of cellular operators or
their activities and of other mobile service providers could have a material
adverse effect on USM's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, many unserved area applications have been filed by USM and others.
USM's strategy with respect to system construction in its markets has been and
will be to build cells covering areas within such markets that USM considers
economically feasible to serve or might conceivably wish to serve and to do so
within the five-year period following issuance of the license. In cases where
applications for unserved areas are filed which are "mutually exclusive" and
would result in overlapping service areas, the FCC will decide between the
competing applicants by an auction process.
USM is also subject to state and local regulation in some instances. In
1981, the FCC preempted the states from exercising jurisdiction in the areas of
licensing, technical standards and market structure. In 1993, Congress preempted
states from regulating the entry of cellular systems into service and the rates
charged by cellular systems to customers. However, certain states still require
cellular system operators to go through a state certification process to serve
communities within their borders. All such certificates can be revoked for
cause. In addition, certain state authorities continue to regulate several
aspects of a cellular operator's business, including the resale of intra-state
long-distance service to its customers, the technical arrangements and charges
for interconnection with the landline network and the transfer of interests in
cellular systems, though it is uncertain whether states any longer have the
right to regulate transfers under current law. The siting and construction of
the cellular facilities, including transmitter towers, antennas and equipment
shelters are still subject to state or local zoning and land use regulations. In
addition, states may still regulate other "terms and conditions" of cellular
service.
Pursuant to 1993 amendments to the Communications Act, cellular service is
classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service
offered to the public, for a fee, which is interconnected to the public switched
telephone network. The FCC has determined that it will forbear from requiring
CMRS carriers to comply with a number of statutory provisions otherwise
applicable to common carriers, such as the filing of tariffs.
There are two regulatory proceedings currently pending before the FCC which
are of particular importance to the cellular industry. In the first proceeding,
the FCC has sought comment on whether "enhanced 911" regulations should be
imposed on cellular carriers. "Enhanced 911" capabilities would enable cellular
systems to determine the precise location of the person making the emergency
call.
18
<PAGE>
In the second proceeding, the FCC, in 1996, issued a Notice of Proposed
Rulemaking regarding the method by which cellular carriers and LECs shall
compensate each other for interconnecting cellular and local exchange
facilities. The FCC has tentatively proposed a "bill and keep" system, under
which cellular and other CMRS carriers and LECs would simply keep all revenues
from calls originating on their systems and would not have to pay special
"interconnection" charges to each other. Since CMRS carriers now pay more to
interconnect with LECs than VICE VERSA, such a rule, if adopted, would be
favorable to the cellular industry. The FCC has also sought comment in this
proceeding on whether it should pre-empt all state regulations of
interconnection.
The FCC has also allocated a total of 140 megahertz ("MHz") to broadband
PCS, 20 MHz to unlicensed operations and 120 MHz to licensed operations,
consisting of two 30 MHz blocks in each of the 51 MTAs and one 30 MHz block and
three 10 MHz blocks in each of 493 BTAs. Cellular operators and those entities
under common ownership with them are permitted to participate in the ownership
of PCS licensees, except for those PCS licenses reserved for small businesses,
and licenses for PCS service areas in which the cellular operator owns a 20% or
greater interest in a cellular licensee, the service area of which covers 10% or
more of the population of the PCS service area. In the latter case, the cellular
license is limited to one 10 MHz PCS channel block.
The FCC licensed the first two 30 MHz MTA frequency blocks in 1995. The FCC
is currently holding an auction for the 30 MHz BTA block which is reserved for
small business entities. APT has been licensed in eight MTAs for 30 MHz blocks.
APT has entered into a definitive agreement to sell its license covering the
Guam MTA, subject to FCC approval, and is pursuing the sale of its license for
the Alaska MTA.
In compliance with FCC restrictions on common ownership of cellular and
broadband PCS interests in overlapping market areas, USM entered into a series
of arrangements for the divestiture or restructuring of certain of its cellular
interests in market areas where APT was awarded broadband PCS licenses. A number
of these proposed arrangements required FCC approval of assignment or transfer
of control applications before they could be consummated. All of these
applications have been approved by the FCC and are either consummated or
awaiting consummation. APT believes that it has taken reasonable steps to comply
with the FCC's cross-interest policies. This is no assurance that the FCC might
not raise questions regarding these compliance efforts.
PCS technology is currently under development and will be similar in some
respects to cellular technology. When it becomes commercially available, this
technology is expected to offer increased capacity for wireless two-way and
one-way voice, data and multimedia communications services and is expected to
result in increased competition in USM's operations. The ability of these future
PCS licensees to complement or compete with existing cellular licensees will be
affected by future FCC rule-makings. These and other future technological
developments in the wireless telecommunications industry and the enhancement of
current technologies will likely create new products and services that are
competitive with the services currently offered by USM. There can be no
assurance that the company will not be adversely affected by such technological
developments.
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. 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.
COMPETITION
USM's principal 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 based on 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.
19
<PAGE>
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
previously given approval, through waivers of its rules, to ESMR, an enhanced
SMR system. ESMR systems may have cells and frequency reuse like cellular. The
first ESMR systems were implemented in 1993 in Los Angeles. In 1995, an ESMR
provider initiated service in Tulsa, Oklahoma, where USM operates a cellular
system. Although less directly a substitute for cellular service, wireless data
services and one-way paging service (and in the future, two-way paging services)
may be adequate for those who do not need full two-way voice service.
The FCC has allocated radio channels to a mobile satellite system in which
transmissions from mobile units to satellites would augment or replace
transmissions to cell sites, and several consortia to provide such service have
been formed. Such a system is designed primarily to serve the communications
needs of remote locations and a mobile satellite system could provide viable
competition for land-based cellular systems in such areas. It is also possible
that the FCC may in the future assign additional frequencies to cellular
telephone service to provide for more than two cellular telephone systems per
market.
PCS is anticipated to be competitive with cellular service in the future.
PCS providers are expected to offer digital, wireless communications services.
Similar technological advances or regulatory changes in the future may make
available other alternatives to cellular service, thereby creating additional
sources of competition. The first PCS system was initiated in Washington, D.C.
in 1995. USM expects PCS operators to begin deployment of PCS in some of its
larger cellular markets like Tulsa, Oklahoma; Knoxville, Tennessee; and Des
Moines, Iowa in late 1996 or early 1997.
TELEPHONE OPERATIONS
The Company's telephone operations are conducted through TDS Telecom and 100
telephone subsidiaries. These telephone companies, ranging in size from less
than 500 to more than 40,000 access lines, serve 425,900 access lines in 28
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 and the Bell Operating Companies
("BOCs"). The Company anticipates that it will need to make arrangements with
AT&T, the BOCs 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.
20
<PAGE>
The following table summarizes certain information regarding the Company's
telephone operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Telephone Operations
Access lines*..................................... 425,900 392,500 356,200 321,700 304,000
% Residential................................... 80.6 81.3 82.0 83.1 83.8
% Business (nonresidential)..................... 19.4 18.7 18.0 16.9 16.2
Total revenues.................................... $ 354,841 $306,341 $268,122 $238,095 $211,232
% Local service................................. 26.8 26.8 26.9 27.4 29.0
% Network access and long-distance.............. 61.6 60.0 59.3 57.9 57.0
Depreciation and amortization expense............. $ 77,354 $ 68,878 $ 59,562 $ 51,946 $ 43,425
Operating income.................................. 98,240 91,606 79,110 72,217 65,242
Construction expenditures......................... 101,139 117,867 82,233 67,357 67,856
Total identifiable assets......................... $1,058,241 $984,563 $829,489 $723,855 $674,712
</TABLE>
- ---------
* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
TELEPHONE ACQUISITIONS
TDS pursues an active program of acquiring operating telephone companies.
Since January 1, 1991, TDS has acquired 24 telephone companies serving a total
of 74,200 access lines for an aggregate consideration totaling $253.8 million.
The consideration consisted of $49.7 million in cash and notes, 155,000
Preferred Shares and 4.8 million Common Shares of the Company. TDS also sold one
telephone company serving 1,100 access lines in 1995.
At December 31, 1995, the Company had agreements, awaiting regulatory or
other approvals, to acquire one telephone company which serves 8,000 access
lines. This acquisition is expected to be completed for an aggregate
consideration consisting of approximately 658,400 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. 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 1995 and 1996 capital plan reflects its continuing commitment
to a First-To-Market service provisioning strategy. With the deployment of
fiber-fed digital serving areas ("DSAs") designed to condition the Company's
outside plant facilities for Integrated Services Digital Network ("ISDN") and
the upgrading of its switching platforms with Signaling System 7 ("SS7"),
Advanced Calling Services ("ACS") and ISDN, the Company intends to remain
competitive in its service territories. During 1995, the Company continued to
upgrade its exchange distribution network facilities by deploying 165 DSAs and
21
<PAGE>
480 route miles of fiber optic cable. In 1996, the Company will update
additional outside plant facilities through the implementation of 211 DSAs and
440 route miles of fiber optic cable. By year-end 1996, the Company expects to
have 3,500 route miles of fiber cable in place. The Company continued its
aggressive role out of flagship switching systems built by AT&T (the "5ESS") and
Siemens Stromberg-Carlson (the "EWSD") in accordance with its strategy of
bringing advanced calling services to its customers. In 1995, the Company
installed 39 switching systems, including 11 host switches and in 1996, plans to
install an additional 47 switching systems including 11 more hosts. The 1995 and
1996 installed switches represent 71,260 and 66,908 lines bringing the total
AT&T and Siemens Stromberg-Carlson equipped lines installed to 250,541. The
Company's switching platform upgrades and replacements result in 77,543 equipped
lines of ISDN and 85,251 equipped lines of SS7 and ACS being installed in 1995
with an additional 91,411 and 115,803 equipped lines installed in 1996. At the
end of 1996, cumulative totals for the Company's ISDN, SS7 and ACS rollouts are
projected to be 281,066, 360,788 and 336,285 lines representing 59%, 75% and
70%, respectively, of all equipped lines. This switch deployment schedule will
continue to keep the Company well ahead of its 1993 rollout plan.
In 1995, the Company continued its efforts to improve customer service and
engage new revenue sources. One such effort was the start-up of the Network
Management Center ("NEMAC"). The NEMAC is a centralized switching support group
that combines the knowledge and expertise of the Company's most experienced
switching personnel to provide switching network performance monitoring 24 hours
a day, 7 days a week, as well as providing technical assistance in the
performance of switching equipment maintenance, problem resolution and upgrades.
As of the end of 1995, six people were dedicated to NEMAC operations and before
it is fully operational at the end of 1996, an estimated 28 additional people
will be employed.
New revenue ventures expanded in 1995 include TDSNET -- the Company's wholly
owned internet provider -- which began its operations in late 1994 though the
deployment of its first internet access node. In 1995, TDSNET expanded its
operations to include 5 additional operating sites and anticipates expanding its
operations to include a minimum of 8 additional nodes in 1996. Further, TDSNET
has plans to investigate the feasibility of implementing 12 additional operating
sites in late 1996 pending the results of associated market feasibility studies.
The deployment of voice mail systems will also help supplement revenues through
its 1996 deployment of 11 additional systems to bring the cumulative number of
systems deployed to 31. A significant service enhancing project that will help
to support the TDSNET and NEMAC operations also began in 1995. The TCP/IP
Multiprotocal Network that interconnects the operating locations of TDSNET, the
NEMAC, operating telcos and regional management centers of the Company was
initiated in late 1995. The Multiprotocal Network will allow the Company to
effectively provide centralized computing, switch surveillance, maintenance and
upgrade support to its operating telephone companies, Internet nodes and
management centers. Plans for the network to enable customer service personnel
from one operating location to assist customers at a different operating
location will also be implemented in 1996. At year-end 1995, 16 operating
companies and the 5 management centers were interconnected via the TCP/IP
network with an additional 50 operating companies planned for interconnection by
the end of 1996.
During 1995, the Company initiated a voice dialing trial, which will
continue in 1996, at an Indiana subsidiary. If the results of the trial prove
positive, further deployment of voice dialing will be planned. The Company also
completed plans to deploy 3 Asynchronous Transfer Mode ("ATM") video switching
systems in Oklahoma as part of a 1996 county-wide interactive educational
system. Both new ventures will enhance the Company's portfolio of
telecommunications technology experience.
The Company's total 1996 capital budget is $125 million compared to $101.1
in 1995 and $117.9 in 1994. Financing for the 1996 capital additions will be
provided primarily by internally generated funds and supplemented by RUS
long-term financing.
FEDERAL FINANCING AND HIGH COST SUPPORT PROGRAMS
TDS Telecom's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Utilities Service ("RUS"),
previously named the Rural Electrification Administration, the Rural Telephone
Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of the United
States of America. The RUS 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.
22
<PAGE>
Currently, the RUS is authorized to make hardship loans at a 5% interest rate
and other loans at an interest rate approximating the government's rate for
instruments of comparable maturity. The previous rate cap of 7% for these loans
has been removed for 1996. The RTB, established in 1971, makes loans at interest
rates based on its average cost of money (6.88% for its fiscal year ended
September 30, 1995), and in some cases makes loans concurrently with RUS loans.
In addition, the RUS guarantees loans made to telephone companies by the FFB at
the federal cost of money (6.562% for a 35-year note at December 31, 1995).
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
RUS, 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 $390.6 million of underlying retained
earnings of the telephone subsidiaries at December 31, 1995, $169.1 million was
available for the payment of dividends on the subsidiaries' common stock.
At December 31, 1995, the Company's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $147 million, at a weighted average annual interest rate of 6.31%,
to finance specific construction activities in 1996 and future years. These loan
commitments are generally issued for five-year periods and may be extended under
certain circumstances. The Company's operating telephone companies intend to
make further applications for additional loans from the RUS, RTB and FFB 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.
A number of the telephone subsidiaries recover a proportion of their costs
via interstate support mechanisms. The 1996 Act requires modification of those
mechanisms by early 1997. In the interim, the interstate Universal Service Fund
("USF") has been capped and indexed for years 1994, 1995 and the first half of
1996. The 1996 Act requires an extensive review of support mechanisms, including
USF, which could involve the development of new mechanisms and changes in
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. The 1996 Act also affects state support
programs. 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
LECs, including the Company's local telephone operating subsidiaries, are
regulated by state regulatory agencies with respect to such matters as local
rates, intrastate toll rates, intrastate access charges billed to intrastate
interexchange carriers, service areas, service standards, accounting and related
matters. States have traditionally regulated entry to compete with an existing
LEC. However, the 1996 Act has almost completely preempted state entry
authority. In a number of states, construction plans, borrowing, depreciation
rates, affiliated charge transactions and certain other financial transactions
are also subject to regulatory approval. The Company has sought and will
continue to seek appropriate increases in local and other service rates and
changes in rate structure to achieve reasonable rates and earnings. The Company
also actively seeks to maintain current revenue streams in light of increasing
earnings review activity at the state level and the enactment of the 1996 Act
which adopts a national policy favoring local exchange service competition and
intrastate long distance competition.
Although the TDS LECs still operate largely in a regulated environment, the
Company has been taking steps to prepare for competition. For example, with the
onset of local competition, the Company will seek pricing and policy directives
to make its rate structures more appropriate in a competitive environment. The
TDS Telecom operating LECs are also participating in state regulatory and
legislative processes seeking appropriate recognition and policy responses for
differences encountered in serving rural service areas. The developing changes
in market structure and policy might impact the operating
23
<PAGE>
LECs' earnings if adequate rate increases are not approved or are unduly
delayed. To the extent that state regulatory approval of operating company
responses to policy and marketplace changes remain necessary, TDS is not now
able to predict the extent of such impact.
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 and requires licenses for
the use of radio frequencies in telephone operations. The Company's telephone
subsidiaries concur in the National Exchange Carrier Association ("NECA")
interstate common line and traffic sensitive tariffs pursuant to FCC rules and
participate in the access revenue pools administered by NECA for interstate
access services. Where applicable, the Company's subsidiaries also participate
in intrastate access tariffs and toll-pooling arrangements approved by state
regulatory authorities for intrastate long distance 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. The FCC has stated its intention to conduct a
comprehensive review of its interstate access rules.
Numerous aspects of federal and state telephone regulation have, in recent
years, been subject to reexamination and ongoing modification, often to pursue
the goals of increasing competition and reducing regulation. For example, state
toll revenue pooling arrangements that are the source of substantial revenues to
local exchange companies continue to be replaced with access-charge-based
arrangements. In these cases, 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. The 1996
Act is likely to accelerate the pace of both state and federal regulatory
reevaluation.
Some of the Company's high cost rural companies now recover a greater
portion of their costs from interstate sources than do urban companies. The FCC
and a federal-state joint board are conducting a rulemaking proceeding on this
subject which could lead to a reduction of this source of revenue. The FCC has
limited the growth of such interstate high cost recovery under the existing
mechanism pending adoption of new rules. Prior to the 1996 Act, the FCC was
seeking to control the level of interstate high cost support by regulating the
support available when an underserved rural LEC or a rural portion of a larger
LEC is acquired. The new proceeding on universal service support is expected to
pursue some of the earlier proceedings' proposals. This might affect the
Company's decision or purchase price for further potential acquisitions. Among
the many proposals advanced for modifying high-cost support are proposals to
base high cost compensation on some "proxy," rather than the current actual cost
measurements, and to make competitors eligible for high cost compensation. The
impact will depend on which of the many alternatives the FCC and joint board
members select. The Company is pursuing a strategy of network modernization and
customer service designed to maintain a strong competitive position as national
and state policies change.
The FCC and many states are placing large LECs under "price caps," rather
than rate-of-return regulation. The price cap approach differs from traditional
rate-of-return regulation by focusing primarily on the prices of communication
services. The intention of price cap regulation is to focus on productivity, and
the FCC's plan for telephone operating companies provides for the sharing with
customers of profits, achieved by increased productivity, that exceed allowed
returns. The Company's telephone subsidiaries have not elected price caps or an
alternative FCC plan designed for smaller LECs for 1996 and will, therefore,
remain in the NECA pools for this period. Since approximately one-third of the
Company's telephone subsidiaries serve high-cost areas, important averaging
mechanisms associated with the NECA pooling process would be lost if the Company
elected either of the alternatives to traditional rate-of-return regulation.
However, the FCC is currently considering whether to initiate a proceeding to
prescribe a new rate of return for rate-of-return LECs. In addition, NECA has
pending 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 continues to evaluate opportunities under all
forms of regulation.
24
<PAGE>
The FCC has been gradually relaxing regulation of AT&T's interstate services
as competition develops. The 1996 Act preserves interstate toll rate averaging
and endorses a nationwide policy that interstate and intrastate long distance
rates should not be higher in rural locations with limited traffic volumes than
in high volume urban areas.
The reevaluation of telephone company requirements and compensation
arrangements which is mandated by the 1996 Act introduces uncertainty as to the
future prospects of the Company's local telephone businesses. For example, the
FCC has said it will commence a more comprehensive review of LEC access charge
rules and policies, but has not yet indicated what changes it will propose or
when it will consider changes in access policy. The outcome of such a review may
affect the source and nature of the operating companies' recovery of
interstate-allocated costs. The FCC has also opened a proceeding to develop new
policies for LECs' compensation arrangements with cellular and PCS providers for
interconnections between and among LEC and wireless networks. To the extent that
resolution of the proceeding may raise the TDS LECs' interconnection costs, the
operating companies would expect to adjust their charges to recover such
increased costs. The FCC must first resolve questions about how the 1996 Act
affects its jurisdiction and regulatory options. In the past, the FCC has
frequently adopted transition rules when changing cost recovery mechanisms to
prevent abrupt revenue and rate changes. While regulatory issues remain
unresolved, the Company cannot predict the cumulative nature or extent of
impacts from regulatory reform.
TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 (the "1996 Act") was enacted on February
8, 1996. The 1996 Act mandates significant changes in existing
telecommunications rules and policies to promote competition, ensure the
availability of telecommunications services to all parts of the nation and to
streamline regulation of the telecommunications industry to remove regulatory
burdens.
The 1996 Act provides that implementing its legislative objectives will be
the task of the FCC, the state public utilities commissions and a federal-state
joint board. Much of this implementation must be completed in numerous,
virtually simultaneous, proceedings with short, 6-18 month, deadlines. These
proceedings are expected to address issues (and possibly even proposals) already
before the FCC in pending rulemaking proceedings affecting the telephone and
wireless industries, as well as additional areas of telecommunications policy
and regulation. The proceedings will also replace, modify or terminate existing
FCC and state policies and regulations that are inconsistent with the new law.
OPEN COMPETITION. The primary purpose and effect of the new law is to open
all telecommunications markets to competition -- including local telephone
service. The 1996 Act makes virtually all direct or indirect state and local
barriers to competition unlawful. It directs the FCC to preempt all inconsistent
state and local laws and regulations, after notice and comment proceedings. It
also enables electric and other utilities to engage in telecommunications
service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose "competitively neutral"
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices in rural telephone company service areas.
Some specific provisions of the 1996 Act which are expected to affect local
exchange, wireless and interexchange providers are:
EXPANDED INTERCONNECTION OBLIGATIONS. The 1996 Act establishes a general
duty for all telecommunications carriers, including cellular and PCS providers,
to interconnect with other carriers.
Congress has also developed a somewhat more specific list of requirements
with respect to the interconnection obligations of Local Exchange Carriers
("LECs"). These obligations include resale, number portability, dialing parity,
access to rights-of-way and reciprocal compensation. These LEC
25
<PAGE>
obligations do not extend to wireless service providers, unless the FCC decides
to include them within the definition of a LEC. However, the requirements apply
to competitive providers of local exchange or exchange access services, as well
as the incumbent LECs, including the TDS Telecom LECs.
Unless exempted or granted suspension or modification, LECs designated
"incumbents" have additional obligations as follows: to negotiate in good faith;
to comply with more detailed interconnection terms, including non-discrimination
and unbundling their network and service components so competitors may provide
only those elements they choose to provide; to offer their retail services at
wholesale rates to facilitate resale by their competitors; and to allow other
carriers to place equipment necessary for interconnection or access on their
premises.
The 1996 Act establishes a framework for state commissions to mediate and
arbitrate interconnection negotiations between incumbent LECs and carriers
requesting interconnection, services or network elements. The 1996 Act
establishes deadlines, standards for state commission approval of
interconnection agreements and recourse to the FCC if a state commission fails
to act.
UNIVERSAL SERVICE. The 1996 Act establishes principles and a process for
implementing a strengthened "universal service" policy. This policy seeks
nationwide, affordable service and access to advanced telecommunications and
information services. It calls for reasonably comparable urban and rural rates
and services. The 1996 Act also requires universal service to schools, libraries
and rural health facilities at discounted rates.
Regulators must complete a major overhaul of current support mechanisms to
eliminate implicit subsidies. All long distance providers must provide urban and
rural long distance services essentially at averaged rates and must average long
distance calls from one state to another. To receive universal service support,
a carrier must obtain state designation as an "eligible telecommunications
carrier" and provide universal service throughout a state-designated service
area. The state must designate more than one requesting eligible carrier to
receive support in most areas, but can only do so in a rural telephone company's
area if it makes a public interest finding.
CARRIER SUPPORT OBLIGATIONS. The 1996 Act requires all interstate
telecommunications providers, including wireless service providers, to "make an
equitable and non-discriminatory contribution," to support the cost of providing
universal service, unless their contribution would be DE MINIMIS.
BELL OPERATING COMPANY PROVISIONS. The 1996 Act establishes the process for
eliminating all remaining line-of-business restrictions placed on the BOCs by
the AT&T divestiture consent decree. Subject to specific safeguards, the BOCs
may immediately provide long distance service outside the area where that Bell
group serves, as well as specified "incidental" long distance services. For
in-region long distance relief, the BOCs must obtain an FCC public interest
finding and show that they have met a strict list of interconnection
requirements and that there is a specified level of competition in each in-
region state to be relieved of the long distance ban.
PROHIBITION AGAINST CROSS-SUBSIDY. The 1996 Act prohibits a LEC from
subsidizing any competitive service (including voice mail, voice
storage/retrieval, live operator services and related ancillary services) from
its telephone exchange service or exchange access service.
TELEPHONE COMPANY PROVISION OF CABLE TELEVISION SERVICES. The 1996 Act
eliminates the ban on LEC provision of cable programming service directly to
subscribers within its telephone service area. However, most mergers,
acquisitions and joint ventures by LECs and cable systems in the same area
remain unlawful.
INFRASTRUCTURE SHARING. LECs with "eligible telecommunications carrier"
status that lack economies of scale may share features and functions of larger
neighboring incumbent LECs on non-common carrier terms.
USE OF CUSTOMER INFORMATION. The new law restricts the use of customer
information for purposes beyond the provision of service except subject to
prescribed safeguards, and requires LECs to provide directory listing
information to competing telephone directory providers.
26
<PAGE>
ELIMINATION OF ALIEN OFFICER/DIRECTOR RESTRICTIONS. The current
restrictions on the numbers of alien officers and directors of FCC licensee
companies and companies controlling such licenses has been eliminated.
BOC COMMERCIAL MOBILE JOINT MARKETING. BOCs are permitted to market jointly
and sell wireless services in conjunction with telephone exchange service,
exchange access, intraLATA and interLATA telecommunications and information
services.
WIRELESS FACILITIES SITING. The 1996 Act limits the rights of states and
localities to regulate placement of wireless facilities so as to "prohibit" the
provision of wireless services or to "discriminate" among providers of such
services. It also eliminates environmental effects (provided that the wireless
system complies with FCC rules) as a basis for states and localities to regulate
the placement, construction or operation of wireless facilities.
EQUAL ACCESS. Section 332(c) of the Communications Act is amended to
provide that wireless providers are not required to provide equal access to
common carriers for toll services. The FCC is authorized to require unblocked
access subject to certain conditions.
DEREGULATION. The FCC is required to forbear from applying any statutory or
regulatory provision that is not necessary to keep telecommunications rates and
terms reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
COMPETITION
The 1996 Act ushers in a new wave of competition in the telecommunications
industry. The 1996 Act embraces competition in telecommunications as a national
policy and also starts the process of deregulation. The 1996 Act applies
expanded interconnection and other requirements to local exchange telephone
companies for the purpose of stimulating competition. Initially, TDS Telecom
LECs may qualify for an exemption from certain interconnection provisions of the
1996 Act.
The Company has no assurance that its LECs will not be adversely affected by
the changes mandated by the 1996 Act. The Company believes that there eventually
will be open entry into nearly every aspect of the telephone industry, including
local service, interstate and intrastate toll, switched and special access
services and customer premises equipment. Accordingly, the Company expects
competition in the telephone business to be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services.
A series of FCC, court and state regulatory agencies' decisions have
introduced competition into certain sectors of the telephone industry already.
Technological developments in cellular telephone, digital microwave, coaxial
cable, fiber optics and other wireless and wired technologies may further
encourage the development of alternatives to traditional telephone service.
Facilities-based competition for intra-LATA toll markets is growing at the state
level (and this trend is expected to continue). Although states have generally
acknowledged differences in urban and rural markets, the competitive nature of
individual markets will be determined by FCC rules and state commission
implementation efforts.
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 by which users of
toll service may bypass the Company's switching services today. 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 strong public policy which ensures adequate interstate and
intrastate cost recovery mechanisms for high cost rural telephone service and
flexible pricing, including reduced pricing of access and toll services, where
appropriate.
The 1996 Act may provide the Company with increased communications
opportunities in video and voice communications. The 1996 Act allows telephone
companies to provide video programming in the
27
<PAGE>
service areas, but places restrictions on cable system buyouts and management
arrangements. The Company will actively monitor regulatory proceedings seeking
to protect its interests in these areas, and will continue to evaluate new
business opportunities that might arise.
RADIO PAGING OPERATIONS
WIRELESS MESSAGING INDUSTRY
Paging is a wireless communications messaging technology which uses an
assigned radio frequency, licensed by the FCC, 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. These
radio transmitters are connected to the paging terminal either through land-line
or satellite. The transmitters broadcast a digital or analog signal that is
received by the pager and delivered as a digital display, alphanumeric text,
tone or voice message.
The paging industry started in 1949 when the FCC allocated certain radio
frequencies for exclusive use in providing one-way and two-way types of mobile
communications services. The industry grew slowly during its first thirty years
as the quality and reliability of equipment was developed and the market began
to perceive the benefits of wireless communications. Until the 1980s, the
industry was highly fragmented with a large number of small, local operators.
During that decade, acquisitions of many firms by regional telephone companies
and others greatly consolidated the industry. Several large industry
acquisitions occurred during the mid-1990s which resulted in the further
consolidation of the paging industry.
In April 1995, APP was granted five regional narrowband PCS licenses by the
FCC, providing equivalent coverage to that of a nationwide license. Each of the
five licenses consists of a 50 kHz outbound channel on frequency 930.625 MHz
paired with a 12.5 kHz return channel on frequency 901.80625 MHz. The PCS
licenses provide APP with the opportunity to introduce two-way wireless
messaging communications services including acknowledgment paging, data and
telemetry services and digitized voice messaging throughout the United States.
The Company intends to begin deploying these new services in some of its
existing markets in early 1997.
Manufacturers of pagers and transmission equipment have produced innovative
technological advances which are expected to continue to broaden the potential
market size for paging services and support the industry's rapid growth rate.
Micro circuitry, liquid crystal display technology and digital signal processing
all have expanded the capability and capacity of paging services while reducing
equipment and air time costs and equipment size. Future technological
developments are expected to greatly expand the messaging capacity of the paging
infrastructure and provide advanced two-way paging and data services such as
acknowledgment paging, which allow customers to confirm a message to the
originator. Other developments include digitized voice paging and
notebook/palm-top computer wireless data applications connected to the network
by a wireless modem encased in a Personal Computer Memory Card International
Association ("PCMCIA") card which functions as a pager and wireless modem.
APP provides wireless communications 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 236,800 at the end of 1991 to 784,500 at year-end 1995.
28
<PAGE>
The following table summarizes certain information about APP's operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Pagers in service................................. 784,500 652,800 460,900 322,200 236,800
Total revenues.................................... $107,150 $ 92,065 $ 75,363 $ 54,716 $ 43,972
Depreciation and amortization expense............. 24,692 17,178 13,392 10,412 9,047
Operating (loss).................................. (8,997) (169) (721) (5,447) (7,750)
Additions to property and equipment............... 28,994 27,403 24,813 15,501 13,322
Identifiable assets............................... $159,170 $146,107 $ 74,923 $ 57,080 $ 41,726
</TABLE>
COMPANY STRATEGY
APP's business strategy is to promote above industry average growth in
customers, revenue and operating cash flow by providing the highest quality
service through one of the industry's most technologically advanced digital
transmission systems with a focus on strong customer service and competitive
pricing. APP stresses quality in every customer interaction and strives to
continuously improve the productivity and efficiency of its employees and its
communications systems.
EXTENSIVE SPECTRUM ACQUISITIONS. In 1995, APP was granted five regional
narrowband PCS licenses at auction by the FCC, providing coverage equivalent to
that of a nationwide license. Each license consists of a 50 kHz outbound channel
on frequency 930.625 MHz paired with a 12.5 kHz return channel on frequency
901.80625 MHz. The licenses will enable APP to introduce two-way wireless
messaging communications services including acknowledgment paging, data and
telemetry services, wireless e-mail and digitized voice messaging. During 1996,
APP plans to complete three phases of beta-testing of the ReFLEX25-Registered
Trademark- protocol and to initiate engineering design and construction in the
initial markets by year-end. APP also intends to continue exploring synergies
with affiliated companies, such as United States Cellular Corporation and
American Portable Telecom, Inc.
In 1994, the FCC granted APP exclusive use of a paging channel on 929.3375
MHz throughout the United States subject to construction/buildout requirements.
APP notified the FCC, by letter dated January 23, 1995, that these requirements
had been met. APP believes this license will enable the Company to offer
competitive regional and nationwide messaging services and has built the systems
required to utilize and retain an exclusive license. APP's Minnesota, Oklahoma
and Washington, D.C. systems utilize this frequency.
STRATEGIC ALLIANCES AND AFFILIATES. APP is a joint venture partner with
Nexus Telecommunications Systems Ltd. Of Israel ("Nexus") in American Messaging
Services, LLC. ("AMS"). AMS was formed to develop multiple applications and
distribution channels worldwide for a patented communications network that
provides two-way paging, location and telemetry services. In September 1995,
American Paging and Nexus introduced the TAG pager, a low-cost two-way pager
which will operate on the Nexus network. Samsung Electronics of Korea will
manufacture the first version of the TAG pager. American Paging holds the
exclusive marketing rights for the Nexus two-way paging technology in the
Western Hemisphere.
In October, APP announced an agreement with Upper Canada Communication
Group, Inc. ("UCCG") of Toronto for the coordinated development and use of
narrowband PCS and conventional PCP paging frequencies in North America. Under
the terms of the agreement, each company will pursue its own PCS build out plans
but will have the added potential to market North American coverage of advanced
wireless messaging services. In a related action, both the FCC and Industry
Canada have provided conditional authority for both companies to construct and
operate transmitters in previously restricted areas.
APP RESTRUCTURING
During the third quarter of 1995, APP began restructuring three key
operating areas: sales and marketing, administration, and customer service. Upon
completion, APP expects to improve its customer mix, lower its administrative
costs and improve customer service. The restructuring is
29
<PAGE>
expected to extend into the second half of 1996. Restructuring-related expenses
include severance costs to be paid as APP's operating centers are closed, costs
of canceling office leases and incurred consulting fees.
The first goal of the restructuring effort is to increase sales
productivity. A key element of this strategy is to improve customer mix.
American Paging aims to increase the percentage of paging units sold directly to
customers by increasing the number of direct sales representatives. Over
one-half of APP's employees are anticipated to be involved in sales functions at
the completion of restructuring. Another key element of the strategy is to
increase sales force productivity through both an improved organization
structure designed to clarify responsibilities and streamline communications,
and improved sales force training.
The second goal of the restructuring effort is to reduce both operating and
administrative expense. APP plans to consolidate 17 operating centers into a
single facility to be located in Oklahoma City, Oklahoma. The national Customer
Service Center ("CSC") office will consolidate APP's customer service,
administrative, billing and collections functions. Currently, the administrative
centers are co-located with 17 of APP's 38 sales offices. Following the
restructuring, field offices will be primarily devoted to sales, and will occupy
significantly reduced office space.
The third goal of the restructuring effort is to improve customer service,
which is critical to adding and retaining customers. Beginning in the second
quarter of 1996, American Paging plans to provide full-service customer response
24-hours-per-day, seven-days-per-week through its CSC.
PAGING OPERATIONS
APP provides local, state-wide, regional and nationwide advanced, one-way
digital wireless messaging communications services to customers through its
sales and service operation centers. It offers local and regional paging
coverage throughout Florida, the Midwest (including all or parts of Illinois,
Indiana, Kentucky, Minnesota, Missouri and Wisconsin), the Mid-Atlantic
(including all or parts of Maryland, Pennsylvania, Virginia, and Washington,
D.C.) regions, and in the states of Oklahoma, Texas, Arizona and Utah. One-way
paging services are also offered in Ohio, Iowa, and Southern California, through
various transmitter-sharing agreements with nonaffiliated service providers.
Nationwide one-way and two-way paging is offered through APP's alliance with
nonaffiliated service providers.
Generally, a paging system consists of a control center, transmitters,
dedicated links (wire, fiber optic, radio, or satellite) between the control
center and the transmitters and the pagers themselves. The control center is
interconnected with the public switched telephone network ("PSTN") and receives
messages from land line telephones. Messages received at the control center are
matched to each pager's unique telephone number, or "cap code," translated into
digital signals and forwarded over dedicated links to transmitters that
broadcast the message over a specified frequency. If the pager to which the
message is directed is in the transmitter coverage area, it will recognize its
"cap code" and indicate to its wearer that it has received a page.
APP currently provides four types of pagers in all of its markets: digital
(or numeric) display, alphanumeric text display, tone and voice. 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. A tone pager
notifies the customer that a message has been received by emitting an audible
beep, displaying a flashing light or vibrating. In the case of voice service,
the notification is followed by a brief voice message.
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 1995, APP obtained approximately
28,400 customers from its acquisition of Dial-Page, Incorporated (of Florida),
Page Link (of Minnesota) and the Texas paging assets of Century
Telecommunications, Inc. In total, APP has added 87,300 net customers through
acquisitions since 1991. As the industry continues to consolidate, APP expects
to evaluate attractive acquisition opportunities and continue to make selective
acquisitions on an ongoing basis.
30
<PAGE>
MARKETING STRATEGY
APP directs its marketing efforts at value-oriented customers who appreciate
APP's high degree of technical reliability and high level of customer service.
APP's marketing strategy is designed to increase market share and operating cash
flow by achieving rapid growth at modest cost per net customer unit added.
Continuing quality improvements, including new services and products, help
stimulate this growth while controlling costs.
APP generates its revenues from (i) service usage billed on a flat-rate or
measured-service basis, (ii) pager rentals, (iii) pager warranties, maintenance
and repair, (iv) loss protection, (v) voice mail usage on a flat rate or
measured service basis, (vi) activation fees, (vii) the sale of pager
accessories and (viii) 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
and retailers. APP's sales force and customer service representatives have the
responsibility to ensure that all customers and prospects as well as resellers
and retailers understand APP's competitive advantages: reliable high-quality
wireless networks, wide-area coverage, value-priced selection of pagers and
ancillary services, and responsive sales and customer service staff.
APP offers its services to third-party resellers under marketing agreements.
APP offers paging air time in bulk quantities at wholesale rates to resellers
who then "re-sell" APP's air time to end users at a markup. 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,
bill and collect revenues from the customer. They also assume the cost of the
paging unit for those who rent rather than purchase. APP sells pagers to
retailers at a small mark-up or cost. Retail outlets then sell the pagers to the
customers who 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 and retailers.
COMPETITION
APP faces significant competition in all of its markets. A number 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 wireless communication technologies, including cellular,
broadband and narrowband PCS, SMR and others, are competitive forms of
technology used in, or projected to be used for, wireless 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.
Narrowband PCS differs from cellular and broadband technology and service in
that APP expects it to carry primarily high-speed one-way and two-way paging,
data transfer and short voice messages. APP envisions applications for
narrowband PCS such as convenient two-way paging potentially aimed at business
users and the mass consumer market; increased capacity to support more
alphanumeric customers; high-speed, two-way data conveyance to highly mobile
devices such as lap-top computer and Personal Digital Assistants ("PDA"); and
high-speed, one-way digitized voice messaging. APP believes that these services
will be complementary to the services and functionality of cellular and
broadband PCS. APP intends to begin providing narrowband PCS services in
selected markets as the technology becomes commercially available, which is
estimated to be early 1997.
31
<PAGE>
Broadband PCS technology is currently under development and will be similar
in design to cellular technology. When offered commercially, this technology
will offer increased capacity for wireless two-way communication and,
accordingly, is expected to result in increased competition for APP.
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 paging operations are subject to regulation by the FCC and by state
regulatory agencies. The FCC exercises broad authority to regulate market entry
and rates and shares responsibilities with state regulatory authorities over a
broad range of other matters. See "Telephone Operations -- Telecommunications
Act of 1996."
The FCC is responsible for awarding licenses for the wireless or radio
frequencies used by APP and its subsidiaries to provide its one- and two-way
messaging and other service offerings. It also establishes and enforces the
licensing, technical and operating rules which govern operations on those
frequencies, the terms and conditions under which the wireless systems of APP
and its subsidiaries are interconnected with and obtain services and facilities
from other service providers such as local exchange carriers and others with
respect to interstate services and adjudicates any consumer or other complaints
filed under the Communications Act with respect to service providers subject to
its jurisdiction.
The FCC licenses granted to APP are issued for up to ten years 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 granted to APP has ever been involuntarily
revoked or modified.
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, APP has no reason to believe that any such
requests, applications or relief will not be approved or granted.
Pursuant to 1993 amendments to the Communications Act, a paging service is
classified as a CMRS, to the extent that it is a service offered to the public,
for a fee, which is interconnected to the public switched telephone network. The
FCC has determined that it will forbear from requiring CMRS carriers to comply
with a number of statutory provisions otherwise applicable to common carriers,
such as the filing of tariffs.
The scope of state regulatory authority while excluding market entry and
rate regulation covers such matters as the terms and conditions of
interconnection between local exchange carriers and wireless carriers with
respect to intrastate services, customer billing information and practices,
billing disputes, other consumer protection matters, facilities setup issues,
transfers of control, the bundling of services and equipment and requirements
relating to the availability of capacity on a wholesale basis. In these areas,
particularly the terms and conditions of interconnection between local exchange
carriers and wireless providers, the FCC and state regulatory authorities share
regulatory responsibilities with respect to interstate and intrastate issues,
respectively.
32
<PAGE>
The FCC and a number of state regulatory authorities have initiated or
indicated their intention to examine the structure of access charge payments,
mutual compensation arrangements for interconnected local exchange carriers and
wireless providers, the pricing of dedicated and common transport and switching
facilities provided by local exchange carriers to wireless providers,
implementation of number portability to permit customers to retain their
telephone numbers when they change service providers, and alterations in the
structure of universal service funding.
APP and its subsidiaries have been and intend to remain active participants
in proceedings before the FCC and, through its membership in state associations
of wireless providers, before state regulatory authorities. Proceedings with
respect to the foregoing policy issues before the FCC and state regulatory
authorities could have a significant impact on the competitive market structure
among wireless providers and the relationships between wireless providers and
other carriers. APP is unable to predict the scope, pace, or financial impact of
policy changes which could be adopted in these proceedings.
BROADBAND PCS OPERATIONS
THE WIRELESS TELECOMMUNICATIONS INDUSTRY
PCS is a term commonly used in the United States to describe a portion of
radio spectrum (1850-1990 MHz) 60MHz of which was auctioned by the FCC in March
1995. This portion of radio spectrum is to be used by PCS licensees to provide
wireless communication services. PCS will initially compete directly with
existing cellular telephone, paging and mobile radio services. PCS will also
include features which are not generally offered by cellular providers, such as:
(i) the provision of all services to one untethered, mobile number; (ii)
lower-priced service options; and (iii) in the near future, medium-speed data
transmissions to and from portable computers, advanced paging services and
facsimile services. In addition, PCS providers may be the first to be able to
offer mass market wireless local loop applications, in competition with switched
and direct access local telecommunications services.
OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into
multiple regions called "cells," each of which contains a base station
consisting of a low-power transmitter, a receiver and signaling equipment. The
cells are typically configured on a grid in a honeycomb-like pattern, although
terrain factors (including natural and man-made obstructions) and signal
coverage patterns may result in irregularly shaped cells and overlaps or gaps in
coverage. The base station in each cell is connected by microwave, fiber optic
cable or telephone wires to a switching office. The switching office controls
the operation of the wireless telephone network for its entire service area,
performing inter-base station hand-offs, managing call delivery to handsets,
allocating calls among the cells within the network and connecting calls to the
local landline telephone system or to a long-distance telephone carrier.
Wireless service providers have interconnection agreements with various local
exchange carriers and interexchange carriers, thereby integrating the wireless
telephone network with landline telecommunications systems. Because two-way
wireless networks are fully interconnected with landline telephone networks and
long-distance networks, subscribers can receive and originate both local and
long distance calls from their wireless telephones.
The signal strength of a transmission between a handset and a base station
declines as the handset moves away from the base station, so the switching
office and the base stations monitor the signal strength of calls in progress.
When the signal strength of a call declines to a predetermined level, the
switching office may "hand off" the call to another base station that can
establish a stronger signal with the handset. If a handset leaves the service
area of the wireless service provider, the call is disconnected unless an
appropriate technical interface is established to hand off the call to an
adjacent system.
Operators of wireless networks frequently agree to provide service to
subscribers from other compatible networks who are temporarily located in or
traveling through the operator's service area. Such subscribers are called
roamers. Agreements among network operators allocate revenues received from
roamers. With automatic roaming, wireless subscribers are preregistered in
certain networks outside their service area and receive service automatically
while they are roaming, without having to notify the switching office. Other
roaming features permit calls to a subscriber to follow the subscriber into
different networks, so that the subscriber will continue to receive calls in a
different network just as if the subscriber were within his or her service area.
33
<PAGE>
While PCS and cellular networks utilize similar technologies and hardware,
they operate on different frequencies and utilize different signaling protocols.
As a result, it generally will not be possible for users of one type of network
to roam on a different type of network outside of their service area, or to hand
off calls from one type of network to another. Digital signal transmission is
accomplished through the use of frequency management technologies, or protocols.
These protocols manage the radio channel either by dividing it into distinct
time slots (a method known as Time Division Multiple Access, or "TDMA") or by
assigning specific coding instructions to each packet of digitized data that
comprises a signal (a method known as Code Division Multiple Access, or "CDMA").
While the FCC has mandated that licensed cellular networks in the U.S. must
utilize compatible analog signaling protocols, the FCC has intentionally avoided
mandating a universal digital signaling protocol. Currently, three principal
competing, incompatible signaling protocols have been proposed by various
vendors for use in PCS networks: GSM (as defined below), CDMA and TDMA. Because
these protocols are incompatible, a subscriber of a network that relies on GSM
technology, for example, will be unable to use his handset when traveling in an
area served only by CDMA or TDMA-based wireless operators, unless he carries a
dual-mode handset that permits the subscriber to use the cellular network in
that area. For this reason, the success of each protocol will depend both on its
ability to offer enhanced wireless service and on the extent to which its users
will be able to use their handsets when roaming outside their service area.
Wireless subscribers generally are charged separately for monthly access,
air time, long-distance calls and custom-calling features (although
custom-calling features may be included in monthly access charges in certain
pricing plans). Wireless network operators pay fees to local exchange and long-
distance telephone companies for access to their networks and toll charges based
on standard or negotiated rates. When wireless operators provide service to
roamers from other networks, they generally charge roamer air-time usage rates,
which usually are higher than standard air-time usage rates for their own
subscribers, and additionally may charge daily access fees. Special, discounted
rate roaming arrangements, often between neighboring operators who wish to
stimulate usage in their respective territories, provide for reduced roaming
fees and no daily access fees.
PRODUCTS AND SERVICES
APT's fundamental customer proposition will be an affordable, reliable,
high-quality mobile voice communications service. At the commencement of
commercial service, APT intends to offer coverage in those areas of the PCS
Markets where most of the population lives and works. Subsequent construction of
its PCS networks will provide coverage which approximates that of current
cellular operators. APT will also provide roaming capabilities, through
agreements with other GSM operators and cellular operators.
APT will provide several distinct services and features, certain of which
are currently available only on networks employing the GSM standard. These
include:
THE SMARTCARD. GSM technology employs a credit-card sized smartcard which
contains a microchip containing detailed information about a customer's service
profile. The smartcard will allow APT to initiate services or change a
customer's service package from a remote location. The smartcard also allows
customers to roam onto other GSM-based networks by using their cards in handsets
compatible with the local network.
FEATURE-RICH HANDSETS. As part of its basic service package, APT will
provide easy-to-use, interactive menu-driven phones that will enable customers
to utilize the features available in a GSM network. These handsets will
primarily use words and easy-to-use menus rather than numeric codes to operate
handset functions such as call-forwarding, call-waiting and text-messaging.
SHORT TEXT MESSAGING. GSM technology allows for the capability to send and
receive short text messages, similar to two-way radio paging services. This
service allows APT to offer a quicker and less expensive form of wireless
communication when a full conversation is not necessary.
ENHANCED SECURITY. APT's service will provide greater security from
eavesdropping and fraud than existing wireless service. Greater conversation
security is provided by the encryption code of the digital GSM signal. Greater
fraud protection is provided because GSM handsets require the use of a smartcard
with a sophisticated authentication scheme, the replication of which is
virtually impossible.
In addition to its basic and enhanced wireless service packages, APT plans
to bundle wireless services with other telecommunications services through
strategic alliances and resale agreements.
34
<PAGE>
APT will also seek to provide bundled service options in partnership with local
businesses and affinity marketing groups. Examples include bundling wireless
service with local telephone and utility services, with banking services or with
local information services. Through these arrangements, APT's customers will be
able to buy multiple services from a single provider, access account information
remotely, and obtain services such as weather and traffic reports as text
messages.
As the market for wireless telecommunications services continues to develop,
APT expects to offer advanced wireless applications such as mobile data
services, wireless private branch exchange applications, wireless local loop
services and other individually customized wireless products and services.
APT plans to construct networks for its PCS markets using Global System for
Mobile Communication ("GSM") technology. By implementing GSM technology,
currently the most widely utilized PCS technology in the world, APT believes it
will be able to launch service early in its markets as well as rapidly complete
the initial construction of its networks.
APT selected GSM technology for its PCS networks because it believes that
GSM has significant advantages compared to other digital technologies. The
advantages include (i) established commercial operations currently serving over
12 million customers in over 85 countries; (ii) new and enhanced service
features not currently available through other technologies, including call
encryption and text messaging; and (iii) an open architecture offering APT the
flexibility and cost advantages of a technology supported by multiple equipment
vendors offering "off the shelf" equipment.
Although APT has chosen GSM for deployment in its PCS markets and believes
that GSM offers significant advantages over the other two principal competing
technologies for PCS deployment, to the extent most competitors in the PCS
industry utilize a competing technology that is not compatible with GSM, APT's
business could be adversely affected and APT's GSM network might be rendered
obsolete.
APT was incorporated in 1991 and has no significant operating history. APT
expects to launch commercial service in early 1997. APT believes that its future
operating results will be subject to several factors, some of which are outside
the control of APT. These factors include the cost of constructing APT's PCS
networks (including any unanticipated costs associated therewith), the costs of
relocation of microwave licensees, changes in technology, and general and local
economic conditions. In addition, the extent of the potential demand for PCS
cannot be estimated with any degree of certainty.
APT has incurred cumulative net losses from inception to December 31, 1995
of approximately $8.0 million. APT expects to incur significant operating losses
and to generate negative cash flow from operating activities during the next
several years, while it develops and constructs its PCS networks and builds a
PCS customer base. There can be no assurance that APT will achieve or sustain
profitability or positive cash flow from operating activities in the future. If
APT cannot achieve operating profitability or positive cash flow from operating
activities, it may not be able to meet its debt service or working capital
requirements.
The development, construction and initial start-up phase associated with the
construction of APT's PCS networks will require substantial capital. APT
estimates that the aggregate funds required through December 31, 1998 will total
approximately $830 million. Although APT is seeking financing from various
sources, there can be no assurance that financing will be available to APT or,
if available, that it can be obtained on terms acceptable to APT and within any
limitations that may be contained in the financing arrangements. Failure to
obtain such financing could result in the delay or abandonment of some or all of
APT's development and expansion plans and could have a material adverse effect
on APT's financial condition and results of operations.
MARKETING AND DISTRIBUTION
APT's marketing objective is to create demand for its PCS service by clearly
differentiating its service offerings. APT believes the strength of its
marketing efforts will be a key contributor to its success. APT has developed
overall marketing strategies as well as certain, specific local marketing
strategies for each PCS Market.
APT plans to use both mass marketing and specific customer segment
marketing. APT's mass marketing efforts will emphasize the value of APT's
high-quality, innovative services and will be
35
<PAGE>
supported by a heavily promoted brand name. APT also plans to create marketing
programs for particular customer segments. For each targeted segment APT will
create a specific marketing program including a service package, pricing plan,
promotional strategy and distinctive distribution channels.
APT believes that by tailoring its service packages and marketing efforts to
specific market segments, customers will perceive a higher value in relation to
the cost of service, will be more inclined to use PCS services and will have
higher levels of customer satisfaction. APT also believes that targeted service
offerings generally create increased customer loyalty and satisfaction, lower
churn and higher life-cycle margins.
APT plans to offer its services and products through traditional cellular
sales channels as well as through new, lower cost channels which increase the
quality of the typical sale. APT will utilize traditional sales channels which
might include mass merchandisers and retail outlets, company retail stores,
sales agents and a direct sales force to execute both its mass-market and
segment-specific strategies. Based in part upon the remote activation feature of
the GSM smartcard, APT also intends to develop distribution innovations such as
simplified retail sales processes and lower-cost channels which might include
inbound telesales, affinity marketing programs, neighborhood sales and on-line
sales.
APT'S PCS MARKETS
APT has licenses to provide PCS services to the Minneapolis, Tampa-St.
Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus MTAs. APT has
entered into a definitive agreement to sell its license covering the Guam MTA,
subject to FCC approval, and is pursuing the sale of its license for the Alaska
MTA. APT believes its PCS Markets have attractive demographic characteristics
including growing populations, high population densities, favorable commuting
patterns, high median household incomes and favorable business climates. APT
believes the geographic and economic diversity of its PCS Markets insulates it
from regional trends and any single competitor. The following table sets forth
certain information regarding the PCS Markets and ranks each of the MTAs below
in relation to the 51 MTAs in the country with number one as the highest in each
category.
SUMMARY MARKET DATA (1)
<TABLE>
<CAPTION>
1995
POPS POP SQUARE
MTA (MM) RANK MILES
- --------------------------------------------- ------- ----- -------
<S> <C> <C> <C>
Minneapolis.................................. 6.3 12 216,471
Tampa-St. Petersburg-Orlando................. 5.9 13 16,904
Houston...................................... 5.7 14 39,799
Pittsburgh................................... 4.1 21 22,890
Kansas City.................................. 3.0 34 42,212
Columbus..................................... 2.3 38 13,174
------- -------
Total........................................ 27.3 351,450
------- -------
------- -------
</TABLE>
- ---------
(1) Source: In the case of POPs, from 1995 Donnelley Information Services
Estimates; in the case of square miles, Paul Kagan Associates 1995 PCS Atlas
and Data Book.
COMPETITION
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades to
existing analog wireless networks, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, and changes in end-user
requirements and preferences. Accordingly, APT expects competition in the
wireless telecommunications business to be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services.
APT also will face competition from other current or developing
technologies, such as paging, ESMR and global satellite networks and expects to
compete with cellular and PCS resellers. In the future, cellular service and PCS
will also compete more directly with traditional landline telephone
36
<PAGE>
service providers and with cable operators who expand into the offering of
traditional communications services over their cable systems. In addition, APT
may face competition from technologies that may be introduced in the future.
APT anticipates that market prices for two-way wireless services generally
will decline in the future based upon increased competition. APT will compete to
attract and retain customers principally on the basis of services and
enhancements, its customer service, the size and location of its service areas
and pricing. APT's ability to compete successfully will also depend, in part, on
its ability to anticipate and respond to various competitive factors affecting
the industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors, which could adversely affect APT's operating margins.
APT will compete directly with up to five other PCS providers in each of its
PCS Markets. These may include PCS PrimeCo, Sprint Telecommunications Venture
("STV") and AT&T Wireless Services, Inc. In addition, each of the PCS Markets
will be served by other two-way wireless service providers, including licensed
cellular operators and resellers. Many of APT's competitors have substantially
greater financial, technical, marketing, sales and distribution resources than
those of APT and have significantly greater experience than APT in testing new
or improved telecommunications products and services and obtaining regulatory
approvals. Some competitors are expected to market other services, such as cable
television access, with their wireless telecommunications service offerings.
Several of APT's competitors are operating, or planning to operate, through
joint ventures and affiliation arrangements, wireless telecommunications
networks that encompass most of the United States.
APT also expects that existing cellular providers in the PCS Markets, most
of which have an infrastructure in place and have been operational for a number
of years, will upgrade their networks to provide comparable services in
competition with APT. Principal cellular providers in the PCS Markets are AT&T
Wireless Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications
Corporation, AirTouch Communications, Inc., U S WEST NewVector Group, Inc., Bell
Atlantic NYNEX Mobile and Ameritech Cellular.
As of February 15, 1996, several major PCS providers, including PCS PrimeCo
and STV, have publicly announced that they intend to deploy CDMA-based PCS
networks. It is anticipated that CDMA-based PCS providers, including competitors
in several of APT's PCS Markets, will cover markets containing at least 89% of
the U.S. population. The fact that APT's PCS customers will not be able to roam
into regions not served by GSM-based PCS networks, unless the customers use
dual-mode telephones that would permit them to use the existing cellular
network, and in which APT has entered into a roaming agreement with the cellular
operator, may adversely affect APT's ability to establish a PCS customer base
and to compete successfully in the PCS business with those PCS operators
offering greater roaming capabilities.
Handsets used for GSM-based PCS networks will not be automatically
compatible with cellular systems, and vice versa. APT expects dual-mode phones
to be available in early 1997, which will permit subscribers to roam by using
the existing cellular wireless network in other markets. Until then, this lack
of interoperability may impede APT's ability to attract current cellular
subscribers or potential new wireless communication subscribers that desire the
ability to access different service providers in the same market.
REGULATION OF WIRELESS TELECOMMUNICATIONS INDUSTRY
REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the U.S.
pursuant to the Communications Act and the rules, regulations and policies
promulgated by the FCC thereunder. Under the Communications Act, the FCC is
authorized to allocate, grant and deny licenses for PCS frequencies, establish
regulations governing the interconnection of PCS networks with wireline and
other wireless carriers, grant or deny license renewals and applications for
transfer of control or assignment of PCS licenses, and impose fines and
forfeitures for any violations of FCC regulations.
PCS LICENSING. The FCC established PCS service areas in the United States
and its possessions and territories based upon Rand McNally's market definition
of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two
BTAs.
37
<PAGE>
The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHz blocks ("A" and "B" blocks) licensed
for each of the 51 MTAs, one 30 MHz block ("C" block) licensed for each of the
493 BTAs, and three 10 MHz blocks ("D," "E" and "F" blocks) licensed for each of
the 493 BTAs. A PCS license will be awarded for each MTA and BTA in every block,
for a total of more than 2,000 licenses. This means that in any PCS service area
as many as six licensees could be operating separate PCS networks. Under the
FCC's rules, a broadband PCS licensee may own combinations of licenses (E.G.,
one MTA (30 MHz) and one BTA (10 MHz)) with total aggregate spectrum coverage of
up to 40 MHz in a single geographic area. Cellular licensees are restricted from
holding attributable interests in 30 MHz PCS licenses for PCS service areas
which significantly overlap their cellular service areas. When mutually
exclusive applications are filed for the same MTA or BTA, those licenses will be
awarded pursuant to auctions. The FCC has adopted comprehensive rules that
outline the bidding process, describe the bidding application and payment
process, establish penalties for certain bid withdrawals, default or
disqualification and establish regulatory safeguards.
On June 23, 1995, the Chief of the Wireless Telecommunications Bureau
("Bureau") of the FCC granted to subsidiaries of APT eight A and B block
broadband PCS authorizations in an order in which, at the culmination of the A
and B block auction, the FCC issued a total of 99 such initial authorizations.
APT has paid its winning bid amount to the United States Treasury. An appeal has
been taken to the FCC from the Bureau order by a party alleging that some of the
authorizations were granted to parties which had engaged in collusion in the
lottery. That party has also sought review of the denial of its motion for a
stay of the grant of A and B block authorizations. No allegation of collusion
was made against TDS or APT. A late-filed request for recision of the Bureau
order was filed by a denied applicant for an authorization for New York City,
which is not one of the markets for which APT holds authorizations. APT would
defend vigorously any challenges to the authorizations it has been granted.
On November 9, 1995, in CINCINNATI BELL TELEPHONE CO. V. FCC (Case No.
94-3701/4113), the United States Court of Appeals for the Sixth Circuit granted
two petitions for review of an FCC order that had barred certain common
ownership of cellular and PCS interests in the same market, and remanded the
case to the FCC for further proceedings. Neither of the two petitioners had been
barred by cross interests from applying for any of the authorizations the FCC
later granted to APT. APT is watching the FCC proceedings closely.
In compliance with FCC restrictions on common ownership of cellular and
broadband PCS interests in overlapping market areas, United States Cellular,
another subsidiary of TDS, entered into a series of arrangements for the
divestiture or restructuring of certain of its cellular interests in market
areas where APT was awarded broadband PCS licenses. A number of these proposed
arrangements required FCC approval of assignment or transfer of control
applications before they could be consummated. Many of these applications have
been approved by the FCC and are either consummated or awaiting consummation.
Certain applications filed by United States Cellular have been opposed and
remain pending. APT believes that it has taken reasonable steps to comply with
the FCC's cross-interest policies. There can be no assurance that the FCC will
not raise questions regarding these compliance efforts.
The grants of licenses to APT are also conditioned upon timely compliance
with the FCC's buildout requirements, I.E., coverage of one-third of the
population of a PCS market within five years of initial license grant and
coverage of two-thirds of that population within ten years. A significant factor
affecting the schedule and cost of APT's network implementation will be the
relocation of existing private microwave facilities which operate on the same
frequencies to be used for APT's broadband PCS operations. Under the FCC's
policies, if APT decides that any existing microwave facility must be relocated,
it is required to provide substitute facilities at its own expense so that the
companies using these existing facilities may continue to have access to the
same or equivalent communications capabilities. The FCC has pending proceedings
to decide whether permissible relocation costs should be limited, whether the
pace of negotiations between broadband PCS licensees and affected private
microwave licensees should be accelerated and whether new procedures should be
adopted for the
38
<PAGE>
sharing of relocation costs where the relocation of private microwave facilities
benefits multiple broadband PCS licensees. Regardless of the outcome of the FCC
pending proceedings, APT expects to proceed with construction so that these
requirements will be met.
The FCC licenses granted to APT are issued for a ten-year period expiring
June 23, 2005 and may be renewed. In the event challengers file competing
applications in response to any of APT's renewal filings, the FCC has rules and
policies providing that the application of the licensee seeking renewal will be
granted and the application of the challenger will not be considered in the
event that the broadband PCS licensee involved has (i) provided "substantial"
performance, which is defined as "sound, favorable and substantially above a
level of mediocre service just minimally justifying renewal" and (ii)
substantially complied with FCC rules, policies and the Communications Act.
Although APT is unaware of any circumstances which would prevent the approval of
any future renewal applications, there can be no assurance that APT'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.
The FCC has proceedings in process which could open up other frequency bands
for wireless telecommunications and PCS-like services. There can be no assurance
that such proceedings will not result in additional wireless competitors.
In addition, the FCC has pending proceedings to address various forms of
interconnection obligations which could affect broadband PCS and other wireless
service providers. In its mutual compensation proceedings, the FCC is examining
its policies regarding the compensation arrangements which apply when wireless
providers, including broadband PCS providers, interconnect with LECs. In a
different part of the same proceeding, the FCC is considering whether to rely
upon private negotiations between wireless providers to determine whether direct
interconnections between wireless networks should occur. The FCC is also
considering whether private negotiations should be the preferred basis for
wireless providers to permit the customers of one such provider to obtain
service while roaming in the service area of the other.
In related parts of the foregoing proceedings, the FCC is trying to decide
whether to require all wireless providers to provide capacity to non-facilities
based resellers, whether wireless licensees should be permitted to resell
capacity acquired from other wireless providers in the markets where they hold
licenses at least during an initial startup period and whether wireless
providers should be required to offer unbundled communications capacity to
resellers who intend to operate their own switching facilities.
The FCC also has proceedings regarding the expansion of the permissible uses
of broadband PCS networks to provide wireless local loop and other fixed
services in competition with the wireline offerings of the LECs. It is also
considering the possible adoption of requirements on broadband PCS and other
providers of real-time voice services to implement enhanced 911 capabilities
within some number of years after the FCC's decision.
In addition, there are citizenship requirements, assignment requirements and
other federal regulations and requirements which may affect the business of APT.
See also "Telephone Operations -- Telecommunications Act of 1996."
STATE AND LOCAL REGULATION. The scope of state regulatory authority covers
such matters as the terms and conditions of interconnection between LECs and
wireless carriers with respect to intrastate services, customer billing
information and practices, billing disputes, other consumer protection matters,
facilities construction issues, transfers of control, the bundling of services
and equipment and requirements relating to the availability of capacity on a
wholesale basis. In these areas, particularly the terms and conditions of
interconnection between LECs and wireless providers, the FCC and state
regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively.
APT and its subsidiaries have been and intend to remain active participants
in proceedings before the FCC and before state regulatory authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have significant impacts on the competitive market
39
<PAGE>
structure among wireless providers and the relationships between wireless
providers and other carriers. APT is unable to predict the scope, pace, or
financial impact of policy changes which could be adopted in these proceedings.
OTHER SUBSIDIARIES
Subsidiaries of the Company provide 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, 1995,
6,363 persons were employed by the Company, 149 of whom are represented by
unions.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The property of TDS consists principally of switching and cell site
equipment related to cellular telephone operations; telephone lines, central
office equipment, telephone instruments and related equipment, and land and
buildings related to telephone operations; and radio pagers and transmitting
equipment related to radio paging operations. As of December 31, 1995, TDS's
gross property, plant and equipment of approximately $2.0 billion consisted of
the following:
<TABLE>
<S> <C>
Cellular telephone........................... 35.2
Telephone.................................... 55.2
Radio paging................................. 5.2
PCS.......................................... .6
Other........................................ 3.8
------
100.0 %
------
------
</TABLE>
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 systems and
other interests. The Company does not believe that any such proceeding should
have a material adverse impact on the Company.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1995.
40
<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.
41
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Proxy Statement sections entitled "Election
of Directors" and "Executive Officers."
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Proxy Statement section entitled "Executive
Compensation" except for the information specified in Item 402(a)(8) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Proxy Statement sections entitled "Security
Ownership of Management" and "Principal Shareholders."
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Proxy Statement section entitled "Certain
Relationships and Related Transactions."
42
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a)(1) Financial Statements
<TABLE>
<S> <C>
Consolidated Statements of 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*
</TABLE>
- ---------
* Incorporated by reference from Exhibit 13.
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
--------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedules......... page 46
I. Condensed Financial Information of Registrant-Balance Sheets as of December
31, 1995 and 1994 and Statements of Income and Statements of Cash Flows for
each of the Three Years in the Period Ended December 31, 1995.............. page 47
II. Valuation and Qualifying Accounts for each of the Three Years in the Period
Ended December 31, 1995.................................................... page 51
Los Angeles SMSA, Nashville/Clarksville MSA, and Baton Rouge MSA Limited
Partnership Combined Financial Statements....................................... page 52
Compilation Report of Independent Public Accountants on Combined
Financial Statements..................................................... page 53
Reports of Other Independent Accountants................................... page 54
Combined Statements of Operations (Unaudited).............................. page 60
Combined Balance Sheets (Unaudited)........................................ page 61
Combined Statements of Cash Flows (Unaudited).............................. page 62
Combined Statements of Changes in Partners' Capital (Unaudited)............ page 63
Notes to Unaudited Combined Financial Statements........................... page 64
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>
43
<PAGE>
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a part
of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------------------------------------------------------------------------------------------
<C> <S>
10.1 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.
10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated May 28, 1991 is hereby incorporated
by reference to Exhibit 10.2(b) to the Company's Annual Report 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 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.
10.5 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.
10.6(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.
10.6(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby
incorporated by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.6(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby
incorporated by reference to Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.7 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.
10.8(a) Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference
to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.8(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No.
33-57257).
10.8(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No.
33-57257).
10.8(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.4 to the Company Registration statement on Form S-8 (Registration No.
33-57257).
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------------------------------------------------------------------------------------------
<C> <S>
10.8(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No.
33-57257).
10.9 Supplemental Executive Retirement Plan of the Company is hereby incorporated by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.10 Deferred Compensation Agreement for Rudolph E. Hornacek dated November 30, 1995.
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1995.
TDS filed a Current Report on Form 8-K on October 3, 1995 dated September 28,
1995, which included a press release that announced that an FCC administrative
law judge issued a ruling finding the Company and United States Cellular
Corporation fully qualified to be FCC licensees. The decision favorably resolved
candor issues raised in the La Star and Wisconsin RSA 8 (Vernon) matters.
45
<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 6, 1996 (except
with respect to the matter discussed in Note 17, as to which the date is
February 20, 1996). Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The financial
statement 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
consolidated financial statements. These financial statement schedules have been
subjected to the auditing procedures applied in the audits of the basic
consolidated 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 consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1996
(except with respect to the matter
discussed in Note 17, as to
which the date is February 20, 1996)
46
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
BALANCE SHEETS
ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 383 $ 291
Temporary investments 99 184
Notes receivable from affiliates 55,156 189,820
Advances to affiliates 1,816 22,016
Accounts receivable
Due from subsidiaries--Income taxes 27,058 7,682
Due from subsidiaries--Other 19,897 8,624
Other 3,163 2,555
Other current assets 518 650
----------------------
108,090 231,822
- -------------------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARIES
Underlying book value 2,133,492 1,605,813
Cost in excess of underlying book value at date of acquisition 1,987 1,907
----------------------
2,135,479 1,607,720
- -------------------------------------------------------------------------------------------
OTHER INVESTMENTS
Minority interests in telephone and cellular companies and other
investments 28,103 31,648
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES
Debt issuance expenses 2,175 2,027
Development and acquisition expenses 1,703 599
Other 5,884 7,239
----------------------
9,762 9,865
- -------------------------------------------------------------------------------------------
$2,281,434 $1,881,055
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
47
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock $ 13,251 $ 13,053
Notes payable 180,760 97,629
Notes payable to affiliates 30,086 2,852
Advances from affiliates 2,464 345
Accounts payable
Due to subsidiaries--Federal income taxes 14,405 5,959
Due to subsidiaries--Other 31,317 1,395
Other 1,549 811
Accrued interest 10,733 9,234
Accrued taxes (6,837) (2,124)
Other 3,951 3,427
----------------------
281,679 132,581
- -------------------------------------------------------------------------------------------
DEFERRED LIABILITIES AND CREDITS
Investment tax credits (1,934) (1,694)
Income taxes 20,065 14,368
Postretirement benefits obligation other than pensions 11,216 12,067
Other 7,920 3,903
----------------------
37,267 28,644
- -------------------------------------------------------------------------------------------
LONG-TERM DEBT, excluding current portion (Note B) 242,458 203,764
- -------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion (Note A) 2,260 13,209
- -------------------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES 29,710 29,819
- -------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000
shares; issued and outstanding 51,137,426 and 47,937,570 shares,
respectively 51,137 47,938
Series A Common Shares, par value $1 per share; authorized
25,000,000 shares; issued and outstanding 6,893,101 and
6,886,684 shares, respectively 6,893 6,887
Common Shares issuable, 31,431 and 41,908 shares, respectively 1,496 1,995
Capital in excess of par value 1,417,513 1,288,453
Retained earnings 211,021 127,765
----------------------
1,688,060 1,473,038
- -------------------------------------------------------------------------------------------
$2,281,434 $1,881,055
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
48
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating service revenues $ 21,863 $ 17,402 $ 17,179
Cost of sales and operating expenses 21,827 18,189 17,109
-------------------------------
Net operations 36 (787) 70
-------------------------------
Other income
Interest income received from affiliates 26,179 13,840 27,333
Other, net (4,490) (1,507) (1,128)
-------------------------------
21,689 12,333 26,205
-------------------------------
Income before interest and income taxes 21,725 11,546 26,275
Interest expense 31,371 22,107 18,934
Federal income tax expense (credit) 6,433 1,411 (2,602)
-------------------------------
Corporate operations (16,079) (11,972) 9,943
Equity in net income of subsidiaries and other
investments 124,852 71,793 23,953
-------------------------------
Net income $ 108,773 $ 59,821 $ 33,896
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</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 $13.5
million, $1.3 million, $79,000, $79,000 and $78,000 for the years 1996 through 2000,
respectively.
Note B: The annual requirements for principal payments on long-term debt are $336,000,
$394,000, $476,000, $372,000 and $309,000 for the years 1996 through 2000,
respectively.
</TABLE>
49
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 108,773 $ 59,821 $ 33,896
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 1,237 1,080 2,547
Gain on sale of investments (408) -- --
Deferred taxes 5,457 8,572 4,563
Equity income (124,852) (71,793) (23,953)
Other noncash expense 1,316 691 6
Change in accounts receivable (32,359) 1,859 1,076
Change in accounts payable 39,106 1,769 (4,603)
Change in accrued taxes (4,713) (4,587) 2,463
Change in other assets and liabilities 3,459 (1,236) 2,689
-------------------------------------------
(2,984) (3,824) 18,684
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 38,908 (130) 91,601
Repayment of long-term debt (1,349) (1,611) (11,935)
Change in notes payable 83,131 91,629 (40,140)
Change in notes payable to affiliates 27,235 1,034 (175)
Change in advances from affiliates 2,118 (3) --
Common stock issued 8,078 11,185 109,972
Redemption of preferred shares (9,609) (644) (220)
Dividends paid (23,971) (20,906) (17,830)
-------------------------------------------
124,541 80,554 131,273
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions
Value of assets acquired (129,005) (215,658) (331,225)
Common Shares issued 127,836 173,658 281,605
Preferred Shares issued -- 12,500 3,000
-------------------------------------------
Net cash paid for acquisitions (1,169) (29,500) (46,620)
Proceeds from sale of investments 4,800 -- --
Investments in subsidiaries (302,722) (527) (126,108)
Dividends from subsidiaries 17,690 17,373 16,266
Other investments (198) (3,058) 1,424
Change in notes receivable from affiliates 139,849 (64,850) 28,040
Change in advances to affiliates 20,200 (20,400) 1,073
Change in temporary investments 85 (128) 114
-------------------------------------------
(121,465) (101,090) (125,811)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 92 (24,360) 24,146
CASH AND CASH EQUIVALENTS--
Beginning of period 291 24,651 505
-------------------------------------------
End of period $ 383 $ 291 $ 24,651
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
50
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A
DESCRIPTION COLUMN B COLUMN C-1 COLUMN C-2 COLUMN E
- ---------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER COLUMN D END OF
(DOLLARS IN THOUSANDS) PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1995
Deducted from deferred state tax asset:
For unrealized net operating losses $ (8,962) 3,905 (5,004) -- (10,061)
Deducted from accounts receivable:
For doubtful accounts (2,785) (16,648) -- 14,329 (5,104)
FOR THE YEAR ENDED DECEMBER 31, 1994
Deducted from deferred state tax asset:
For unrealized net operating losses (8,704) 327 (585) -- (8,962)
Deducted from accounts receivable:
For doubtful accounts (2,093) (9,710) -- 9,018 (2,785)
Deducted from marketable equity securities:
For unrealized loss (626) -- 626 -- --
FOR THE YEAR ENDED DECEMBER 31, 1993
Deducted from deferred state tax asset:
For unrealized net operating losses (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)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED FINANCIAL STATEMENTS
The following financial statements are the combined financial statements of
the cellular system partnerships listed below which are accounted for by the
Company following the equity method. The combined financial statements were
compiled from financial statements and other information obtained by the Company
as a limited partner of the cellular limited partnerships listed below. The
cellular system partnerships included in the combined financial statements, the
periods each partnership is included, and the Company's ownership percentage of
each cellular system partnership at December 31, 1995 are set forth in the
following table.
<TABLE>
<CAPTION>
PERIODS THE
INCLUDED COMPANY'S
IN LIMITED
COMBINED PARTNERSHIP
CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST
- --------------------------------------------------------- -------- -----------
<S> <C> <C>
Los Angeles SMSA Limited Partnership..................... 1993-95 5.5%
Nashville/Clarksville MSA Limited Partnership............ 1993-95 49.0%
Baton Rouge MSA Limited Partnership...................... 1993-95 52.0%
</TABLE>
52
<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, 1995 and 1994 and the related
combined statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1995, have been
prepared from the separate financial statements, which are not presented
separately herein, of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships, as described in Note 1. We have reviewed for
compilation only the accompanying combined financial statements, and, in our
opinion, those statements have been properly compiled from the amounts and notes
of the underlying separate financial statements of the Los Angeles SMSA,
Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, on the basis
described in Note 1.
The statements for the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships were audited by other auditors as set forth in
their reports included on pages 54 through 59. We have not been engaged to audit
either the separate financial statements of the aforementioned limited
partnerships or the related combined financial statements in accordance with
generally accepted auditing standards and to render an opinion as to the fair
presentation of such financial statements in accordance with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 9, 1996
53
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
LOS ANGELES SMSA LIMITED PARTNERSHIP:
In our opinion, the balance sheet and the related statements of income,
partner's capital and of cash flows and the financial statement schedule II --
valuation and qualifying accounts present fairly, in all material respects, the
financial position of Los Angeles SMSA Limited Partnership at December 31, 1995,
and the results of its operations and its cash flows for the year in conformity
with generally accepted accounting principles. These financial statements, which
are not presented separately herein, are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
January 25, 1996
54
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
LOS ANGELES SMSA LIMITED PARTNERSHIP:
We have audited the balance sheets of Los Angeles SMSA Limited Partnership
as of December 31, 1994, and the related statements of operations, partners'
capital and cash flows for each of the two years in the period ended December
31, 1994; such financial statements are not included separately herein. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Los Angeles SMSA Limited
Partnership as of December 31, 1994, and results of its operations and its cash
flows for each of the two years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
February 17, 1995
55
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1995, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 9, 1996
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1994, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1994, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 10, 1995
56
<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
57
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1995, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 9, 1996
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1994, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1994, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 10, 1995
58
<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
59
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................................... $ 811,933 $ 648,896 $ 515,228
Expenses
Selling, general and administrative...................................... 460,048 370,938 296,499
Depreciation and amortization............................................ 71,748 66,234 57,357
----------- ----------- -----------
Total expenses........................................................... 531,796 437,172 353,856
----------- ----------- -----------
Operating income........................................................... 280,137 211,724 161,372
Other income............................................................... 985 573 272
----------- ----------- -----------
Net Income................................................................. $ 281,122 $ 212,297 $ 161,644
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
60
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Assets
Cash.................................................................................. $ 214 $ 38
Accounts receivable--customers, net................................................... 116,966 95,630
Accounts receivable--affiliates....................................................... 14,830 16,016
Notes receivable--affiliates.......................................................... 8,860 402
Other current assets.................................................................. 11,801 18,523
----------- -----------
152,671 130,609
Notes Receivable--Other................................................................. 3,184 --
Property, Plant and Equipment, net...................................................... 564,564 380,473
Other................................................................................... 23,715 1,640
----------- -----------
Total Assets............................................................................ $ 744,134 $ 512,722
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Liabilities
Accounts payable--other............................................................... $ 53,526 $ 58,210
Accounts payable--affiliates.......................................................... -- 1,431
Notes payable......................................................................... 5,084 692
Customer deposits..................................................................... 3,311 4,060
Other current liabilities............................................................. 50,191 39,323
----------- -----------
112,112 103,716
Other Liabilities....................................................................... 5,788 5,539
Partners' Capital....................................................................... 626,234 403,467
----------- -----------
Total Liabilities and Partners' Capital................................................. $ 744,134 $ 512,722
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
61
<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,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................ $ 281,122 $ 212,297 $ 161,644
Add (Deduct) adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization....................................... 71,748 66,234 57,357
Deferred revenue and other credits.................................. (966) 1,387 497
Loss on asset dispositions.......................................... 3,021 3,542 3,838
Change in accounts receivable....................................... (19,523) (9) (37,422)
Change in accounts payable and accrued expenses..................... (3,587) 25,527 6,119
Change in other assets and liabilities.............................. 15,185 (2,069) 4,286
------------ ------------ ------------
347,000 306,909 196,319
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable............................................. 4,392 692 --
Change in notes receivable.......................................... (7,355) 3,354 (5)
Capital contribution................................................ 5,096 -- --
Capital distribution................................................ (72,017) (166,300) (111,461)
------------ ------------ ------------
(69,884) (162,254) (111,466)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements...... (254,629) (143,807) (86,011)
(Increases) decreases in other assets............................... (21,573) (44) 1,335
Change in deferred charges.......................................... (738) (827) (202)
Proceeds from sale of assets........................................ -- 34 26
------------ ------------ ------------
(276,940) (144,644) (84,852)
------------ ------------ ------------
NET INCREASE IN CASH.................................................... 176 11 1
CASH
Beginning of period................................................. 38 27 26
------------ ------------ ------------
End of period....................................................... $ 214 $ 38 $ 27
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
62
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<S> <C>
(DOLLARS IN THOUSANDS)
Balance at January 1, 1993...................................................... $ 307,287
Distributions................................................................. (111,461)
Net Income for the year ended December 31, 1993............................... 161,644
---------
Balance at December 31, 1993.................................................... 357,470
Distributions................................................................. (166,300)
Net Income for the year ended December 31, 1994............................... 212,297
---------
Balance at December 31, 1994.................................................... 403,467
Contributions................................................................. 13,662
Distributions................................................................. (72,017)
Net Income for year ended December 31, 1995................................... 281,122
---------
Balance at December 31, 1995.................................................... $ 626,234
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
63
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. BASIS OF COMBINATION:
The combined financial statements and notes thereto were compiled from the
individual financial statements of cellular limited partnerships listed below in
which United States Cellular Corporation (AMEX symbol "USM") has a
non-controlling ownership interest and which it accounts for using the equity
method. The cellular partnerships, the period each partnership is included in
the combined financial statements and USM's ownership interest in each
partnership are set forth in the table below. The combined financial statements
and notes thereto present 100% of each partnership whereas USM's ownership
interest is shown in the table.
<TABLE>
<CAPTION>
PERIOD INCLUDED LIMITED
IN COMBINED PARTNERSHIP
STATEMENTS INTEREST
--------------- -------------
<S> <C> <C>
Los Angeles SMSA Limited Partnership................................................................ 1993-95 5.5%
Nashville/Clarksville MSA Limited Partnership....................................................... 1993-95 49.0%
Baton Rouge MSA Limited Partnership................................................................. 1993-95 52.0%
</TABLE>
Profits, losses and distributable cash are allocated to the partners based
upon respective partnership interests. Distributions are made quarterly at the
discretion of the General Partner for one of the Partnerships.
Of the partnerships included in the combined financial statements, the Los
Angeles SMSA Limited Partnership is the most significant, accounting for
approximately 86% of the combined total assets at December 31, 1995, and
substantially all of the combined net income for the year then ended.
USM's investment in and advances to Los Angeles SMSA Limited Partnership
totaled $27,784,000 as of December 31, 1995, of which $29,282,000 represents its
proportionate share of net assets of the Partnership. USM's investment in and
advances to the Nashville/Clarksville MSA Limited Partnership totaled
$25,889,000 as of December 31, 1995, of which $29,957,000 represents its
proportionate share of net assets. USM's investment in and advances to the Baton
Rouge MSA Limited Partnership totaled $19,723,000 as of December 31, 1995,
$16,993,000 of which represents its proportionate share of net assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR COMBINED ENTITIES:
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the following estimated lives:
<TABLE>
<S> <C>
Buildings.............................................. 10-15 years
Equipment.............................................. 3-10 years
Furniture and Fixtures................................. 5-10 years
Leasehold Improvements................................. 10 years
</TABLE>
Effective January 1, 1995, one of the Partnerships changed its estimate of
the useful lives of certain telecommunications equipment from 7 to 10 years. The
change in estimate had the effect of reducing depreciation expense and
increasing net income by approximately $14,844,000 for 1995.
64
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land.................................................................................... $ 3,974 $ 2,987
Buildings and Leasehold Improvements.................................................... 149,644 100,312
Equipment............................................................................... 580,810 432,949
Furniture and Fixtures.................................................................. 58,580 33,602
Under Construction...................................................................... 80,665 55,176
----------- -----------
873,673 625,026
Less Accumulated Depreciation........................................................... 309,109 244,553
----------- -----------
$ 564,564 $ 380,473
----------- -----------
----------- -----------
</TABLE>
Included in buildings are costs relating to the acquisition of cell site
leases; such as legal, consulting, and title fees. Lease acquisition costs are
capitalized when incurred and amortized over the period of the lease. Costs
related to unsuccessful negotiations are expensed in the period the negotiations
are terminated.
Gains and losses on disposals are included in income at amounts equal to the
difference between net book value and proceeds received upon disposal.
On January 10, 1994, one of the Partnerships entered into an agreement with
its major supplier to purchase $77 million in equipment. At December 31, 1995,
approximately $22 million in equipment had been purchased by the Partnership
under the agreement.
OTHER CURRENT ASSETS
Other current assets includes inventory consisting primarily of cellular
phones and accessories held for resale stated at average cost. Consistent with
industry practice, losses on sales of cellular phones are recognized in the
period in which sales are made as a cost of acquiring subscribers.
REVENUE RECOGNITION
Revenues from operations primarily consist of charges to customers for
monthly access charges, cellular airtime usage, and roamer charges. Revenues are
recognized as services are rendered. Unbilled revenues, resulting from cellular
service provided from the billing cycle date to the end of each month and from
other cellular carriers' customers using the partnership's cellular systems for
the last half of each month, are estimated and recorded as receivables. Unearned
monthly access charges and bundled service packages relating to the periods
after month-end are deferred and netted against accounts receivable and
recognized the following month when services are provided.
INCOME TAXES
No provisions have been made for federal or state income taxes since such
taxes, if any, are the responsibility of the individual partners.
ADVERTISING
Advertising costs are expensed as incurred. The advertising expense for 1995
was $42,046,000.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
65
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
Under SFAS 121, the Partnerships are required to evaluate long-lived assets and
certain identifiable intangible assets, including fixed assets, for impairment
whenever events or changes in circumstances indicate that the book value of an
asset may not be recoverable. An impairment loss should be recognized whenever
the review demonstrates that the book value of a long-lived asset is not
recoverable. The Partnerships do not expect the implementation of SFAS 121,
adopted effective January 1, 1996, to have a material impact on its financial
condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications of the 1994 and 1993 financial statements of one
of the Partnerships have been made to conform to the 1995 presentation. The
reclassifications have not affected previously reported net income or partners'
capital.
3. LEASE COMMITMENTS:
Future minimum rental payments required under operating leases for real
estate that have initial or remaining noncancellable lease terms in excess of
one year as of December 31, 1995, are as follows:
<TABLE>
<S> <C>
(DOLLARS IN THOUSANDS)
1996............................................................. $ 20,063
1997............................................................. 18,723
1998............................................................. 17,992
1999............................................................. 16,563
2000............................................................. 13,409
Thereafter....................................................... 20,076
---------
$ 106,826
---------
---------
</TABLE>
The initial lease terms generally range from 5 to 25 years with the majority
of them having initial terms of 10 years and providing for one renewal option of
5 years and for rental escalation. Included in selling, general and
administrative expense are rental costs of $17,455,000, $17,750,000 and
$15,119,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
One of the Partnerships leases office facilities under a ten-year lease
agreement which provides for free rent incentives for six months and rent
escalation over the ten-year period. The Partnership recognizes rent expense on
a straight-line basis and recorded the related deferred rent as a noncurrent
liability to be amortized as an adjustment to rental costs over the life of the
lease.
4. SUPPLEMENTAL CASH FLOW INFORMATION
On November 1, 1995, one of the Partners of one of the Partnerships
contributed a note receivable of $3,152,000 (Note 5) and other assets of
$104,000 and the assets and liabilities of other RSA interests totaling
$6,018,000. All assets and liabilities were recorded at their historical net
book value. The contribution of the note receivable and the combined properties
is reflected in the Statement of Changes in Partners' Capital.
During 1995, one of the Partnerships replaced and upgraded certain of its
cellular equipment with new cellular technology which supports both analog and
digital voice transmissions. In connection with this equipment upgrade, the
Partnership traded-in cellular equipment with a net book value of $3,704,000 for
new cellular equipment with a cost of $6,250,000. The remaining balance was
funded through the credit facility with its General Partner.
66
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. RELATED PARTY TRANSACTIONS:
Certain affiliates of these cellular limited partnerships provide services
for the system operations, legal, financial, management and administration of
these entities. These affiliates are reimbursed for both direct and allocated
costs (totaling $59.5 million in 1995, $57.6 million in 1994 and $57.1 million
in 1993) related to providing these services. In addition, certain affiliates
have established a credit facility with certain partnerships to provide working
capital to the partnership. One of the partnerships participates in a
centralized cash management arrangement with its general partner. At December
31, 1995 and 1994, the interest-bearing balance amounted to $14,830,000 and
$16,016,000, respectively. Effective January 1, 1989, the general partner pays
or charges the Partnership monthly interest, computed using the general
partner's average borrowing rate, on the amounts due to or from the Partnership.
Interest earned in 1995, 1994 and 1993 was $785,000, $1,480,000 and $1,294,000,
respectively.
One of the Partnerships has a note receivable from its General Partner with
a balance of $3,152,000 and accrued interest of $32,000 at December 31, 1995.
The note bears interest at 12% per annum, compounded quarterly with all
principal and interest due at maturity on May 10, 1997. The note was contributed
to the Partnership by its General Partner during 1995 (Note 4).
6. ACCOUNTS RECEIVABLE
Accounts receivable of one of the partnerships consists of:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1994
------------ -----------
<S> <C> <C>
Retail......................................................................... $ 83,682 $ 63,626
Wholesale...................................................................... 17,660 14,557
Intercarrier and other......................................................... 9,437 9,280
------------ -----------
110,779 87,463
Allowance for doubtful accounts................................................ (8,719) (3,033)
------------ -----------
$ 102,060 $ 84,430
------------ -----------
------------ -----------
</TABLE>
Accounts receivable are derived from revenues earned from customers located
in the Partnership's metropolitan serving area. The Partnership performs ongoing
credit evaluations of its customers and in certain circumstances obtains
refundable deposits. The Partnership maintains reserves for potential credit
losses; historically, such losses have been within management's expectations.
The carrying value of accounts receivable approximates fair value.
Two of the Partnerships provide cellular service and sell cellular
telephones to diversified groups of consumers within concentrated geographical
areas. The general partner performs credit evaluations of the Partnerships'
customers and generally does not require collateral. Receivables are generally
due within 30 days. Credit losses related to customers have been within
management's expectations.
7. REGULATORY MATTERS:
On December 21, 1993, the California Public Utilities Commission ("CPUC")
issued an Order Instituting Investigation into the regulation of mobile
telephone service and wireless communications. The investigation proposes a
regulatory program which would encompass all forms of mobile telephone services.
In 1993, the U.S. Congress passed legislation prohibiting state and local
governments from regulating the rates for commercial mobile radio services
("CMRS"), including cellular service. States with rate regulation in place on
June 1, 1993, including California, were given the opportunity to petition the
Federal Communications Commission ("FCC") for continuation of such authority.
The CPUC filed such a petition with the FCC. The FCC denied the CPUC's petition
in an interim decision issued in May 1995 and issued a final Order in August
1995 (the "Order"), thereby preempting the CPUC's authority over rates. As a
consequence, one of the Partnerships withdrew its rate-related traiffs.
67
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The CPUC is currently considering outstanding issues concerning its
remaining jurisdiction over CMRS providers in recognition of the changes in
federal law and the Order. Specifically, the CPUC is assessing changes to
existing regulation in light of the preemption of rate and entry regulation and
the scope of its residual authority to regulate "other terms and conditions" of
services. Until the CPUC completes its assessment of its remaining regulatory
authority, the effect, if any, of such regulation to the Partnership and its
operating activities can not be determined.
8. CONTINGENCIES AND COMMITMENTS:
A class action complaint was filed in November 1993 naming a partner of one
of the partnerships as general partner of the Partnership. In April 1995, the
Partnership was named as a necessary party to the action. The plaintiff alleged
the Partnership conspired to fix the price of wholesale and retail cellular
service in its metropolitan serving area market. The plaintiff alleged damages
for the class "in a sum in excess of $100 million." The Partnership has answered
the complaint and intends to defend itself vigorously. This case has been
consolidated for purposes of discovery with two other class actions making
identical price-fixing allegations. The case has been removed to federal court.
The other cases have been stayed pending resolution of a motion to remand the
case to state court. In addition, three non-class action antitrust cases brought
by cellular agents making similar allegations were settled for immaterial
amounts. In April 1995, a Federal class action complaint was dismissed on a
motion for summary judgment. The dismissal was upheld on appeal. The Partnership
does not believe that these proceedings will have a material adverse effect on
the Partnership's financial position.
In September 1995, a class action lawsuit was brought on behalf of all
subscribers of the general partner of one of the Partnerships, including the
Partnership's subscribers, regarding customer notification of the Partnership's
practices with respect to billing for fractional minutes of service. No
dispositive motions have been filed in the proceeding and discovery has not yet
begun. The Partnership believes the lawsuit to be without merit.
One of the Partnerships is a party to various other lawsuits arising in the
ordinary course of business. Although the ultimate resolution of these
proceedings cannot be ascertained, the Partnership's management does not believe
they will have a materially adverse effect on the results of operations or
financial position of the Partnership.
68
<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
(CHIEF FINANCIAL OFFICER)
By: /S/ GREGORY J. WILKINSON
------------------------------------------
Gregory J. Wilkinson,
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Dated March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------------------------- ----------- ---------------------
<S> <C> <C>
/S/ LEROY T. CARLSON DIRECTOR March 21, 1996
-----------------------------------------------
LeRoy T. Carlson
/S/ LEROY T. CARLSON, JR. DIRECTOR March 21, 1996
-----------------------------------------------
LeRoy T. Carlson, Jr.
/S/ MURRAY L. SWANSON DIRECTOR March 21, 1996
-----------------------------------------------
Murray L. Swanson
/S/ RUDOLPH E. HORNACEK DIRECTOR March 21, 1996
-----------------------------------------------
Rudolph E. Hornacek
/S/ JAMES BARR III DIRECTOR March 21, 1996
-----------------------------------------------
James Barr III
/S/ LESTER O. JOHNSON DIRECTOR March 21, 1996
-----------------------------------------------
Lester O. Johnson
/S/ DONALD C. NEBERGALL DIRECTOR March 21, 1996
-----------------------------------------------
Donald C. Nebergall
/S/ HERBERT S. WANDER DIRECTOR March 21, 1996
-----------------------------------------------
Herbert S. Wander
/S/ WALTER C.D. CARLSON DIRECTOR March 21, 1996
-----------------------------------------------
Walter C.D. Carlson
/S/ DONALD R. BROWN DIRECTOR March 21, 1996
-----------------------------------------------
Donald R. Brown
/S/ ROBERT J. COLLINS DIRECTOR March 21, 1996
-----------------------------------------------
Robert J. Collins
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report
on Form 8-A/A-2 dated December 20, 1994.
3.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2
dated December 20, 1994.
4.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report
on Form 8-A/A-2 dated December 20, 1994.
4.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2
dated December 20, 1994.
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.
4.5 Revolving Credit Agreement, dated as of May 19, 1995, among TDS and the First National Bank of Boston, as agent,
is hereby incorporated by reference to the registrant's Form 8-K dated May 19, 1995.
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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
10.4 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.
10.5 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.
10.6(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.
10.6(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by
reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
10.6(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by
reference to Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
10.7 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.
10.8(a) Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1
to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.8(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.8(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to
Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.8(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.4 to the Company Registration statement on Form S-8 (Registration No. 33-57257).
10.8(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to
Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.9 Supplemental Executive Retirement Plan of the Company is hereby incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.10 Deferred Compensation Agreement for Rudolph E. Hornacek dated November 30, 1995.
10.11 Securities Loan Agreement, dated June 13, 1995, between TDS and Merrill Lynch & Co. is hereby incorporated by
reference to Exhibit 99.1 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation.
10.12 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby
incorporated by reference to Exhibit 99.2 to the Form 8-K dated June 16, 1995 of United States Cellular
Corporation.
10.13 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation
is hereby incorporated by reference to Exhibit 99.3 to the Form 8-K dated June 16, 1995 of United States Cellular
Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
10.14 LYONs Offering Agreement between TDS and United States Cellular Corporation is hereby incorporated by reference to
Exhibit 99.4 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation.
11 Statement regarding computation of per share earnings.
12 Statements regarding computation of ratios.
13 Incorporated portions of 1995 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.
27 Financial Data Schedules
</TABLE>
<PAGE>
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, between TDS and RUDOLPH E. HORNACEK, entered into on
November 30, 1995 (to supersede the Agreement dated August 28, 1995), by and
between Rudolph E. Hornacek (hereinafter referred to as "Executive") and
Telephone and Data Systems, Inc. (hereinafter referred to as "Company"), an Iowa
Corporation, located at 30 North LaSalle Street, Suite 4000, Chicago, Illinois,
60602.
WITNESSETH:
WHEREAS, the Executive is now and will in the future be rendering valuable
services to the Company, and the Company desires to assure the continued
loyalty, service and counsel of the Executive;
WHEREAS, the Executive desires to defer a portion of his monthly salary until
retirement, resignation, disability or death;
NOW, THEREFORE, in consideration of the covenants and agreements herein set
forth, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto covenant and agree as follows:
1. DEFERRED COMPENSATION ACCOUNT. The Company agrees to establish and
maintain a book reserve (the "Deferred Compensation Account") for the
purpose of measuring the amount of deferred compensation payable under this
Agreement. Credits shall be made to the Deferred Compensation Account as
follows:
a) On September 30, 1995, and at the end of each month during the
Executive's continued employment with the Company, there shall be
deducted from the Executive's payroll check and credited to the
Deferred Compensation Account the sum of $3,000.00.
b) Commencing on October 31, 1995, and on the last day of each month
thereafter during the Executive's continued employment with the
Company, there shall be credited to the Deferred Compensation Account
(before any amount is credited for the month then ending pursuant to
paragraph 1(a)), interest, compounded monthly on the balance in the
Deferred Compensation Account multiplied by the average 30-year
Treasury Bond rate of interest (as published in the Wall Street
Journal for the last day of the preceding month) plus 1.25% times 1/12
(monthly interest).
Monthly reports which specify the amount credited to the Executive's
Deferred Compensation Account during the previous month (amount
deferred plus interest) and the then current balance, shall be
provided to the Executive.
<PAGE>
2. PAYMENT OF DEFERRED COMPENSATION.
a) In the event the Executive terminates his employment for whatever
reason ("Termination Event"), the Company will compute the balance in
the Deferred Compensation Account as of the last day of the preceding
month (the "Ending Balance"). In the event that the Executive becomes
disabled, his employment shall for these purposes be deemed to
terminate on the first day of the month which he begins to receive
long term disability payments provided by the Company's insurance
carrier (thus, the Ending Balance shall be computed as of the
preceding month). Payment of deferred compensation under these events
will be in accordance with the Executive's payment method election in
paragraph 2(e).
b) The Executive will elect the payment method for receiving his Ending
Balance either in a lump sum or in an indicated number of
installments. This determination will be made at the time of
execution of the agreement in section 2(e). Any amendment changing
the payment method to defer income over a longer period of time must
be made at least two years prior to a Termination Event to be
considered effective.
c) In the event the Executive chooses the installment option, he will
inform the Company of the number of installment he wishes to receive.
The installments will be paid quarterly (not to exceed 20
quarters)commencing with the fifteenth day of the quarter following
the quarter in which the Executive's service with the Company
terminates. Installments will then be paid on the fifteenth day of
each succeeding calendar quarter until the Ending Balance and accrued
interest has been paid.
d) If the Executive dies prior to the total distribution of the Ending
Balance, the Company shall pay an amount equal to the then current
balance including accrued interest in the Deferred Compensation
Account. Such payment shall be made in a lump sum within 30 days
following the Executive's death to the Executive's Designated
Beneficiary (as hereinafter defined). However, if the Executive is
married at the time of death, the Executive may designate (at the time
of entering this agreement) that the payments specified in 2(c)
continue to the spouse. If such spouse dies before all payments are
made, the procedures in 3(a) and 3(b) shall apply.
e) Payment of Deferred Compensation Election (Executive must choose one
option):
i) Lump sum distribution; or
-----
ii) X Installment Method. The amount of each installment shall
----- be equal to one-twentieth (cannot be less than one-
twentieth) of the Ending Balance plus accrued interest compounded
monthly for the preceding calendar quarter.
If the Executive does not fully complete the blanks shown in paragraph
2(e), it will be assumed that he has chosen the lump sum option.
<PAGE>
3. DESIGNATION OF BENEFICIARIES.
a) The Executive may designate a beneficiary to receive any amount
payable pursuant to paragraph 2(c) (the "Designated Beneficiary") by
executing or filing with the Company during his lifetime, a
Beneficiary Designation in the form attached hereto. The Executive
may change or revoke any such designation by executing and filing with
the Company during his lifetime a new Beneficiary Designation.
b) If any Designated Beneficiary pre-decease's the Executive, or if any
corporation, partnership, trust or other entity which is a Designated
Beneficiary is terminated or dissolved or becomes insolvent or is
adjudicated bankrupt prior to the date of the Executive's death, or if
the Executive fails to designate a beneficiary, then the following
persons in the order set forth below shall receive the amount
specified in paragraph 2(c) above:
i) his wife, if she is living; otherwise
ii) his then living descendants, per stirpes; and otherwise
iii) his estate.
4. MISCELLANEOUS.
a) The right of the Executive or any other person to any payment of
benefits under this Agreement shall not be assigned, transferred,
pledged or encumbered.
b) If the Company shall find that any person to whom any amount is
payable under this Agreement is unable to care for his/her affairs
because of illness or accident, or is under any legal disability, any
payment due (unless a prior claim therefor shall have been made by a
duly appointed guardian, committee or other legal representative) may
be made to the spouse, a child, a parent, or a brother or sister of
such person, or to any party deemed by the Company to have incurred
expense for such person otherwise entitled to payment, in such manner
and proportions as the Company may determine. Any such lump sum
payment, as discussed in 2(d), shall be a complete discharge of the
liability of the Company under this Agreement for such payment.
c) This Agreement shall be construed in accordance with and governed by
the laws of the State of Illinois.
d) The Executive is considered to be a general unsecured creditor of the
Company with regard to the deferred compensation amounts to which this
Agreement pertains.
e) The deferred amounts under this Agreement are unfunded for tax and
ERISA purposes.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
TELEPHONE AND DATA SYSTEMS, INC. ("Company")
By: /s/ LeRoy T. Carlson, Jr.
----------------------------------------
LEROY T. CARLSON, JR.
RUDOLPH E. HORNACEK ("Executive")
By: /s/ Rudolph E. Hornacek
----------------------------------------
EXECUTIVE
<PAGE>
EXHIBIT 11
TELEPHONE AND DATA SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
PRIMARY EARNINGS
Net Income before.............................................................. $ 103,978
Dividends on Preferred Shares.................................................. (1,934)
Minority income adjustment assuming issuance of a subsidiary's issuable
securities.................................................................... (271)
---------
Net Income Available to Common................................................. $ 101,773
---------
---------
PRIMARY SHARES
Weighted average number of Common and Series A Common Shares Outstanding....... 57,456
Additional shares assuming issuance of:
Options and Stock Appreciation Rights........................................ 158
Convertible Preferred Shares................................................. 709
Common Shares Issuable....................................................... 33
---------
Primary Shares................................................................. 58,356
---------
---------
PRIMARY EARNINGS PER COMMON SHARE
Net Income..................................................................... $ 1.74
---------
---------
FULLY DILUTED EARNINGS*
Net Income..................................................................... $ 103,978
Dividends on Preferred Shares.................................................. (1,511)
Minority income adjustment assuming issuance of a subsidiary's issuable
securities.................................................................... --
---------
Net Income Available to Common................................................. $ 102,467
---------
---------
FULLY DILUTED SHARES
Weighted average number of Common and Series A Common Shares Outstanding....... 57,456
Additional shares assuming issuance of:
Options and Stock Appreciation Rights........................................ 157
Convertible Preferred Shares................................................. 1,109
Common Shares issuable....................................................... 33
---------
Fully Diluted Shares........................................................... 58,755
---------
---------
FULLY DILUTED EARNINGS PER COMMON SHARE
Net Income..................................................................... $ 1.74
---------
---------
<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 YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT RATIO AMOUNTS)
<TABLE>
<S> <C>
EARNINGS:
Income from Continuing Operations before Income Taxes.......................... $ 185,007
Add (Deduct):
Minority Share of Losses................................................... (2,955)
Earnings on Equity Method.................................................. (43,188)
Distributions from Minority Subsidiaries................................... 9,062
Amortization of Non-Telephone Capitalized Interest......................... 11
Minority share of income in majority-owned subsidiaries that have fixed
charges................................................................... 20,791
---------
168,728
Add fixed charges:
Consolidated interest expense.............................................. 50,492
Interest Portion (1/3) of Consolidated Rent Expense........................ 6,431
Amortization of debt expense and discount on indebtedness.................. 357
---------
$ 226,008
---------
---------
FIXED CHARGES:
Consolidated interest expense.................................................. $ 50,492
Capitalized interest........................................................... 13,249
Interest Portion (1/3) of Consolidated Rent Expense............................ 6,431
Amortization of debt expense and discount on indebtedness...................... 357
---------
$ 70,529
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES............................................... 3.20
---------
---------
Tax-Effected Redeemable Preferred Dividends.................................... $ 1,920
Fixed Charges.................................................................. 70,529
---------
Fixed Charges and Redeemable Preferred Dividends............................. $ 72,449
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS............ 3.12
---------
---------
Tax-Effected Preferred Dividends............................................... $ 4,464
Fixed Charges.................................................................. 70,529
---------
Fixed Charges and Preferred Dividends........................................ $ 74,993
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS....................... 3.01
---------
---------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Telephone and Data Systems, Inc. ("TDS" or the "Company") provides high-quality
telecommunications services to over 1.9 million consolidated cellular telephone,
local 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: United States Cellular
Corporation [AMEX: "USM"], TDS Telecommunications Corporation ("TDS Telecom"),
and American Paging, Inc. [AMEX: "APP"], as well as its developing personal
communications services business, American Portable Telecom, Inc. ("American
Portable") and 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
telecommunications businesses that management believes utilize TDS's expertise
in customer-based telecommunications.
CONSOLIDATED
TDS reported net income available to common of $102.0 million, or $1.74 per
share, in 1995, compared to $58.0 million, or $1.07 per share, in 1994 and $31.5
million, or $.67 per share, in 1993. Consolidated operating results for 1995 and
1994 primarily reflect:
/ / rapid growth in cellular customer units resulting in substantial
increases in revenue, operating income and operating cash flows;
/ / steady growth in telephone access lines and revenues;
/ / slower growth in pagers served and higher operating costs coupled with
a restructuring charge in the paging business unit resulting in a
sharp decline in paging operating income for 1995;
/ / significant gains and cash proceeds from sales and trades of non-
strategic cellular interests and other investments in 1995; and
/ / increased interest expense to finance continuing development of core
cellular and telephone operations and expansion into personal
communications services.
Net income available to common for 1995 was boosted by significant gains from
the sales of non-strategic cellular interests and other investments. Excluding
these gains, along with the related impact on income taxes and minority
interest, net income available to common would have been $61.4 million, or $1.05
per share, in 1995, compared to $52.2 million, or $.96 per share, in 1994 and
$29.2 million, or $.62 per share, in 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
-----------------------------------------------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C>
NET INCOME AVAILABLE TO COMMON
As Reported $ 102.0 $ 58.0 $ 31.5
Less Effects of Gains 40.6 5.8 2.3
--------------------------------------------
Excluding Gains $ 61.4 $ 52.2 $ 29.2
--------------------------------------------
--------------------------------------------
EARNINGS PER SHARE
As Reported $ 1.74 $ 1.06 $ .67
Less Effects of Gains .69 .10 .05
--------------------------------------------
Excluding Gains $ 1.05 $ .96 $ .62
--------------------------------------------
--------------------------------------------
</TABLE>
OPERATING REVENUES increased 31% ($223.6 million) during 1995 and 31% ($173.0
million) during 1994 primarily as a result of increases in customer units
served. Consolidated cellular telephone, telephone and radio paging customer
units increased 31% in 1995 and 36% in 1994 primarily through internal growth.
The rate of customer unit growth declined in 1995 due primarily to the slower
rate of growth of paging customer units.
Cellular telephone revenues increased $160.0 million in 1995 and $118.1 million
in 1994 on 69% and 61% increases in customer units and strong increases
in inbound roaming revenues. Telephone revenues increased $48.5 million in 1995
and $38.2 million in 1994 as a result of acquisitions, increased network usage,
recovery of increased costs of providing long-distance services and internal
access line growth of 5% in each year. Radio paging revenues increased $15.1
million in 1995 and $16.7 million in 1994 on 20% and 42% increases in paging
units in service.
<PAGE>
OPERATING EXPENSES rose 32% ($200.4 million) in 1995 and 27% ($133.9 million) in
1994 due primarily to added expenses to serve the growing customer base.
Cellular telephone operating expenses increased $134.6 million during 1995 and
$92.1 million during 1994 due to the effects of additional marketing and selling
expenses incurred to add new customers as well as the costs of providing
services to the increased customer base. Telephone operating expenses increased
$41.9 million during 1995 and $25.7 million during 1994 due to the effects of
acquisitions and growth in internal operations. Paging operating expenses
increased $23.9 million in 1995 and $16.1 million in 1994 due to additional
costs to serve current customers and to add new customers as well as additional
1995 expenses to restructure certain business processes.
OPERATING INCOME increased 21% ($23.2 million) in 1995 and 56% ($39.1 million)
in 1994 due to improved cellular and telephone operating results offset somewhat
in 1995 by the sharp decline in paging operating results.
Cellular telephone operating income increased $25.4 million in 1995 and $26.0
million in 1994. Telephone operating income increased $6.6 million in 1995 and
$12.5 million in 1994. Paging operating loss increased $8.8 million in 1995
after declining $600,000 in 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Income
Cellular telephone $ 42,755 $ 17,385 $ (8,656)
Telephone 98,240 91,606 79,110
Radio paging (8,997) (169) (721)
---------------------------------------------
$ 131,998 $ 108,822 $ 69,733
---------------------------------------------
---------------------------------------------
Operating Margins
Cellular telephone* 9.0% 5.5% (4.2%)
Telephone** 29.2% 30.8% 29.5%)
Radio paging* (9.7%) (.2%) (1.1%)
Consolidated 13.8% 14.9% 12.5%)
---------------------------------------------
---------------------------------------------
</TABLE>
*Computed on Service Revenues
**Local Telephone Operating Margin
Management anticipates continued growth in consolidated customer units and
revenues as the business units continue their expansion and development
programs. The rate of revenue growth is expected to be somewhat slower as
cellular and paging revenue per unit continues to decline. Expenses should
increase driven by customer growth, although at a slower rate than revenues,
yielding continued growth in operating income and operating cash flow.
INVESTMENT AND OTHER INCOME totalled $103.9 million in 1995, $33.7 million in
1994 and $28.1 million in 1993.
CELLULAR INVESTMENT INCOME, the Company's share of income of cellular markets in
which the Company has a minority interest and follows the equity method of
accounting, increased 56% ($14.6 million) in 1995 and 66% ($10.3 million) in
1994 as income from the cellular markets increased. Cellular investment income
is net of amortization of license costs relating to these minority interests.
GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totalled $86.6 million
in 1995, $7.5 million in 1994 and $5.0 million in 1993 as the Company has sold
or traded non-strategic cellular interests and sold other investments.
PCS DEVELOPMENT COSTS totalled $7.8 million in 1995 and $1.7 million in 1994
representing expenses incurred by TDS and American Portable to participate in
the Federal Communications Commission ("FCC") auction process, to build American
Portable's management and operating teams and to develop American Portable's
strategic and operational plans for the future deployment of per-
<PAGE>
sonal communications services ("PCS"). American Portable spent approximately
$289 million on the purchase of the PCS licenses. Amortization of the licenses
will begin upon commencement of operations in early 1997. The Company expects to
incur significant expenditures for the development of PCS activities during 1996
and 1997.
MINORITY SHARE OF INCOME includes (a) minority shareholders' share of USM's net
income (1995 and 1994) or loss (1993), (b) minority partners' share of income or
loss of majority-owned cellular markets, (c) minority shareholders' share of
income of majority-owned telephone companies, and (d) minority shareholders'
share of APP's loss in 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share $ (19,046) $ (2,740) $ 4,270
Minority
Partners Share (7,902) (5,152) (3,496)
---------------------------------------------
(26,948) (7,892) 774
Telephone
Subsidiaries (1,691) (1,420) (1,249)
American Paging 2,781 233 --
---------------------------------------------
$ (25,858) $ (9,079) $ (475)
---------------------------------------------
---------------------------------------------
</TABLE>
INTEREST EXPENSE increased 23% ($9.6 million) in 1995 and 10% ($3.8 million) in
1994. USM sold $745 million principal amount at maturity of 6% zero coupon
convertible debt in June 1995, realizing approximately $221.5 million.
Amortization of the related bond discount, a non-cash item, increased interest
expense $7.4 million in 1995. USM has also financed certain equipment purchases
and construction costs under a vendor financing agreement. The average amount
outstanding under the vendor arrangement increased $54.0 million in 1995,
increasing interest expense $5.3 million. TDS Telecom interest expense increased
$1.4 million in 1995 and $900,000 in 1994 due primarily to additional interest
expense of acquired telephone companies.
TDS has used short-term debt supplemented by proceeds from the sale of Medium-
Term Notes to fund the acquisition of PCS licenses, to fund paging operations
and for general corporate purposes. Corporate interest expense increased $8.6
million in 1995 and $2.9 million in 1994. Average short-term debt increased
$89.2 million in 1995 and $18.2 million in 1994. The average interest rate
jumped to 6.4% in 1995 from 5.2% in 1994. TDS capitalized a total of $13.2
million of interest related to the development of PCS licenses in 1995. See
"Financial Resources and Liquidity" for a further discussion of short and long-
term debt.
INCOME TAX EXPENSE increased 99% ($40.3 million) in 1995 and 54% ($14.2 million)
in 1994, reflecting primarily the 83% and 68% increases in pretax income. The
effective income tax rates were 44% in 1995, 40% in 1994, and 44% in 1993. The
lower 1994 rate reflects deferred income taxes provided on the book/tax basis
difference related to certain telephone acquisitions and certain income excluded
due to the dividend exclusion rules.
NET INCOME AVAILABLE TO COMMON was $102.0 million in 1995, $58.0 million in 1994
and $31.5 million in 1993. The increase in 1995 from 1994 reflects the increase
in gain on the sales of cellular interests and other investments of
$34.8 million (after income taxes and minority shareholders' share), and the
continued improvement in operating results of the cellular business offset
somewhat by increased paging losses and PCS development expenses. The increase
in 1994 from 1993 reflects the significant improvement in operating results for
the cellular and telephone segments.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in American Portable's major markets will reduce the rate
of growth in TDS's operating and net income from levels which would otherwise be
achieved during the next few years.
EARNINGS PER COMMON SHARE were $1.74 in 1995, $1.06 in 1994 and $.67 in 1993.
The increases in earnings per share reflect the 76% and 84% increases in net
income available to common, offset somewhat by the 8% and 15% increases in
weighted average common shares outstanding in 1995 and 1994, respectively.
TELECOMMUNICATIONS ACT OF 1996. On February 8, 1996, the Telecommunications Act
of 1996 was signed into law. The new law is deregulatory and pro-competition but
also contains special pro-rural provisions which continue such principles as
universal service and toll rate averaging. All TDS Telecom companies fit the
definition of a rural telephone company. The new law will provide TDS Telecom
with some protection from competitors, while also providing opportunities to
grow its business. During the next 15 months, the FCC will be initiating and
managing various rulemaking proceedings to establish the necessary rules to
implement the law. State Commissions will also be involved in the implementation
of the law and FCC rules and will monitor the actions and progress of carriers
in their respective states. TDS Telecom will be actively participating in this
process with the goal that the pro-rural provisions of the law are translated
into effective rules.
<PAGE>
CELLULAR TELEPHONE OPERATIONS
TDS provides cellular telephone service through United States Cellular
Corporation [AMEX: "USM"], an 80.8%-owned subsidiary. USM owns, operates and
invests in cellular markets.
Consolidated results of operations include 710,000 customer units in 137 markets
at the end of 1995 compared to 421,000 customer units in 130 markets at the end
of 1994 and 261,000 customer units in 116 markets at the end of 1993. USM
follows the equity method of accounting for its investments in minority-owned
and managed markets and the more significant minority-owned markets managed by
others. USM follows the cost method of accounting for its investments in
minority-owned markets managed by others which are being held for sale or
exchange. In the aggregate, USM had rights to interests in 201 cellular
telephone markets representing 24.5 million population equivalents at December
31, 1995.
Operating results for 1995 and 1994 primarily reflect the rapid customer
growth in USM's consolidated markets. Operating revenue increases were driven
by the 69% and 61% growth in consolidated customer units in 1995 and 1994,
respectively. Operating expenses increased due to increased marketing costs
related to the rapid customer growth, increased customer usage and the costs
associated with operating an increased number of cell sites. Operating
expenses increased at a slower rate than the increase in revenues due to
improving economies of scale and continued improvements in business
processes. Operating cash flow (operating income plus depreciation and
amortization) increased 60% to $132.2 million in 1995 from $82.8 million in
1994 and $36.4 million in 1993. Operating income more than doubled to $42.8
million in 1995 compared to $17.4 million in 1994 and an operating loss of
$8.7 million in 1993.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
1995 1994 1993
-----------------------------------------
(Dollars in thousands, except per customer amounts)
<S> <C> <C> <C>
Operating Revenues
Local service $ 289,518 $ 187,978 $ 117,610
Inbound roaming 148,020 104,009 70,109
Long-distance 35,228 22,796 13,965
Other 3,868 3,866 2,116
-----------------------------------------
Service Revenues 476,634 318,649 203,800
Equipment sales 15,761 13,755 10,510
-----------------------------------------
492,395 332,404 214,310
-----------------------------------------
Operating Expenses
System operations 70,442 46,869 34,301
Marketing and selling 102,361 69,072 43,478
Cost of
equipment sold 54,948 39,431 25,688
General and
administrative 132,431 94,193 74,472
Depreciation 57,302 39,520 25,665
Amortization 32,156 25,934 19,362
-----------------------------------------
449,640 315,019 222,966
-----------------------------------------
Operating
Income (Loss) $ 42,755 $ 17,385 $ (8,656)
-----------------------------------------
-----------------------------------------
Cellular telephone
revenues as a percent
of total revenues 52% 45% 38%
Additions to property,
plant and equipment $ 218,506 $ 158,453 $ 94,088
Identifiable assets $ 1,890,621 $ 1,584,142 $ 1,275,569
-----------------------------------------
-----------------------------------------
Consolidated Markets:
Customers 710,000 421,000 261,000
Market penetration 3.18% 1.98% 1.35%
Cell sites in service 1,116 790 522
Average monthly
service revenue
per customer $ 72.48 $ 79.74 $ 84.83
Churn rate per month 2.1% 2.3% 2.3%
Marketing cost per
gross customer
addition $ 361 $ 408 $ 414
-----------------------------------------
-----------------------------------------
</TABLE>
OPERATING REVENUES increased 48% ($160.0 million) in 1995 and 55% ($118.1
million) in 1994. The revenue increases in 1995 and 1994 were primarily
attributable to increases in the number of local retail customers, growth in
inbound roaming revenues and the effect of acquisitions. Acquisitions increased
operating revenues 13% ($44.2 million) in 1995 and 12% ($25.5 million) in 1994.
Average monthly revenue per customer was $72 in 1995, $80 in 1994 and $85 in
1993. The decline in average monthly revenue per customer reflects the industry-
wide
<PAGE>
trend of newer customers tending to use fewer minutes per month, per minute
price decreases, incentives for using lower-priced off-peak minutes and the
declining contribution of inbound roaming revenue per customer.
LOCAL SERVICE REVENUE, from local customers' usage of USM's systems, increased
54% ($101.5 million) in 1995 and 60% ($70.4 million) in 1994. The revenue
increases were primarily the result of the 69% and 61% customer growth,
respectively, in consolidated markets.
Local minutes of use averaged 95 per month in 1995 and 1994 and 103 in 1993.
Average monthly local retail revenue per customer was $44 in 1995, $47 in 1994
and $49 in 1993. The decline in average local revenue per customer in 1995 was
primarily a result of USM's use of incentive programs to increase lower-priced
weekend and off-peak usage. The 1994 decline was primarily related to the
decrease in average minutes of use per customer. The industry trend of declining
average monthly minutes of use and average monthly retail revenue per customer
is believed to be related to the tendency of early customers in a market to be
the heaviest users during peak business hours. Newer customers are a result of
continued penetration of the consumer market, which tends to include fewer peak
business hour usage customers. USM believes local retail revenue per customer
will continue to decrease due to the usage patterns of incrementally added
customers.
INBOUND ROAMING REVENUE (charges to customers of other systems who use USM's
cellular systems when roaming) increased 42% ($44.0 million) in 1995 and 48%
($33.9 million) in 1994. 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 cell sites within those systems offset somewhat by a
reduction in the average price per minute. Average monthly inbound roaming
revenue per customer was $23, $26 and $29 in 1995, 1994 and 1993, respectively.
LONG-DISTANCE AND OTHER REVENUE increased 47% ($12.4 million) in 1995 and 66%
($10.6 million) in 1994 as the volume of long-distance calls billed by USM
increased. Average monthly long-distance and other revenue per customer was $5,
$7 and $7 in 1995, 1994 and 1993, respectively.
EQUIPMENT SALES REVENUE reflects the sale of cellular telephone units. The
average revenue per telephone unit sold was $53 in 1995, $90 in 1994 and $127 in
1993. The decline in average revenue per unit reflects USM's decision to reduce
sales prices on cellular telephones to increase the number of customers, to
maintain its market position and to meet competitive prices, as well as to pass
through reduced manufacturers' prices.
OPERATING EXPENSES increased 43% ($134.6 million) in 1995 and 41% ($92.1
million) in 1994. The increases were primarily due to increased marketing costs
related to increased customer activations, a larger customer base, acquisitions
and increased depreciation and amortization expense related to increases in
fixed assets and license costs. Acquisitions increased operating expenses 13%
($40.7 million) in 1995 and 14% ($30.9 million) in 1994.
SYSTEM OPERATIONS EXPENSES increased 50% ($23.6 million) in 1995 and 37% ($12.6
million) in 1994 as a result of increases in customer usage expenses and costs
associated with operating the increased number of cell sites.
Customer usage expenses represent charges from other telecommunications service
providers for local intercon-
<PAGE>
nection to the landline network, toll charges and roaming expenses from USM's
customers' use of systems other than their local systems, offset somewhat by
pass-through roaming revenue. Customer usage expenses grew 62% ($13.4 million)
in 1995 and 19% ($3.5 million) in 1994 as minutes used on USM's systems
increased, primarily related to the 69% increase in customers and increased
inbound roaming usage.
Maintenance, utility and cell site expenses grew 40% ($10.2 million) in 1995 and
56% ($9.1 million) in 1994 reflecting the 41% and 51% growth in the number of
cell sites, respectively. The number of cell sites operated increased to 1,116
in 1995 from 790 in 1994 and 522 in 1993.
MARKETING AND SELLING EXPENSES increased 48% ($33.3 million) in 1995 and 59%
($25.6 million) in 1994. Marketing and selling expenses consist primarily of
personnel costs, commissions, retail office expenses, advertising and
promotional expenses. These expenses grew in 1995 and 1994 due to the increased
number of gross customer activations. COST OF EQUIPMENT SOLD reflects the cost
of increased unit sales discussed above, offset somewhat by falling
manufacturers' prices per unit. The average cost of a telephone unit sold was
$186 in 1995, $258 in 1994 and $309 in 1993. Cost per gross customer addition
(marketing and selling expenses and cost of equipment sold less equipment
revenues divided by gross customer additions) decreased to $361 in 1995 from
$408 in 1994 and $414 in 1993.
GENERAL AND ADMINISTRATIVE EXPENSES increased 41% ($38.2 million) in 1995 and
26% ($19.7 million) in 1994. These expenses include the cost of operating USM's
local business offices and its corporate expenses. The increases include the
effects of an increase in expenses required to serve the growing customer base
in existing markets and an expansion of both local administrative office and
corporate staff, necessitated by growth in USM's business and the acquisition of
additional operations. USM is using an ongoing clustering strategy to combine
local operations wherever feasible in order to gain operational efficiencies and
reduce its administrative expenses.
DEPRECIATION EXPENSE increased 45% ($17.8 million) in 1995 and 54% ($13.9
million) in 1994, reflecting increases in average fixed asset balances of 48%
and 54%, respectively. AMORTIZATION EXPENSE, primarily amortization of
license costs, increased 24% ($6.2 million) in 1995 and 34% ($6.6 million) in
1994 due to increases in license costs.
OPERATING INCOME was $42.8 million in 1995 and $17.4 million in 1994, compared
to an operating loss of $8.7 million in 1993. Operating margin on service
revenues improved to 9.0% in 1995 from 5.5% in 1994 and (4.2%) in 1993. The
improvement in 1995 and 1994 was primarily due to the growth in the customer
base and the increase in roaming revenue.
<PAGE>
The Company expects service revenues to continue to grow in 1996 as customers
are added to USM's markets and as it realizes a full year of revenue from
customers and additional retail and roaming revenue from cell sites added in
1995. However, management anticipates that average monthly revenue per customer
will continue to decrease as local retail revenue per minute of use declines and
as the growth rate of the Company's customer base exceeds the growth rate of
inbound roaming revenue, diluting the roaming contribution per customer. The
Company also expects expenses to continue to increase in 1996 as it incurs a
full year of expenses for markets and cell sites added in 1995 and it incurs
expenses associated with customer and system growth.
Additionally, management believes there exists a seasonality at USM in both
service revenues, which tend to increase more slowly in the first and fourth
quarters, and operating expenses, which tend to be higher in the fourth quarter
due to increased marketing activities and customer growth. This seasonality may
cause operating income to vary from quarter to quarter.
TELEPHONE OPERATIONS
TDS manages its local landline telephone service through its wholly
owned subsidiary TDS Telecommunications Corporation ("TDS Telecom").
TDS Telecom operates 100 telephone companies which serve 425,900
access lines in 28 states. It also operates a small, long-distance company.
TDS Telecom expands its operations through internal access line growth and
acquisitions. During the last three years, a total of 50,900 access lines
have been added through internal growth and 53,300 access lines through
acquisitions.
Operating results for 1995 and 1994 primarily reflect increases in access lines
of 9% in 1995 and 10% in 1994 due to internal growth and acquisitions. Operating
cash flow increased 9% to $175.6 million in 1995 compared to an increase of 16%
to $160.5 million in 1994. The rate of growth of operating cash flow slowed in
1995 due to the effects of earnings pressures from regulatory agencies
and long-distance providers and increased operating expenses. TDS Telecom
continues to provide steadily growing operating cash flow and earnings to
support its construction activities.
<TABLE>
<CAPTION>
Year Ended or at December 31,
1995 1994 1993
---------------------------------------------------
(Dollars in thousands, except per customer amounts)
<S> <C> <C> <C>
Local Telephone Operations
Operating Revenues
Local service $ 94,964 $ 81,986 $ 72,191
Network access and
long-distance 195,575 174,178 159,111
Miscellaneous 41,625 40,399 36,820
---------------------------------------------------
332,164 296,563 268,122
---------------------------------------------------
Operating Expenses
Network operations 54,086 45,033 42,524
Depreciation 69,890 64,060 56,024
Amortization 4,898 3,894 3,538
Customer operations 47,322 42,618 39,416
Corporate and other 59,084 49,706 47,510
---------------------------------------------------
235,280 205,311 189,012
---------------------------------------------------
Local Telephone
Operating Income 96,884 91,252 79,110
---------------------------------------------------
Long-distance Operations
Revenues 22,677 9,778 --
Expenses 21,321 9,424 --
---------------------------------------------------
Long-distance
Operating Income 1,356 354 --
---------------------------------------------------
Operating Income $ 98,240 $ 91,606 $ 79,110
---------------------------------------------------
---------------------------------------------------
Telephone revenues
as a percent of
total revenues 37% 42% 48%
Additions to property,
plant and equipment $ 101,139 $ 117,867 $ 82,233
Identifiable assets 1,058,241 984,563 829,489
Telephone plant
in service
per access line $ 2,356 $ 2,283 $ 2,205
---------------------------------------------------
---------------------------------------------------
Companies 100 96 94
Access lines 425,900 392,500 356,200
Growth in access lines
from prior year-end:
Acquisitions 13,500 19,700 20,100
Internal growth 19,900 16,600 14,400
Average monthly
revenue per
access line $ 66.80 $ 66.60 $ 65.30
---------------------------------------------------
---------------------------------------------------
</TABLE>
<PAGE>
OPERATING REVENUES from local telephone operations increased 12% ($35.6 million)
in 1995 and 11% ($28.4 million) in 1994. The increases in revenues were due to
the effects of acquisitions, increased network usage, internal access line
growth and the recovery of increased costs of providing long-distance services.
Acquisitions increased local telephone revenues 6% ($16.8 million) in 1995 and
4% ($9.7 million) in 1994.
Excluding the effects of acquisitions, local telephone revenues increased 6%
($18.8 million) in 1995 and 7% ($18.8 million) in 1994.
LOCAL SERVICE REVENUES increased 10% ($8.4 million) in 1995 and 11% ($8.1
million) in 1994, excluding the effects of acquisitions. Internal growth in
access lines and sales of custom-calling and other features increased local ser-
vice revenues approximately $5.5 million in 1995 and $4.8
million in 1994. Certain extended community calling ("ECC") revenues previously
reported as network access revenues and changes in settlement plans increased
local service revenues approximately $3.4 million in 1995 and $1.6 million in
1994.
NETWORK ACCESS AND LONG-DISTANCE REVENUES increased 6% ($10.5 million) in 1995
and 5% ($8.5 million) in 1994, excluding the effects of acquisitions. Recovery
of increased costs of providing access to long-distance carriers increased
revenues $4.5 million in 1995 and $4.1 million in 1994. Settlements received
from toll pools relating to prior years' activity increased these revenues by
$1.7 million in 1995, while a $3.4 million decrease in these revenues resulted
from the reclassification of ECC revenues to local service revenues. Changes in
FCC-mandated cost separations rules increased revenues $1.3 million in 1994. The
remainder of the revenue increase in 1995 and 1994 was primarily due to
increased minutes of use, increases in access lines served and changes
in rates of return.
MISCELLANEOUS REVENUES, excluding the effects of acquisitions, remained
relatively unchanged in 1995 and increased 6% ($2.2 million) in 1994.
OPERATING EXPENSES from local telephone operations increased 15% ($30.0 million)
in 1995 and 9% ($16.3 million) in 1994. The effects of acquisitions increased
expenses 7% ($13.8 million) in 1995 and 4% ($7.2 million) in 1994.
NETWORK OPERATIONS EXPENSE INCREASED 14% ($6.3 million) in 1995 and 1%
($500,000) in 1994, net of acquisitions. Network operations expense consists of
costs to maintain the high-quality telecommunications networks which
provide advanced telecommunications services. The increase in 1995 includes a
$2.0 million charge for additional routine maintenance activity and write-offs
of equipment. The remaining increase in 1995 and the increase in 1994 were
primarily due to salary and work force changes.
CUSTOMER OPERATIONS EXPENSE increased 5% ($2.2 million) in 1995 and 5% ($2.0
million) in 1994, net of acquisitions. Customer operations expense includes
costs for marketing, sales, product management, as well as expenses for
establishing and servicing customer accounts. The increases were due primarily
to salary and workforce changes.
CORPORATE AND OTHER EXPENSES increased 10% ($5.2 million) in 1995 and 1%
($500,000) in 1994, net of acquisitions. Corporate and other expenses consist of
costs incurred for executive administration and management, accounting, human
resource management, information management, legal services and property and
other non-income taxes. The increase in 1995 relates to increased property and
non-income taxes and marketing, advertising and start-up costs for non-regulated
activities as well as salary and work force changes.
DEPRECIATION AND AMORTIZATION EXPENSE increased 4% ($2.5 million) in 1995 and
10% ($6.0 million) in 1994, excluding the effects of acquisitions. The increase
in depreciation expense is primarily due to growth in plant and equipment. Lump-
sum depreciation adjustments and increases in certain depreciation rates
increased these expenses 4% ($2.4 million) in 1994. The composite depreciation
rate was 7.1% in 1995, 7.5% in 1994 and 7.3% in 1993.
LONG-DISTANCE OPERATIONS represents revenues and expenses from a small, long-
distance operation acquired in August 1994.
<PAGE>
OPERATING INCOME from telephone operations increased 7% ($6.6 million) in 1995
and 16% ($12.5 million) in 1994. The effects of acquisitions increased operating
income 4% ($3.8 million) in 1995 and 4% ($2.8 million) in 1994. The local
telephone operating margin, excluding long-distance operations, was 29.2% in
1995, 30.8% in 1994 and 29.5% in 1993. The reduction in operating margin in 1995
was caused by earnings pressures from regulatory agencies and long-distance
providers and increased operating expenses.
Management expects TDS Telecom's revenues, operating income and operating cash
flow to continue to increase modestly in 1996 from steady growth in operations.
Continued pressures on revenue sources, however, may cause operating margins to
be somewhat reduced in future periods.
TDS Telecom is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." As of December 31, 1995, all seven Bell Companies and a few major
independent local exchange carriers have discontinued the application of SFAS 71
for external reporting purposes. Criteria that would give rise to the
discontinuance of SFAS No. 71 at TDS Telecom include: 1) increasing competition
that would restrict TDS Telecom's ability to establish prices to recover
specific costs, and 2) a significant change in the manner in which rates are set
by regulators from cost-based regulation to another form of regulation. These
criteria are reviewed on a state-by-state basis to determine whether continued
application of SFAS No. 71 is appropriate. The Company has no current plans to
change its method of accounting.
In analyzing the effect of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore any adjustments to accumulated
depreciation would be immaterial. The net effect of a write-off of regulatory
assets and liabilities would also be immaterial.
RADIO PAGING OPERATIONS
TDS manages its radio paging business through American Paging, Inc. [AMEX:
"APP"], an 82.3%-owned sub-sidiary. APP provides wireless messaging
communications through 38 sales and service operating centers in 14 states and
the District of Columbia. At December 31, 1995, APP served 784,500 customers
through its digital radio transmission systems covering an area with a total
population of approximately 75 million. During the last three years, APP has
added 385,600 customers through internal growth and 76,700 customers through
acquisitions.
During 1995, American Paging announced a plan to restructure key operating areas
which began in the third quarter and will extend into 1996. Upon completion of
the plan, APP is targeting increased sales through the direct channel, an
improved customer mix, a lower level of administrative costs and improved
customer service. As a part of the plan, APP is consolidating its 17 service
operating centers into a single center. APP recorded restructuring charges of
$2.9 million in the last half of 1995.
American Paging experienced a slowing of growth in customers during the last
half of 1995 as a result of disruptions due to staff reductions, the
announcement of the consolidation of administrative offices and the realignment
of its sales force which was done to place greater emphasis on the direct
distribution channel. As a result, combined with the restructuring charges,
operating cash flow decreased 8% to $15.7 million in 1995 compared to an
increase of 34% to $17.0 million in 1994. APP expects slower unit and revenue
growth through the next several quarters as a result of refocusing the sales
force and retraining customer service representatives. The slower revenue growth
along with the additional costs of the restructuring activities
may result in operating losses for the next several quarters.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service Operations
Revenues $ 93,034 $ 77,520 $ 64,384
---------------------------------------------------
Costs and expenses
Cost of services 24,062 19,347 15,837
Selling and
advertising 15,988 13,249 11,131
General and
administrative 37,308 27,947 24,783
Depreciation 20,659 14,537 11,182
Amortization 4,033 2,641 2,210
---------------------------------------------------
102,050 77,721 65,143
---------------------------------------------------
Service
Operating (Loss) (9,016) (201) (759)
---------------------------------------------------
Equipment Sales
Revenues 14,116 14,545 10,979
Cost of equip-
ment sold 14,097 14,513 10,941
---------------------------------------------------
Equipment Sales
Income 19 32 38
---------------------------------------------------
Operating (Loss) $ (8,997) $ (169) $ (721)
---------------------------------------------------
---------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended or at December 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands, except per unit amounts)
<S> <C> <C> <C>
Radio paging revenues
as a percent of
total revenues 11% 13% 14%
Additions to property
and equipment $ 28,994 $ 27,403 $ 24,813
Identifiable assets $ 159,170 $ 146,107 $ 74,923
----------------------------------------
----------------------------------------
Pagers in service 784,500 652,800 460,900
Average monthly service
revenue per unit $ 10.57 $ 11.92 $ 13.65
Transmitters in service 1,018 943 685
Churn rate per month 2.5% 2.6% 2.9%
Marketing cost per
gross customer
unit addition $ 50 $ 41 $ 42
----------------------------------------
----------------------------------------
</TABLE>
SERVICE REVENUES increased 20% ($15.5 million) in 1995 and 20% ($13.1 million)
in 1994, primarily as a result of growth in the number of pagers in service.
Pagers in service increased 20% (131,700, including 28,400 from acquisitions) in
1995 and 42% (191,900, including 37,600 from an acquisition) in 1994.
Average monthly service revenue per unit declined 11% to $10.57 in 1995 and 13%
to $11.92 in 1994. The decline in average revenue per unit reflects the shift
during 1993 to lower revenue producing reseller channels as well as competitive
pressures. APP refocused its marketing strategy in mid-1995 to the higher
revenue producing direct distribution channel. Reseller units comprised 49% of
net unit sales in 1995, 53% in 1994 and 39% in 1993. Average revenue per
reseller unit is approximately 30% of the average revenue per direct unit.
SERVICE OPERATING EXPENSES increased 31% ($24.3 million) in 1995 and 19% ($12.6
million) in 1994 primarily due to additional costs to serve the expanded
customer base, add new customers, increase system capacity and geographic
coverage, and the added 1995 restructuring expenses.
COST OF SERVICES increased 24% ($4.7 million) in 1995 and 22% ($3.5 million) in
1994 due to additional costs to provide service to the increased customer base,
and the costs of maintaining, upgrading and expanding systems to improve system
reliability and coverage.
SELLING AND ADVERTISING EXPENSE increased 21% ($2.7 million) in 1995 and 19%
($2.1 million) in 1994 due to the increased number of sales personnel and
advertising expenses. The cost per gross customer addition, excluding customers
added through acquisitions, was $50 in 1995 compared to $41 in 1994 and $42 in
1993.
GENERAL AND ADMINISTRATIVE EXPENSE increased 33% ($9.4 million) in 1995 and 13%
($3.2 million) in 1994 due to increases in administrative personnel costs, bad
debt expenses and general office expenses to support the growing customer base.
Costs related to the restructuring of operations, including costs associated
with closing excess office space and employee severance and related costs,
increased expenses $2.1 million in 1995.
DEPRECIATION AND AMORTIZATION charges increased 44% ($7.5 million) in 1995 and
28% ($3.8 million) in 1994, reflecting increased investment in pagers and
related equipment, and the effects of acquisitions. Based on a study of useful
lives, APP shortened the estimated useful lives of pagers and
<PAGE>
transmitters beginning July 1, 1994. This change increased depreciation expense
by approximately $1.7 million in 1995 and $1.5 million in 1994. During 1995, an
$800,000 charge was incurred to write off certain assets expected
to be retired as a result of the restructuring.
OPERATING LOSS was $9.0 million in 1995, $200,000 in 1994 and $700,000 in 1993.
BROADBAND PERSONAL
COMMUNICATIONS SERVICES
TDS manages its broadband personal communications services business through
American Portable Telecom, Inc. ("American Portable"), a wholly owned
subsidiary. American Portable's licenses cover the Major Trading Areas of
Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus and account for approximately 27.3 million population equivalents.
American Portable filed a registration statement on February 20, 1996 for an
initial public offering of approximately 16% of its Common Shares.
Management anticipates that the construction of the cell sites will begin in the
second quarter of 1996, following the completion of detailed engineering and
site acquisition activities. Marketing and selling activities along with
commercial operations are anticipated to commence in early 1997.
PCS DEVELOPMENT COSTS include expenses incurred by TDS and American Portable to
participate in the FCC auction process, to build American Portable's management
and operating teams and to develop American Portable's strategic and operational
plans for the future deployment of personal communications services. American
Portable expects to incur significant expenditures for the development of PCS
activities during 1996.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Additions to property
and equipment $ 12,025 $ -- $ --
Identifiable assets $ 318,265 $ 20,473 $ --
----------------------------------------
----------------------------------------
</TABLE>
PARENT AND SERVICE COMPANY OPERATIONS
OTHER (EXPENSE) INCOME, NET includes the gross income of TDS's computer,
printing and other service companies and costs of corporate operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Additions to property
and equipment $ 9,964 $ 7,754 $ 7,386
Identifiable assets $ 42,786 $ 54,841 $ 79,202
----------------------------------------
----------------------------------------
</TABLE>
INFLATION
Management believes that inflation affects TDS's business to no greater
extent than the general economy.
ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standard Board issued SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in
March 1995, which became effective in January 1996. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
any entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management is currently analyzing the impact of this statement, but
does not anticipate that the effect on results of operations and financial
position will be material.
FINANCIAL RESOURCES AND LIQUIDITY
TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid
growth has caused expenditures for construction, expansion and acquisition
programs to exceed internally generated cash flow in recent years. Accordingly,
TDS has obtained substantial funds from external sources to finance construction
of cellular telephone systems and to fund acquisitions during the
past three years. Although the steady internal cash flow from TDS Telecom and
increasing internal cash flow from USM have reduced the need for external
financing, the development and construction activities of American Portable will
require substantial additional funds from external sources.
<PAGE>
CASH FLOWS FROM OPERATING ACTIVITIES TDS is generating substantial internal
funds from the rapid growth in customer units and revenues. Operating cash flow
(operating income plus depreciation and amortization) increased 24% to $323.5
million in 1995, and 39% to $260.3 million in 1994. The increases represent
primarily the 60% ($49.4 million) and 127% ($46.5 million) increases,
respectively, from the cellular telephone operations. Cash flows from other
operating activities (investment and other income, interest and income tax
expense, and changes in working capital and other assets and
liabilities) required $111.9 million in 1995, $35.6 million
in 1994 and $27.5 million in 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating cash flow
Cellular telephone $ 132,213 $ 82,839 $ 36,371
Telephone 175,594 160,484 138,672
Radio paging 15,695 17,009 12,671
----------------------------------------
323,502 260,332 187,714
Other operating
activities (111,893) (35,646) (27,518)
----------------------------------------
$ 211,609 $ 224,686 $ 160,196
----------------------------------------
----------------------------------------
</TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES TDS's long-term strategy is to provide a
strong yet flexible financial foundation for each of its principal subsidiaries.
TDS targets a consolidated ratio of equity to total capital in the range of 55%
to 65%. Consolidated equity capital declined to 55% of total capitalization at
December 31, 1995, compared to 62% at the beginning of 1993, primarily as a
result of significant increases in debt and minority interest.
TDS uses short-term debt to finance its cellular telephone and radio paging
operations, for acquisitions and for general corporate purposes. TDS takes
advantage of attractive opportunities to retire short-term debt with the
proceeds from long-term debt and equity sales and sales of non-strategic
assets.
In 1995, USM received approximately $221.5 million on the sale of 20-year 6%
zero coupon convertible debt. In 1995 and 1993, TDS sold $39.2 million and $92.5
million of Medium-Term Notes, respectively. In 1994, TDS sold Common Shares for
cash totalling $4.9 million and APP received $45.6 million in an initial public
offering of Common Shares. In 1993, TDS sold Common Shares for cash totalling
$65.6 million and USM received $36.8 million from the sale of Common Shares to
parties other than TDS pursuant to a rights offering. The sale of non-strategic
cellular assets and other investments provided $197.6 million in net proceeds in
1995, $6.0 million in 1994 and $6.8 million in 1993.
USM and TDS Telecom have also used long-term debt to finance their construction
and development activities. USM financed cellular system equipment and
construction costs totalling $52.5 million in 1995 and $18.0 million in 1994
under vendor financing arrangements. Loans under these programs bear interest at
2.25% to 2.3% over the 90-day Commercial Paper Rate (5.58% at December 31, 1995)
and have terms of seven to eight years. TDS Telecom telephone subsidiaries
borrowed $12.0 million in 1995, $16.8 million in 1994 and $28.2 million in 1993
under the Rural Utility Service and the Rural Telephone Bank long-term federal
government loan programs. Financing under these programs comprises 97% of total
outstanding telephone subsidiary long-term debt at an average annual interest
rate of 5.34%.
CASH FLOWS FROM INVESTING ACTIVITIES TDS makes substantial investments each year
to acquire, construct, operate and maintain modern high-quality communications
networks and facilities that exceed its customers expectations as a basis for
creating long-term value for shareowners. In recent years, rapid changes in
technology and new opportunities have required substantial investments in
revenue enhancing and cost reducing upgrades of the Company's networks.
Cash expenditures for property, plant and equipment additions totalled $366.2
million in 1995, $321.4 million in 1994 and $198.7 million in 1993. The
acquisition and development of broadband and narrowband PCS licenses required
$326.0 million in 1995 and $31.6 million in 1994. Cash used for acquisitions,
excluding cash acquired, totalled $53.8 million in 1995, $37.6 million in 1994
and $51.6 million in 1993.
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
The primary purpose of TDS's construction and expansion program is to provide
for normal growth, to upgrade service, to expand into new communication areas,
and to take advantage of service-enhancing and cost-reducing technological
developments. The following table summarizes the Company's investments in its
communications networks and related facilities during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cellular telephone
Cell sites and
equipment $ 153,434 $ 127,253 $ 66,037
Switching
equipment 19,678 4,533 7,419
Other 43,464 36,428 14,021
-------------------------------------------------
216,576 168,214 87,477
-------------------------------------------------
Telephone
Central office 38,697 46,618 29,584
Outside plant 55,569 52,629 38,877
Other 10,106 16,236 12,357
-------------------------------------------------
104,372 115,483 80,818
-------------------------------------------------
Radio paging
Pagers 15,582 15,641 12,201
Terminals and
transmitters 6,353 11,056 6,653
Other 5,134 2,954 3,782
-------------------------------------------------
27,069 29,651 22,636
-------------------------------------------------
Other 18,219 8,087 7,812
-------------------------------------------------
$ 366,236 $ 321,435 $ 198,743
-------------------------------------------------
-------------------------------------------------
</TABLE>
USM constructed 292 cell sites in 1995, 225 in 1994 and 138 in 1993. TDS Telecom
installed 39 digital switches in 1995, 32 in 1994 and 54 in 1993, and made
substantial improvements in outside plant facilities during each year. In
addition to substantial expenditures for pagers in the past three years, APP
added 75 net new transmitters in 1995, 258 in 1994 and 153 in 1993 in order to
improve signal quality and expand the coverage areas of its paging systems.
The Company's expected property, plant and equipment additions reflect the
Company's construction and expansion programs and are anticipated to aggregate
approximately $434 million for 1996 excluding PCS construction and development
expenditures discussed below.
/ / The cellular capital additions budget totals approximately $240
million for 1996, including about $100 million for new cell sites, $80
million for enhancements to existing systems and about $40 million for
various information systems initiatives.
/ / The telephone capital additions budget totals approximately $125
million in 1996, including about $50 million for new digital switches
and other switching facilities and $50 million for improvements to
outside plant facilities.
/ / The radio paging property and equipment additions are anticipated to
total about $54 million in 1996, including $14 million for systems and
transmitters, $18 million for pagers, $14 million for information
systems initiatives and restructuring activities, and $8 million for
narrowband PCS activities.
/ / Other fixed asset expenditures are estimated to total $15 million in
1996.
The Company will finance the additions primarily with internally generated cash,
supplemented by short-term bank financing, long-term financing obtained under
federal government programs at TDS Telecom, and proceeds from the sale of non-
strategic cellular interests.
PCS DEVELOPMENT American Portable plans to construct networks in its six primary
Major Trading Areas. Management anticipates the construction of the cell sites
will begin in the second quarter of 1996, following the completion of detailed
engineering and site acquisition activities. Marketing and selling activities
along with commercial operations are anticipated to commence in early 1997.
American Portable anticipates construction, development and introduction of PCS
networks and services will require substantial capital and operating
expenditures over the next several years. While construction (including
microwave relocation), and other start-up activities may be
<PAGE>
impacted by many factors, American Portable estimates that the aggregate
funds required through December 31, 1998 will total approximately $830
million ($420 million in 1996, $340 million in 1997 and $70 million in 1998).
This amount includes an estimated $585 million of capital expenditures for
construction of the PCS networks ($370 million in 1996, $205 million in 1997
and $10 million in 1998) and $245 million of estimated working capital
requirements.
TDS expects American Portable's 1996 capital expenditures and expenditures for
start-up and development activities to aggregate approximately $420 million.
These expenditures will be financed using a variety of resources, including but
not limited to, borrowings from TDS's short-term bank lines of credit, vendor
financing and equity investors in American Portable. American Portable filed a
registration statement on February 20, 1996 for an initial public offering
covering 11.0 million, or approximately 16%, of its Common Shares. At the
midpoint of the $15-$18 per share preliminary price range, completion of the
offering would yield net proceeds of approximately $170 million.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in American Portable's major markets will reduce the rate
of growth in TDS's operating and net income from levels which would otherwise be
achieved during the next few years.
ACQUISITIONS
TDS seeks to acquire cellular telephone, telephone and paging companies which
add value to the organization. The table below summarizes interests acquired at
the respective dates of acquisition during the last three years and the
aggregate consideration paid.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------------
<S> <C> <C> <C>
Cellular interests
acquired
Population equivalents
(millions) 1.6 1.3 3.8
Units (consolidated) 34,000 18,000 23,600
Telephone
interests acquired
Companies 5 3 4
Access lines 13,500 19,700 20,100
Paging units acquired 28,400 37,600 10,700
Consideration (millions)
Cash $ 47.8 $ 40.4 $ 58.8
TDS Common Shares 127.8 173.7 281.6
TDS Preferred Shares -- 12.5 3.0
USM Common Shares 12.8 1.4 7.7
Subsidiary
preferred stock -- -- 2.9
Other -- 1.4 --
--------------------------------------------
Total Consideration $ 188.4 $ 229.4 $ 354.0
--------------------------------------------
--------------------------------------------
</TABLE>
TDS has entered into definitive agreements at December 31, 1995, to acquire a
controlling interest in one cellular market, a minority interest in one market,
and one telephone company for an aggregate consideration of approximately $73
million, primarily TDS Common Shares. The two cellular interests to be acquired
by TDS 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, notes payable or cash.
The Company is currently negotiating agreements for the acquisition of
additional cellular, telephone and paging companies.
TDS and USM continue to assess the makeup of cellular holdings in order to
maximize the benefits derived from clustering USM's markets. As the number of
opportunities for acquisitions of cellular interests has decreased and as USM's
clusters have grown to realize greater economies of scale, USM's focus has
shifted toward exchanges and sales of non-strategic interests.
During 1995, USM sold its majority interests in six markets and its minority
interests in six markets. These sales, along with sales of various marketable
securities and certain other investments by the Company, generated aggregate
cash proceeds of $199.6 million.
At December 31, 1995, USM had agreements pending to exchange a controlling
interest in one market for a controlling interest in another market, to sell
controlling interests in certain other markets and to settle litigation related
to an investment interest sold in 1995. Pursuant to the agreements, USM will
receive $150 million in cash and $20 million of notes receivable due in three
years. All of the pending agreements discussed above are expected to be
completed during 1996. Certain of these transactions will generate substantial
gains for book and tax purposes.
<PAGE>
LIQUIDITY
Management believes TDS has sufficient internal and external resources to
finance the anticipated requirements of its business development, construction
and acquisition programs.
The Company is generating substantial internal funds. Operating cash flow
(operating income plus depreciation and amortization) increased to $323.5
million in 1995 from $260.3 million in 1994 and $187.7 million in 1993.
Operating cash flow was 88% of property, plant and equipment additions in 1995,
81% in 1994 and 94% in 1993.
TDS Telecom plans to continue financing its telephone construction program
primarily using internally generated cash supplemented by long-term financing
from federal government programs. The TDS Telecom telephone
subsidiaries had $147 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 6.3%.
USM plans to finance its cellular construction program using primarily
internally generated cash supplemented by proceeds from the sales of non-
strategic cellular interests.
American Portable plans to finance its 1996 construction and development
expenditures primarily from the proceeds of the initial public offering, vendor
financing and borrowings from TDS's short-term line of credit.
TDS and its subsidiaries have cash and temporary investments totalling $80.9
million and longer-term investments totalling $25.2 million at December 31,
1995. These 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. TDS and its subsidiaries had $468 million of bank lines of credit for
general corporate purposes at December 31, 1995, $443 million of which were
committed. Unused amounts of such lines totalled $287 million, $262 million of
which were committed. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.
TDS has a universal shelf registration statement which may be used from time to
time to issue debt securities and/or Common Shares for cash. As of December 31,
1995, $238.4 million remained unused on the universal shelf.
TDS and USM have shelf registration statements covering the issuance of
equity for acquisitions. TDS's shelf registration statement for acquisitions
had 2.7 million Common Shares and 249,000 Preferred Shares unissued and
unreserved at December 31, 1995. USM's shelf registration statement for
acquisitions had 6.4 million Common Shares and 200,000 shares of Preferred
Stock unissued and unreserved at December 31, 1995. In addition, the Company
has issued Common Shares for acquisitions pursuant to registration statements
filed specifically for particular acquisitions.
Management believes 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 help meet
its short- and long-term financing needs. Moreover, TDS and its subsidiaries
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,
1995 1994 1993 1992 1991
-------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 954,386 $ 730,810 $ 557,795 $ 432,740 $ 340,160
Operating Income 131,998 108,822 69,733 54,065 40,661
Net Income Before
Extraordinary Item and Cumulative
Effect of Accounting Changes 103,978 60,544 33,896 38,520 21,113
Extraordinary Item -- -- -- (769) --
Cumulative Effect of
Accounting Changes -- (723) -- (6,866) (5,035)
Net Income 103,978 59,821 33,896 30,885 16,078
Net Income Available to Common $ 102,044 $ 58,012 $ 31,510 $ 28,648 $ 14,390
Weighted Average
Common Shares (000s) 58,356 54,197 47,266 39,074 33,036
Earnings per Common Share:
Before Extraordinary Item and
Cumulative Effect of
Accounting Changes $ 1.74 $ 1.07 $ .67 $ .91 $ .59
Extraordinary Item -- -- -- (.02) --
Cumulative Effect of
Accounting Changes -- (.01) -- (.17) (.15)
Net Income $ 1.74 $ 1.06 $ .67 $ .72 $ .44
Pretax Profit on Revenues 19.4% 13.9% 10.8% 15.8% 10.6%
Effective Income Tax Rate
(Before Extraordinary Item
and Cumulative Effect
of Accounting Changes) 43.8% 40.2% 43.9% 43.6% 41.4%
Dividends per Common
and Series A Common Share $ .38 $ .36 $ .34 $ .32 $ .30
Cash and Cash Equivalents
and Temporary Investments $ 80,851 $ 44,566 $ 73,385 $ 58,145 $ 53,346
Property, Plant and Equipment (Net) 2,471,835 2,153,575 1,738,298 1,275,516 997,187
Total Assets 3,469,082 2,790,127 2,259,182 1,696,486 1,368,145
Notes Payable 184,320 98,608 6,309 46,816 41,283
Long-term Debt (including
current portion) 894,584 562,164 537,566 426,885 395,960
Redeemable Preferred Shares
(including current portion) 15,093 25,001 27,367 27,967 28,779
Common Stockholders' Equity 1,684,365 1,473,038 1,224,285 877,419 645,290
Construction Expenditures $ 370,628 $ 311,477 $ 208,520 $ 162,245 $ 154,574
Current Ratio .6 .5 1.1 .9 .9
Common Equity per Share $ 29.01 $ 26.85 $ 24.15 $ 21.27 $ 18.42
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES
Cellular telephone $492,395 $332,404 $214,310
Telephone 354,841 306,341 268,122
Radio paging 107,150 92,065 75,363
--------------------------------------
954,386 730,810 557,795
--------------------------------------
OPERATING EXPENSES
Cellular telephone 449,640 315,019 222,966
Telephone 256,601 214,735 189,012
Radio paging 116,147 92,234 76,084
--------------------------------------
822,388 621,988 488,062
--------------------------------------
OPERATING INCOME 131,998 108,822 69,733
--------------------------------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income 13,024 10,612 8,082
Cellular investment income,
net of license cost amortization 40,666 26,018 15,704
Gain on sale of cellular interests
and other investments 86,625 7,457 4,970
PCS development costs (7,829) (1,709) (65)
Other (expense) income, net (2,771) 387 (90)
Minority share of income (25,858) (9,079) (475)
--------------------------------------
103,857 33,686 28,126
--------------------------------------
INCOME BEFORE INTEREST AND INCOME TAXES 235,855 142,508 97,859
Interest expense 50,848 41,251 37,466
--------------------------------------
INCOME BEFORE INCOME TAXES 185,007 101,257 60,393
Income Tax Expense 81,029 40,713 26,497
--------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 103,978 60,544 33,896
Cumulative effect of Accounting Change --- (723) ---
--------------------------------------
NET INCOME 103,978 59,821 33,896
Preferred Dividend Requirement (1,934) (1,809) (2,386)
--------------------------------------
NET INCOME AVAILABLE TO COMMON $102,044 $ 58,012 $ 31,510
--------------------------------------
--------------------------------------
WEIGHTED AVERAGE COMMON SHARES (000S) 58,356 54,197 47,266
EARNINGS PER COMMON SHARE:
Before Cumulative Effect of Accounting Change $ 1.74 $ 1.07 .67
Cumulative Effect of Accounting Change --- (.01) ---
--------------------------------------
Net Income $ 1.74 $ 1.06 $ .67
--------------------------------------
DIVIDENDS PER COMMON --------------------------------------
AND SERIES A COMMON SHARE $ .38 $ .36 $ .34
--------------------------------------
--------------------------------------
</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,
1995 1994 1993
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $103,978 $59,821 $33,896
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Cumulative effect of accounting changes -- 723 --
Depreciation and amortization 201,063 161,796 127,509
Deferred taxes 19,603 14,529 5,846
Investment income (43,188) (30,083) (20,015)
Minority share of income 25,858 9,079 475
Gain on sale of cellular interests
and other investments (86,625) (7,457) (4,970)
Noncash interest expense 12,761 26 1,061
Other noncash expense 7,388 5,384 4,275
Change in accounts receivable (33,346) (22,401) (11,262)
Change in accounts payable (3,188) 31,714 11,308
Change in accrued taxes (2,638) (4,638) 4,661
Change in other assets and liabilities 9,943 6,193 7,412
----------------------------------------------
211,609 224,686 $ 160,196
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 334,323 36,916 122,275
Repayment of long-term debt (30,734) (33,710) (37,969)
Change in notes payable 80,351 92,318 (40,533)
Common stock issued 6,921 11,185 69,644
Minority partner capital
contributions (distributions) 1,411 12,504 (1,528)
Redemption of preferred shares (638) (9) (220)
Dividends paid (23,972) (20,906) (17,830)
Sale of stock by subsidiaries 1,812 45,714 37,154
----------------------------------------------
369,474 144,012 130,993
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (366,236) (321,435) (198,743)
Investments in PCS licenses (326,035) (31,604) ---
Investments in and advances
to cellular minority partnerships (20,509) (24,444) (14,595)
Distributions from partnerships 9,062 17,375 11,943
Proceeds from investment sales 197,558 6,000 6,750
Other investments 2,503 (18,370) (43,211)
Acquisitions, excluding cash acquired (53,770) (37,552) (51,579)
Change in temporary investments 6,727 10,399 13,102
----------------------------------------------
(550,700) (399,631) (276,333)
----------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 30,383 (30,933) 14,856
CASH AND CASH EQUIVALENTS
Beginning of period 24,733 55,666 40,810
----------------------------------------------
End of period $55,116 $24,733 $55,666
----------------------------------------------
----------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED BALANCE SHEETS--ASSETS
- --------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 55,116 $ 24,733
Temporary investments 25,735 19,833
Construction funds 1,588 1,309
Accounts receivable
Due from customers, less allowance
of $5,104 and $2,785, respectively 77,148 52,897
Other, principally connecting companies 68,196 57,369
Materials and supplies, at average cost 20,738 17,106
Other 12,689 12,671
------------------------------
261,210 185,918
------------------------------
INVESTMENTS
Cellular limited partnership interests 158,559 111,733
Cellular license acquisition costs, net of amortization 110,091 94,470
Broadband PCS license acquisition costs 301,196 20,400
Narrowband PCS license acquisition costs 55,365 54,101
Marketable equity securities 346 25,604
Marketable non-equity securities 24,871 71,314
Other 62,537 60,806
------------------------------
712,965 438,428
------------------------------
PROPERTY, PLANT AND EQUIPMENT
Cellular Telephone
In service and under construction 701,083 479,457
License acquisition costs 1,058,316 979,492
------------------------------
1,759,399 1,458,949
Less accumulated depreciation and amortization 240,237 169,112
------------------------------
1,519,162 1,289,837
------------------------------
Telephone
In service and under construction,
substantially at original cost 1,099,714 995,601
Less accumulated depreciation 442,699 386,487
------------------------------
657,015 609,114
Franchise and other costs in excess of the underlying
book value of subsidiaries, net of amortization 168,607 151,107
------------------------------
825,622 760,221
------------------------------
Radio Paging
In service 136,801 110,779
Less accumulated depreciation and amortization 56,667 39,962
------------------------------
80,134 70,817
------------------------------
Other
In service and under construction 87,935 66,832
Less accumulated depreciation and amortization 41,018 34,132
------------------------------
46,917 32,700
------------------------------
2,471,835 2,153,575
------------------------------
OTHER ASSETS AND DEFERRED CHARGES 23,072 12,206
------------------------------
$3,469,082 $2,790,127
------------------------------
------------------------------
</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,
1995 1994
------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares $ 49,233 $ 37,447
Notes payable 184,320 98,608
Accounts payable 122,886 112,967
Due to FCC - PCS licenses -- 42,897
Advance billings and customer deposits 27,706 20,898
Accrued interest 11,573 10,054
Accrued taxes 2,525 3,894
Other 29,481 19,419
------------------------------
427,724 346,184
------------------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 103,206 80,274
Postretirement benefits obligation other than pensions 12,146 14,379
Other 22,943 24,423
------------------------------
138,295 119,076
------------------------------
LONG-TERM DEBT, excluding current portion 858,857 536,509
------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion 1,587 13,209
------------------------------
MINORITY INTEREST in subsidiaries 328,544 272,292
------------------------------
NONREDEEMABLE PREFERRED SHARES 29,710 29,819
------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share;
authorized 100,000,000 shares; issued and outstanding
51,137,426 and 47,937,570 shares, respectively 51,137 47,938
Series A Common Shares, par value $1 per share;
authorized 25,000,000 shares; issued and outstanding
6,893,101 and 6,886,684 shares, respectively 6,893 6,887
Common Shares issuable, 31,431 and 41,908
shares, respectively 1,496 1,995
Capital in excess of par value 1,417,513 1,288,453
Retained earnings 207,326 127,765
------------------------------
1,684,365 1,473,038
------------------------------
$3,469,082 $2,790,127
------------------------------
------------------------------
</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,
1995 1994 1993
---------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
COMMON SHARES
Balance beginning of period $ 47,938 $ 43,504 $ 34,383
Add
Acquisitions 2,960 4,041 7,477
Employee stock ownership plans 81 89 158
Dividend reinvestment plan 105 86 26
Sales of Common Shares -- 100 1,320
Conversion of Preferred Shares 41 116 140
Conversion of Series A Common Shares 12 2 --
--------------------------------------------------
Balance end of period $ 51,137 $ 47,938 $ 43,504
--------------------------------------------------
--------------------------------------------------
SERIES A COMMON SHARES
Balance beginning of period $ 6,887 $ 6,881 $ 6,864
Add (Deduct)
Dividend reinvestment plan 18 8 17
Conversion to Common Shares (12) (2) --
--------------------------------------------------
Balance end of period $ 6,893 $ 6,887 $ 6,881
--------------------------------------------------
--------------------------------------------------
COMMON SHARES ISSUABLE
Balance beginning of period $ 1,995 $ 15,189 $ --
Add (Deduct)
Acquisitions -- 1,995 15,189
Shares issued pursuant
to acquisition agreements (499) (15,189) --
--------------------------------------------------
Balance at end of period $ 1,496 $ 1,995 $ 15,189
--------------------------------------------------
--------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE
Balance beginning of period $1,288,453 $1,069,022 $ 761,706
Add (Deduct)
Acquisitions 125,886 182,812 299,146
Employee stock ownership plans 2,294 2,848 2,578
Dividend reinvestment plans 4,700 3,819 1,835
Sales of Common Shares -- 4,924 64,271
Capital stock expense (124) (53) (333)
Conversion of Preferred Shares (3,127) 1,324 1,972
Gain (loss) on sale of subsidiary stock 714 21,184 (62,153)
Net unrealized (loss) gain on
marketable equity securities (2,090) 2,100 --
Income tax effects of capital stock transactions 807 473 --
--------------------------------------------------
Balance at end of period $1,417,513 $1,288,453 $1,069,022
--------------------------------------------------
--------------------------------------------------
RETAINED EARNINGS
Balance beginning of period $ 127,765 $ 89,689 $ 74,466
Add net income 103,978 59,821 33,896
Deduct
Dividends
Common and Series A Common Shares 21,910 19,287 16,287
Preferred Shares 2,507 2,458 2,386
--------------------------------------------------
Balance at end of period $ 207,326 $ 127,765 $ 89,689
--------------------------------------------------
--------------------------------------------------
</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.
NATURE OF OPERATIONS
TDS is a diversified telecommunications company which, at December 31, 1995,
provided high-quality telecommunications services to 1,920,400 consolidated
cellular telephone, telephone and radio paging customers in 37 states and the
District of Columbia. The Company conducts substantially all of its cellular
operations through its 80.8%-owned subsidiary, United States Cellular
Corporation [AMEX:USM], its telephone operations through its wholly owned
subsidiary, TDS Telecommunications Corporation ("TDS Telecom"), and its radio
paging operations through its 82.3%-owned subsidiary, American Paging, Inc.
[AMEX:APP]. The Company is developing its Personal Communications Services
("PCS") operations through its wholly owned subsidiary American Portable
Telecom, Inc. ("American Portable"). (See Note 17 - American Portable Initial
Public Offering.)
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. Certain amounts reported in prior years have been
reclassified to conform to current period presentation.
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 more than three months to 12 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,
1995 1994
--------------------------
(Dollars in thousands)
<S> <C> <C>
General funds $ 55,116 $ 21,544
Government agency securities 12,021 11,475
Certificates of deposit 13,714 11,547
--------------------------
$ 80,851 $ 44,566
--------------------------
--------------------------
</TABLE>
INVESTMENTS
Investments in cellular limited partnership interests consist 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 ($146.1
million and $97.9 million at December 31, 1995 and 1994, respectively). Income
and losses from these entities are reflected in the consolidated income
statements on a pretax basis. At December 31, 1995, the cumulative share of
income from minority cellular investments accounted for under the equity method
was $127.4 million, of which $64.3 million was undistributed. The cost method of
accounting is followed for those minority interests which TDS is holding for
sale or exchange ($12.5 million and $13.8 million at December 31, 1995 and 1994,
respectively).
Cellular license acquisition costs consist of costs incurred in acquiring
Federal Communications Commission ("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 interests 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 amortized through charges to expense over 40 years upon
commencement of operations. Amortization amounted to $2.0 million, $2.0 million
and $1.6 million in 1995, 1994 and 1993, respectively. Accumulated amortization
of cellular license costs was $7.0 million and $7.2 million at December 31, 1995
and 1994, respectively. Included in
<PAGE>
cellular license costs is approximately $3.1 million of goodwill which resulted
from various acquisitions structured to be tax-free.
Broadband and Narrowband PCS license acquisition costs consist of costs incurred
in acquiring PCS licenses and capitalized interest. These costs will be
amortized through charges to expense upon commencement of operations.
At December 31, 1995, investment in Broadband and Narrowband PCS licenses
consist of the following:
<TABLE>
<CAPTION>
Broadband Narrowband
PCS Licenses PCS Licenses
--------------------------------
(Dollars in thousands)
<S> <C> <C>
License acquisition costs $ 289,194 $ 53,622
Professional services -- 531
Capitalized interest 12,002 1,212
-------------------------------
$ 301,196 $ 55,365
-------------------------------
-------------------------------
</TABLE>
Other investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
--------------------------
(Dollars in thousands)
<S> <C> <C>
Minority telephone and
paging interests $ 30,422 $ 31,012
Long-term notes receivable 16,419 14,589
Rural Telephone Bank Stock,
at cost 6,350 5,951
Other 9,346 9,254
----------------------------
$ 62,537 $ 60,806
----------------------------
----------------------------
</TABLE>
The equity method of accounting is followed for minority telephone and paging
interests in which TDS holds common stock ownership of at least 20% or can
influence the policies of the affiliated company. At December 31, 1995, the
cumulative share of income from minority telephone and paging investments
accounted for under the equity method was $7.4 million, of which $5.9 was
undistributed. Amortization of excess cost relating to minority telephone
interests totalled $407,000, $532,000 and $545,000 in 1995, 1994 and 1993,
respectively.
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 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 33%, 31% and 31% of telephone revenues in 1995, 1994
and 1993, respectively. Compensation for intrastate toll and access services is
based on tariffed access charges, cost separation studies, nationwide 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.
EARNINGS PER COMMON SHARE
Earnings per Common Share were computed by dividing Net Income Available to
Common, less a 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, $271,000 and
$411,000 in 1995 and 1994, respectively, reflects the additional minority share
of USM's income computed as if all of USM'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,
1995, the preferred dividend requirement on all outstanding Preferred Shares was
$1.9 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 $49.4
million, $39.9 million and $34.4 million, and income taxes of $60.5 million,
$27.6 million and $17.3 million, during 1995, 1994 and 1993, respectively.
TDS has acquired operating telephone and paging companies, certain cellular
licenses and operating companies and certain other assets since January 1, 1993.
In conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Property, plant
and equipment $ 81,789 $ 89,092 $ 78,252
Cellular licenses 129,510 169,845 312,656
Minority interest (1,941) (259) (14,115)
Increase (decrease)
in equity method
investment in
cellular interests 977 (15,586) (4,690)
Long-term debt (9,254) (21,571) (23,930)
Deferred credits (538) (6,225) (5,300)
Other assets and
liabilities, excluding
cash and cash
equivalents (6,143) 9,808 3,821
Common Shares
issued and issuable (127,836) (173,658) (281,553)
Preferred Shares issued (12,500) (3,000)
USM Common Shares
issued and issuable (12,794) (1,394) (7,653)
Subsidiary preferred
stock issued -- -- (2,909)
-------------------------------------------
Decrease in cash due
to acquisitions $ 53,770 $ 37,552 $ 51,579
------------------------------------------
------------------------------------------
</TABLE>
TDS issued Common Shares aggregating $940,000, $1.4 million and $2.1 million in
1995, 1994 and 1993, respectively, for TDS Preferred Shares converted into
Common Shares. TDS issued Common Shares in 1993 aggregating $40.3 million for
certain cellular acquisitions completed in prior years.
ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," in March 1995, which became effective in January 1996. SFAS No.
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by any entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. Management is
currently analyzing the impact of this statement, but does not anticipate that
the effect on results of operations and financial position will be material.
NOTE 2
INCOME TAXES
TDS files a consolidated federal income tax return. Income tax provisions
charged to net income before the cumulative effect of an accounting change are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $44,690 $20,921 $15,562
State 16,736 4,873 4,521
Deferred:
Federal 19,253 13,440 6,696
State 2,386 2,963 1,510
Amortization of
deferred investment
tax credits (2,036) (1,484) (1,792)
---------------------------
Total income tax
expense $81,029 $40,713 $26,497
---------------------------
---------------------------
</TABLE>
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.
The statutory federal income tax rate is reconciled to TDS's effective income
tax rate before the cumulative effect of an accounting change below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 6.9 5.1 6.2
Amortization of license
acquisition costs and costs
in excess of book value 2.4 3.5 4.8
Acquisition-related tax
basis adjustment -- (2.7) (.3)
Dividend exclusion (.1) (1.8) --
Amortization of deferred
investment tax credits (1.0) (1.5) (3.0)
Effects of corporations not
included in consolidated
federal tax return 2.1 1.4 1.9
Deferred tax rate differential -- -- (.7)
Other differences, net (1.5) 1.2 --
-----------------------------------
Effective income tax rate 43.8% 40.2% 43.9%
-----------------------------------
-----------------------------------
</TABLE>
The total income tax expense for the year ended December 31, 1994, including the
cumulative effect of an accounting change was $40.3 million. The effective
income tax rate including the cumulative effect of an accounting change was
40.3% in 1994.
Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax bases.
<PAGE>
The Company's current net deferred tax assets totalled $3.2 million and $3.5
million as of December 31, 1995 and 1994, respectively. The net current
deferred tax asset 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, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------------------------------
(Dollars in thousands)
<S> <C> <C>
Deferred Tax Asset:
Alternative minimum
tax credit carryforward $ 10,316 $ 22,834
State operating loss
carryforwards 10,537 9,956
Postretirement benefits 4,502 4,940
Other 9,075 10,799
--------------------------
34,430 48,529
Less valuation allowance (10,061) (8,962)
--------------------------
Net Deferred Tax Asset 24,369 39,567
--------------------------
Deferred Tax Liability:
Property, plant and equipment 83,131 76,173
Partnership investments 20,047 12,830
Marketable equity securities 2,572 8,217
Minority share of USM income (1,500) 4,916
Effects of corporations not
included in consolidated
federal tax return 3,642 4,172
Licenses 16,001 12,329
Other 3,682 1,204
--------------------------
Total Deferred Tax Liability 127,575 119,841
--------------------------
Net Deferred Income
Tax Liability $ 103,206 $80,274
-------------------------------
-------------------------------
</TABLE>
At December 31, 1995, TDS had $10.3 million of federal alternative minimum tax
credit carryforward available to offset regular income tax payable in future
years. In addition, TDS had $173.5 million of state net operating loss
carryforward at December 31, 1995, expiring between 1996 and 2010, which
generated a $10.5 million deferred tax asset. A valuation allowance was
established for the state operating loss carryforwards since it is more likely
than not that a portion will expire before such carryforwards can be utilized.
TDS's telephone subsidiaries have recorded additional deferred income tax
liabilities related primarily to temporary differences not deferred under rate-
making policy. 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, 1995, are $5.0 million
and $5.8 million, respectively. These amounts are being amortized over the lives
of the related temporary differences.
NOTE 3
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
effective January 1, 1994. Information regarding the Company's securities is
summarized below.
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------------------------
(Dollars in thousands)
<S> <C> <C>
Available-for-sale
Equity Securities
Aggregate Fair Value $ 346 $25,604
Amortized Cost Basis 336 22,229
Gross Unrealized
Holding Gains 10 3,379
Gross Unrealized
Holding Losses -- 4
Held-to-maturity
U.S. Treasury and other
U.S. government corporations
and agencies
Aggregate Fair Value
Current 12,293 10,981
Noncurrent 25,200 67,120
Amortized Cost Basis
Current 12,337 11,061
Noncurrent 24,871 71,314
Gross Unrealized
Holding Gains 343 --
Gross Unrealized
Holding Losses $ 58 $4,274
--------------------------
--------------------------
</TABLE>
The Company's debt securities classified as held-to-maturity have contractual
maturities at December 31, 1995 as follows:
<TABLE>
<CAPTION>
Aggregate Amortized
Fair Value Cost Basis
--------------------------
(Dollars in thousands)
<S> <C> <C>
Within one year $ 12,293 $ 12,337
Over one year through five years $ 25,200 $ 24,871
-------------------------------
-------------------------------
</TABLE>
The Company's net unrealized holding gain on available-for-sale securities,
$10,000 in 1995 and $2.1 million (net of income taxes of $1.3 million) in 1994,
has been included as an increase to Common Stockholders' Equity.
Realized gains and losses are determined on the basis of specific
identification. For 1995, proceeds from the sale of available-for-sale
securities totalled $57.6 million and gross realized gains totalled $3.9
million. For 1994, proceeds from the sale of available-for-sale securities
totalled $835,000 and gross realized losses totalled $165,000.
<PAGE>
On December 21, 1995, as a result of the one-time reassessment allowed by the
FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities," issued in November 1995,
the Company reclassified securities classified as held to maturity with an
amortized cost basis of $31.5 million to available-for-sale. These securities
were subsequently sold with no realized gain or loss. No sales or transfers of
securities classified as held-to-maturity occurred during 1994.
NOTE 4
BUSINESS SEGMENT INFORMATION
TDS's operations are classified into four principal segments: Cellular
Telephone, Telephone, Radio Paging and PCS 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 5
PROPERTY, PLANT AND EQUIPMENT
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 interests in cellular
entities awarded licenses; amounts incurred by TDS in acquiring these interests;
and goodwill. These costs are amortized on a straight-line basis over 40 years
upon commencement of operations. Amortization amounted to $25.8 million, $22.2
million and $17.3 million in 1995, 1994 and 1993, respectively. Accumulated
amortization of these cellular license costs was $83.6 million and $65.5 million
at December 31, 1995 and 1994, respectively. Included in cellular license costs
is approximately $359.7 million of goodwill which resulted from various
acquisitions structured to be tax-free.
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 $682,000, $1.7 million
and $698,000 in 1995, 1994 and 1993, respectively. The composite weighted
average rates were 9.3%, 10.4%, and 9.2% in 1995, 1994 and 1993, respectively.
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 cost 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. Costs aggregating
$186.9 million at December 31, 1995, relating to acquisitions since November 1,
1970, are being amortized on a straight-line basis over a 40-year period.
Amortization amounted to $4.4 million, $3.3 million and $3.0 million in 1995,
1994 and 1993, respectively. Accumulated amortization of excess cost was $24.7
million and $20.3 million at December 31, 1995 and 1994, respectively. Included
in excess cost is approximately $142 million of goodwill which resulted from
various acquisitions structured to be tax-free.
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 25 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,
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Cellular Telephone 10.0% 10.5% 10.5%
Telephone 7.1 7.5 7.3
Radio Paging 22.1 23.1 18.0
----------------------------------
Other 9.7 12.8 12.9
----------------------------------
----------------------------------
</TABLE>
<PAGE>
NOTE 6
ACQUISITIONS AND SALES
During 1995, 1994 and 1993, TDS and its subsidiaries completed the following
business combinations.
<TABLE>
<CAPTION>
Consideration
----------------------------------
TDS and USM
Common Stock,
Cash, TDS
Notes and Preferred Shares,
Long-term and Subsidiary
Debt Preferred Stock
---------------------------------
(Dollars in thousands)
<S> <C> <C>
Acquisitions During 1995
Cellular interests $ 41,885 $ 94,542
Majority interests in five
telephone companies 250 46,087
Paging interests 5,656 --
Acquisitions During 1994
Cellular interests $ 29,599 $ 110,732
Majority interests in three
telephone companies 7,386 71,945
Paging interests 4,875 4,875
Acquisitions During 1993
Cellular interests $ 19,538 $ 262,346
Majority interests in four
telephone companies 34,396 32,281
Paging interest 4,896 --
--------------------------------
--------------------------------
</TABLE>
Assuming that these acquisitions had taken place on January 1, 1994, unaudited
pro forma results of operations from continuing operations would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
---------------------------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Operating revenues $ 979,694 $ 836,560
Net income before cumulative
effect of an accounting change 90,604 38,048
Earnings per share before
cumulative effect of
an accounting change $ 1.50 $ .61
--------------------------------
--------------------------------
</TABLE>
SALES OF CELLULAR AND OTHER INVESTMENTS
The $86.6 million gain in 1995 reflects the sales and exchanges of non-strategic
and other investments. USM sold its majority interests in six markets and its
minority interests in six markets during 1995. These sales, along with the sales
of marketable equity securities and certain other investments by TDS, generated
cash proceeds of $199.6 million.
The $7.5 million gain in 1994 reflects the sale and exchange of minority-owned
cellular and telephone interests. The cellular gain represents the excess of
the fair market value of the cellular interests traded over the book value of
such interests. The Company also sold its minority interest in a telephone
company for preferred shares of the telephone company having a face value of
$5.9 million and $6.0 million in cash.
The $5.0 million gain in 1993 reflects primarily the sales of two minority
cellular interests. USM received $6.8 million cash consideration on the sales.
NOTE 7
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash and Cash Equivalents, Temporary Investments and
Short-term Debt approximate fair value due to the short-term nature of these
instruments.
The carrying value and estimated fair value of the Company's long-term debt was
$894.6 million and $932.6 million, respectively, at December 31, 1995, and
$562.2 million and $497.7 million, respectively, at December 31, 1994. The fair
value was estimated using discounted cash flow analysis based on the Company's
current incremental borrowing rates for similar types
of borrowing arrangements.
At December 31, 1995 and 1994, the carrying value of the Company's Redeemable
Preferred Shares, $15.1 million, and $25.0 million, respectively, was
approximately equal to its fair value. The fair value was estimated using
discounted cash flow analysis 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
quoted market prices).
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, 1995 and 1994 represent the original cost of
the investments, which management believes is not impaired.
<PAGE>
NOTE 8
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 a USM convertible debt offering reduced
$131.4 million of short-term debt in 1995. Proceeds from an APP initial public
offering (see Note 10-Sale of Stock by Subsidiaries) and TDS's sales of Common
Shares retired $21.2 million of short-term debt in 1994.
TDS and its subsidiaries had $467.9 million of bank lines of credit for general
corporate purposes at December 31, 1995, $442.9 million of which were committed.
Unused amounts of such lines totalled $287.0 million, $262.0 million 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,
1995 1994 1993
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance
at end of period $184,320 $ 98,608 $ 6,309
Weighted average
interest rate at
end of period 6.3% 6.5% 3.6%
Maximum amount
outstanding during
the period $184,320 $106,077 $ 49,851
Average amount
outstanding during
the period (1) $139,671 $ 50,499 $ 32,270
Weighted average
interest rate during
the period (1) 6.4% 5.2% 3.9%
----------------------------------
----------------------------------
</TABLE>
(1) The average was computed based on month-end balances.
NOTE 9
LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-----------------------
(Dollars in thousands)
<S> <C> <C>
Telephone and Data Systems, Inc.
(Parent)
Medium-term notes, 8% to 10%,
due through 2025 $239,200 $200,000
Purchase contracts, 8% to 14%,
due through 2003 2,896 3,116
Subordinated debentures, 8%
to 14.5%, due through 2008 780 1,909
-----------------------
242,876 205,025
Less current portion 418 1,261
-----------------------
Total parent debt 242,458 203,764
-----------------------
Subsidiaries
RUS, RTB and FFB Mortgage
Notes, due through 2031
0% to 2% 26,350 29,060
4% to 6% 172,231 168,027
6.04% to 9% 84,464 75,546
9.5% to 11% 1,233 1,153
-----------------------
284,278 273,786
6% zero coupon convertible
debentures matures at
June 15, 2015 745,000 --
Unamortized discount (509,250) --
-----------------------
235,750
Vendor financing,
approximating 90-day
Commercial Paper
plus 2.25% or 2.307%
due through 2002 119,998 69,265
Other long-term notes, 4.6%
to 10.5%, due through 2005 11,682 14,089
-----------------------
651,708 357,140
Less current portion 35,309 24,395
-----------------------
Total subsidiaries' debt 616,399 332,745
-----------------------
Total long-term debt $858,857 $536,509
-----------------------
-----------------------
</TABLE>
The Company sold $39.2 million of senior unsecured debt securities in 1995 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 Utilities
Service ("RUS"), 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 2031.
Substantially all telephone plant is pledged under RUS and RTB mortgage notes
and various other obligations of the subsidiaries.
<PAGE>
USM sold $745 million principal amount at maturity of zero coupon 6% yield to
maturity convertible debt in June 1995 with proceeds to the Company of $221.5
million. This 20-year fixed rate debt, in the form of Liquid Yield Option TM
Notes ("LYONsTM") (TMTrademark of Merrill Lynch & Co., Inc.), is subordinated to
all senior indebtedness of USM. Each LYON is convertible at the option of the
holder at any time at a conversion rate of 9.475 USM Common Shares per LYON.
Upon conversion, USM may elect to deliver its Common Shares or cash equal to the
market value of the Common Shares. Beginning June 15, 2000, the LYONs may be
redeemed at any time for cash at the option of USM at the issue price plus
accrued original issue discount through the date of redemption. USM will
purchase LYONs, at the option of the holder, as of June 15, 2000, at the issue
price plus accrued original issue discount through that date. USM will have the
option of purchasing such LYONs with cash, USM Common Shares or TDS common
equity securities, or any combination thereof. No LYONs have been converted as
of December 31, 1995.
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 years at interest rates of 2.25% or 2.307% over
the 90-day Commercial Paper Rate (5.58% at December 31, 1995).
The annual requirements for principal payments on long-term debt are
approximately $35.7 million, $36.2 million, $36.4 million, $34.2 million and
$28.5 million for the years 1996 through 2000, respectively.
NOTE 10
MINORITY INTERESTS IN SUBSIDIARIES
The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------------------------
(Dollars in thousands)
<S> <C> <C>
USM
USM shareholders' share $259,719 $213,892
USM subsidiaries'
partners share 45,303 33,552
------------------------
305,022 247,444
TDS Telecom telephone
subsidiaries' share 17,108 16,047
APP shareholders' share 6,280 8,928
Other 134 (127)
-------------------------
$328,544 $272,292
-------------------------
-------------------------
</TABLE>
SALE OF STOCK BY SUBSIDIARIES
USM has issued Common Shares during 1995, 1994 and 1993 in connection with
acquisitions, employee stock purchase plans, and in 1993 pursuant to a rights
offering. APP has issued Common Shares during 1995 in connection with employee
stock purchase plans, and in 1994 issued 3.5 million Common Shares in an initial
public offering (at a price of $14 per share). The initial public offering
reduced TDS's ownership percentage from 100% to 82.5%. The USM and APP Common
Share transactions were recorded at fair market values which were either less
than or in excess of TDS's book value investment in USM and APP. TDS adjusted
its book value investment as a result of these issues and increased or
(decreased) capital in excess of par value ($545,000), $22.8 million and ($62.2
million) in 1995, 1994 and 1993, respectively.
NOTE 11
PREFERRED SHARES
All issued TDS Cumulative Voting Preferred Shares have a stated value of $100
per share. The 5,000,000 authorized 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 mandatory redemption features or are redeemable at the
option of the holder. At December 31, 1995, 150,929 shares of Redeemable
Preferred Shares were outstanding. Dividends on certain series are payable in
additional shares of that series. All other dividends are payable in cash.
The various series of Redeemable Preferred Shares are redeemable 1) at the
option of the holder at $100 per share plus accrued and unpaid dividends or 2)
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 $13.5 million, $1.3 million, $79,000, $79,000 and $78,000 for the years 1996
through 2000, respectively.
<PAGE>
The following is a schedule of the Redeemable Preferred
Shares' activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning
of period $25,001 $27,367 $27,967
Add:
Stock dividends 546 839 834
Less:
Redemption of preferred (9,608) (644) (220)
Conversion of preferred -- (1,361) (14)
Expiration of
redemption feature (839) (1,200) (1,200)
Change in
redemption feature (7) -- --
---------------------------------
15,093 25,001 27,367
Less current portion 13,506 11,792 1,735
---------------------------------
Balance, end of period $ 1,587 $13,209 $25,632
---------------------------------
---------------------------------
</TABLE>
NONREDEEMABLE PREFERRED SHARES
Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. At
December 31, 1995, 297,104 shares of Nonredeemable Preferred Shares were
outstanding. Outstanding Nonredeemable Preferred Shares are generally redeemable
at the option of TDS at $100 per share, plus accrued and unpaid dividends. At
December 31, 1995, certain series of Preferred Shares are convertible into TDS
Common Shares. (See Note 12 - Convertible Preferred Shares)
The following is a schedule of the Nonredeemable Preferred Shares activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning
of period $29,819 $16,833 $14,233
Add:
Acquisitions -- 12,500 3,000
Reclassification
from Redeemable
Preferred Shares 839 1,200 1,200
Less:
Conversion of preferred (948) (714) (1,600)
--------------------------------------
Balance, end of period $29,710 $29,819 $16,833
--------------------------------------
--------------------------------------
</TABLE>
NOTE 12
COMMON STOCK ACQUISITIONS
During 1995, 1994 and 1993, TDS issued 3.0 million Common Shares, 4.0 million
Common Shares and 7.5 million Common Shares, respectively, for the acquisition
of cellular and telephone interests.
COMMON SHARES ISSUABLE
A cellular acquisition agreement requires TDS to deliver 10,477 Common Shares in
1996, 1997 and 1998.
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,
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
Common Shares
Employee stock
purchase plan 18,010 34,171 31,065
Tax-deferred
savings plan 40,624 30,764 29,760
Employee stock
options and stock
appreciation rights 22,015 25,107 96,877
Dividend
reinvestment plan 105,001 85,754 26,070
-------------------------------------
185,650 175,796 183,772
-------------------------------------
-------------------------------------
Series A Common Shares
Dividend
reinvestment plan 17,855 7,783 17,182
-------------------------------------
-------------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 72,823 Common Shares for sale to
the employees of TDS and its subsidiaries at the lower of $44.73 per share or
the year-end closing price ($39.50 per share at December 31, 1995) in connection
with the 1993 Employee Stock Purchase Plan.
TAX-DEFERRED SAVINGS PLAN. TDS has reserved 147,181 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, APP Common Shares or five nonaffiliated funds.
Employer matching contributions, equal to 20% of employee contributions up to a
certain limit, are made in TDS Common Shares.
<PAGE>
EMPLOYEE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. TDS has reserved 1,327,221
Common Shares for options granted and to be 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 1996 to
2004, 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, 1993
(177,001 exercisable) 424,974 $ 13.01
Granted 11,125 $ 35.54
Exercised (133,414) $ 9.62
------------------------------
Outstanding December 31, 1993
(107,661 exercisable) 302,685 $ 15.35
Granted 221,275 $ 47.59
Exercised (25,876) $ 5.30
Cancelled (12,487) $ 27.47
------------------------------
Outstanding December 31, 1994
(172,689 exercisable) 485,597 $ 30.25
Granted 49,125 $ 38.28
Exercised (26,101) $ 5.52
Cancelled (3,046) $ 43.32
------------------------------
Outstanding December 31, 1995
(238,125 exercisable) 505,575 $ 32.30
------------------------------
------------------------------
</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,
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Outstanding beginning
of period 12,096 9,100 22,076
Granted 8,174 7,796 9,410
Exercised (4,236) (4,800) (22,386)
----------------------------------
Outstanding end of period 16,034 12,096 9,100
----------------------------------
----------------------------------
</TABLE>
Compensation expense, measured on the difference between the year-end market
price of the Common Shares and SAR prices, was $408,000, $218,000 and $664,000
in 1995, 1994 and 1993, respectively.
DIVIDEND REINVESTMENT PLANS. TDS has reserved 514,842 Common Shares for issue
under the Automatic Dividend Reinvestment and Stock Purchase Plan and 218,699
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.
CONVERTIBLE PREFERRED SHARES
TDS has reserved 2,245,123 Common Shares for the possible conversion of its
convertible Preferred Shares (See Note 11 - Nonredeemable Preferred Shares). TDS
issued 40,734, 115,542 and 139,689 Common Shares in 1995, 1994 and 1993,
respectively, 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 6,893,101 Common Shares for possible
issuance upon such conversion.
PUBLIC OFFERING
TDS issued 100,000 and 1.3 million Common Shares for cash under its shelf
registration statements in 1994 and 1993, respectively. Proceeds aggregated $4.9
million and $65.6 million in 1994 and 1993, respectively.
NOTE 13
COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
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. Property and equipment expenditures for
cellular telephone operations are estimated to be approximately $240 million
during 1996. Telephone construction expenditures are estimated to be
approximately $125 million during 1996. Radio paging fixed asset expenditures
are estimated to be approximately $54 million during 1996, including $8
million for narrowband PCS activities. Broadband PCS aggregate capital
requirements for 1996-1998 are estimated to total approximately $830 million,
with
<PAGE>
$585 million for capital additions and $245 million for working capital, start-
up costs and market development activities. Other fixed asset expenditures are
estimated to be approximately $15 million during 1996.
PENDING ACQUISITIONS AND SALES
The Company has an ongoing acquisition program to acquire cellular telephone
interests and telephone companies. At December 31, 1995, TDS has entered into
definitive agreements to acquire a controlling interest in one cellular market,
a minority interest in one cellular market and one telephone company for an
aggregate consideration of approximately $73 million, primarily TDS Common
Shares. The two cellular interests to be acquired by TDS 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, notes payable or cash.
At December 31, 1995, USM had agreements pending to exchange a controlling
interest in one market for a controlling interest in another market, to sell
controlling interests in seven other markets and one market partition and to
settle litigation related to an investment interest which was sold in 1995.
Pursuant to the agreements, USM will receive $150 million in cash and $20
million in notes receivable due in three years. All of the pending agreements
are expected to be completed during 1996. Certain of the sales and the
litigation settlement will generate substantial gains for book and tax purposes.
LEASE COMMITMENTS
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 1995, 1994 and 1993, rent expense for term
leases was $13.6 million, $10.4 million and $7.8 million, respectively, and rent
expense under cancelable and short-term leases was $7.5 million, $6.5 million
and $5.4 million, respectively. At December 31, 1995, the aggregate minimum
rental commitments under noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
Minimum Future
Rental Payments
----------------------
(Dollars in thousands)
<S> <C>
1996 $11,716
1997 10,280
1998 8,563
1999 7,253
2000 6,066
Thereafter $18,160
----------------------
----------------------
</TABLE>
LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain cellular telephone systems and other
interests. Management does not believe that any of such proceedings should have
a material adverse impact on the financial position or results of operations of
the Company.
COLLECTIBILITY OF NOTE RECEIVABLE
As of December 31, 1995, USM loaned a total of $5.5 million to another cellular
company ("Cellular Co.") under a long-term financing agreement. Under the
agreement, USM will provide up to $6 million to finance Cellular Co.'s equipment
purchases and construction costs related to the operations in a cellular market.
Although interest payments are current, USM has no assurance that Cellular Co.
will have sufficient assets at the time the principal payment is due in June
2000 to repay the loans in full. No accrual has been made for this possibility
and the note is being carried on the balance sheet at the full loan amount as of
December 31, 1995.
STANDBY LETTER OF CREDIT
The Company has entered into a standby letter of credit agreement effective July
20, 1994 with a financial institution. This standby letter of credit, which will
not exceed $10.0 million, provides supplemental security in support of a bank
loan to an entity minority-owned by the Company. In the event of default under
the minority-owned entity's bank loan agreement, the bank may call upon the
Company's standby letter of credit to satisfy
any amounts still due under this loan agreement.
NOTE 14
RESTRICTION ON COMMON STOCK DIVIDENDS
Under TDS's loan agreements at December 31, 1995, 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 $390.6 million underlying
retained earnings of all TDS subsidiaries at December 31, 1995, $169.1 million
was available for the payment of dividends on the subsidiaries common stock. Of
the $2.4 billion underlying net assets of the TDS subsidiaries at December 31,
1995, $1.8 billion was available for transfer to TDS.
<PAGE>
NOTE 15
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The following summarizes the unaudited combined assets, liabilities and equity,
and the unaudited results of operations of the cellular and telephone companies
in which TDS's investments are accounted for by the
equity method.
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets $ 266,967 $ 217,872
Due from affiliates 24,765 20,123
Property and other 937,609 631,222
------------------------------
$1,229,341 $ 869,217
------------------------------
------------------------------
Liabilities and Equity
Current liabilities $ 240,480 $ 194,728
Due to affiliates 31,501 32,034
Deferred credits 5,766 5,468
Long-term debt 40,220 38,984
Partners' capital
and stockholders' equity 911,374 598,003
------------------------------
$1,229,341 $ 869,217
------------------------------
------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Results of Operations
Revenues $1,173,559 $ 892,530 $ 765,983
Costs and expenses (808,008) (652,918) (568,458)
Other income
(expense) 8,249 7,952 (8,045)
Interest expense (6,414) (5,650) (9,046)
Income taxes (4,670) (1,824) (3,596)
Cumulative effect of
accounting changes -- -- 432
--------------------------------------
Net income $ 362,716 $ 240,090 $ 177,270
--------------------------------------
--------------------------------------
</TABLE>
NOTE 16
EMPLOYEE BENEFIT PLANS
PENSION PLAN
Telephone and Data Systems, Inc. Employees' Pension Trust I (the "TDS Plan"), a
qualified noncontributory defined contribution pension plan, provides pension
benefits for most of the employees of TDS, Inc., its telephone subsidiaries and
its service companies. Under this plan, pension benefits and costs are
calculated separately for each participant and are funded currently. Employees
of certain of the telephone subsidiaries not covered by the TDS Plan are covered
under other pension plans or receive direct pension payments. USM adopted the
United States Cellular Corporation Pension Plan (the "USM Plan") effective
January 1, 1994. The USM Plan, a qualified noncontributory defined contribution
pension plan, provides pension benefits for USM and American Portable employees.
Under the USM Plan, pension costs are calculated separately for each participant
and are funded currently.
TDS established the Telephone and Data Systems, Inc. Supplemental Executive
Retirement Plan (the "SERP") in 1994 to supplement the benefits under the TDS
Plan and the USM Plan. The SERP was established to offset the reduction of
benefits caused by the limitation on annual employee compensation under Internal
Revenue Service Code Section 401(a)(17). The SERP is a nonqualified deferred
compensation plan and is intended to be unfunded.
Total pension costs were $4.6 million, $4.8 million and $3.3 million in 1995,
1994 and 1993, respectively.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors two defined benefit postretirement plans that cover most of
the employees of TDS, Inc., its telephone subsidiaries and its service
companies. One plan provides medical benefits and the other plan 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 TDS Plan, under Internal Revenue Code Section 401(h). The Fund was
established to pay for part of the cost of the medical benefits. An amount not
to exceed 25% of the total contribution to the TDS Plan will be contributed to
the Fund annually. An additional contribution equal to a reasonable amortization
of the past service cost may be made without regard to the 25% limitation
described above. The Company will limit overall contributions to the aggregate
accruals recorded by its subsidiaries. The Company established a Voluntary
Employees' Beneficiary Association during 1993 to fund the costs of the life
insurance benefits. The Company's postretirement medical and life insurance
plans are currently underfunded.
<PAGE>
The following table sets forth the plans' funded status reconciled with the
amount shown in the Company's consolidated balance sheet at December 31, 1995
(dollars in thousands):
<TABLE>
<CAPTION>
Life Health
Insurance Care
Plan Plan Total
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retiree's $ 1,066 $ 3,292 $ 4,358
Fully eligible active
plan participants 597 2,562 3,159
Other active plan
participants 1,001 9,950 10,951
--------------------------------------
2,664 15,804 18,468
Plan assets at fair value 940 5,876 6,816
--------------------------------------
Accumulated postretirement
benefit obligation in excess
of plan assets 1,724 9,928 11,652
Unrecognized prior
service cost (42) (357) (399)
Unrecognized net gain from
past experience different
from that assumed and from
changes in assumptions 180 713 893
--------------------------------------
Accrued postretirement
benefit cost
at December 31, 1995 $ 1,862 $10,284 $12,146
--------------------------------------
--------------------------------------
</TABLE>
Net postretirement cost for 1995, 1994 and 1993 includes the following
components:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $ 588 $ 810 $ 806
Interest cost on accumulated
postretirement benefit
obligation 1,082 1,116 1,378
Actual return on plan assets (656) -- (64)
Net amortization and deferral 204 (224) (49)
--------------------------------------
Net postretirement cost $ 1,218 $ 1,702 $ 2,071
-------------------------------------
-------------------------------------
</TABLE>
For measurement purposes, a 10.9% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1995; the rate was assumed to
decrease over eight years to 6.1% and to remain at 6.1% thereafter. The assumed
rates of compensation increases and return on plan assets were 5% and 8%,
respectively. The health care cost trend rate assumption has a significant
effect on the amounts reported. Increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995, by $3.5 million and
the aggregate of the service and interest cost components of postretirement
expense for the year then ended by $502,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1994. SFAS No. 112 requires employers to
recognize the obligation to provide benefits to former or inactive employees
after employment but before retirement. The adoption of SFAS No. 112 had no
significant effect on results of operations or financial condition.
NOTE 17
SUBSEQUENT EVENTS
AMERICAN PORTABLE INITIAL PUBLIC OFFERING
American Portable filed a registration statement on February 20, 1996, for an
initial public offering of 11.0 million of its Common Shares and is expected to
grant the underwriters an over-allotment option for up to 1.65 million Common
Shares. If the offering is completed as currently planned, upon completion of
the offering, TDS will own 82.4% to 84.3% of the capital stock of American
Portable. It is estimated that the initial public offering price will be between
$15 and $18 per Common Share.
<PAGE>
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share amounts)
1995
Operating Revenues $209,975 $ 232,091 $256,508 $255,812
Operating Income 29,156 33,825 40,560 28,457
Net Income 23,193 22,580 42,596 15,609
Net Income Available to Common $ 22,701 $ 22,086 $ 42,338 $ 15,100
Weighted Average Common Shares (000s) 57,292 58,508 59,038 58,741
Earnings per Common Shares: $ .39 $ .38 $ .72 $ .26
1994
Operating Revenues $158,802 $ 173,585 $193,105 $205,318
Operating Income 22,304 29,005 32,303 25,210
Net Income Before Cumulative Effect of
Accounting Changes 10,224 14,320 17,623 18,377
Cumulative Effect of Accounting Changes (723) -- -- --
Net Income 9,501 14,320 17,623 18,377
Net Income Available to Common $ 8,937 $ 13,810 $ 17,166 $ 17,876
Weighted Average Common Shares (000s) 52,555 53,217 54,282 55,612
Earnings per Common Share:
Before Cumulative Effect of
Accounting Changes $ .18 $ .26 $ .31 $ .32
Cumulative Effect of Accounting Changes (.01) -- -- --
Net Income $ .17 $ .26 $ .31 $ .32
</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,
1995 and 1994, 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, 1995. 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 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 Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1996
(except with respect to the matter discussed in
Note 17, as to which the date is February 20,1996)
<PAGE>
TDS STOCK AND DIVIDEND INFORMATION
TDS's Common Shares are listed on the American Stock Exchange ("AMEX") under
the symbol "TDS" and in the newspapers as "TeleData." As of February 29,
1996, TDS Common Shares were held by 3,921 record owners and the Series A
Common Shares were held by 108 record owners. TDS has paid cash dividends on
Common Shares since 1974, and paid dividends of $.38 and $.36 per Common and
Series A Common Share during 1995 and 1994, respectively.
The Common Shares of United States Cellular Corporation, an 80.8%-owned
subsidiary of TDS, are listed on the AMEX under the symbol "USM" and in the
newspapers as "US Cellu." The Common Shares of American Paging, Inc., an
82.3%-owned subsidiary of TDS, are also listed on the AMEX under the symbol
"APP" and in the newspapers as "AmPaging."
MARKET PRICE PER COMMON SHARE BY QUARTER
TDS's Series A Common Shares and Preferred Shares are not actively traded and
therefore, quotations are not reported for such securities. Dividends on
TDS's Preferred Shares have been paid quarterly since the dates of issue. The
high and low sales prices of the Common Shares on the AMEX as reported by the
Dow Jones News Service are as follows:
<TABLE>
<CAPTION>
1995 1ST 2ND 3RD 4TH
--------------------------------------------------
<S> <C> <C> <C> <C>
High $ 46.38 39.38 42.88 43.25
Low $ 36.13 36.00 36.38 35.63
Dividend Paid $ .095 .095 .095 .095
--------------------------------------------------
--------------------------------------------------
<CAPTION>
1994 1ST 2ND 3RD 4TH
--------------------------------------------------
<S> <C> <C> <C> <C>
High $ 51.50 42.88 47.63 49.88
Low $ 36.75 36.00 35.50 39.50
Dividend Paid $ .09 .09 .09 .09
--------------------------------------------------
--------------------------------------------------
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
TELEPHONE COMPANIES
TDS Telecommunications Corporation
CENTRAL REGION - MID-CENTRAL DIVISION
Arcadia Telephone Company
Camden 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
Arvig Telephone Company
Badger Telecom, Inc.
Black Earth Telephone Company, Inc.
Bonduel Telephone Company
Bridge Water 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 AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
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
Lewis River Telephone Company
McDaniel Telephone Company
Mid-America Telephone Company, Inc.
New London Telephone Company
Oklahoma Communication Systems, Inc.
Orchard Farm Telephone Company
Potlatch Telephone Company
Southwestern Telephone Company
The Stoutland Telephone Company
Strasburg Telephone Company
Troy Telephone Company, Inc.
Vernon Telephone Company
Winterhaven Telephone Company
Wyandotte Telephone Company
NORTHEAST REGION
Chichester Telephone Company, Inc.
Edwards Telephone Company, Inc.
Hampden Telephone Company
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 AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
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
Arvig Telcom, Inc.
Arvig Cellular, Inc.
Central Region - TSSD, Inc.
Metroplex Communications Corporation
Metroplex Olympia Cellular Communications Corporation
Metroplex Portland Cellular Communications Corporation
Metroplex RSD-7 Cellular Communications Corporation
Metroplex Security Company
Rural Development Acquisition Corporation
TDSNet
TDS Oklahoma Holdings, Inc.
TDS Telecom N.E.R., Inc.
Tennessee Telecommunications Service Corporation
U.S. Link, Inc.
3
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
SERVICE COMPANIES
American Communications Consultants, Inc.
American Radio Communications, Inc.
CellVest
CommVest, Inc.
Integrated Communications Services, Inc.
National Telephone & Telegraph Company
Rudevco, Inc.
Suttle Press, Inc.
TCC, Incorporated
TDS Computing Services, Inc.
TDS Realestate Investment Corporation
Tel Radio Communications Properties, Inc.
Telecommunications Technologies Fund, Inc.
CABLE TV COMPANIES
Acorn Cable Company
TDS Cable Communications Company
Carolina Cable T.V. Co., Inc.
Comvideo Systems, Inc.
Condon TV Systems, Inc.
Interlake CableVision, Inc.
Kearsarge Cable Communications, Inc.
Lewisport Cable TV
Metroplex Cable, Inc.
21st Century T.V., Inc.
Volunteer TV Cable Company
Warren Cable Company
PCS COMPANIES
American Portable Telecom, Inc.
APT Operating Company, Inc.
APT Alaska, Inc.
APT Columbus, Inc.
APT Guam, Inc.
APT Houston, Inc.
APT Kansas City, Inc.
APT Minneapolis, Inc.
APT of Pittsburgh G.P., Inc.
APT Tampa/Orlando, Inc.
4
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
RADIO PAGING COMPANIES
American Paging, Inc.
Advanced Wireless Messaging, Inc.
American Messaging Services, LLC
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, Inc.
APPNOC, Inc.
Texas Paging Transmission, Inc.
5
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
CELLULAR COMPANIES
United States Cellular Corporation
United States Cellular Operating Company
United States Cellular Investment Company
Carry Phone, Inc.
USCC Real Estate Corporation
CellVest, Inc.
ComVest, Inc.
ILP, Inc.
Arkansas RSA #9, Inc.
California Rural Service Area #1, Inc.
California RSA #2, Inc.
California RSA #9, Inc.
Florida RSA #8, Inc.
USCOC of Florida RSA #9, Inc.
Florida RSA #10, Inc.
USCOC of Georgia RSA #1, Inc.
USCOC of Georgia RSA #14, Inc.
USCOC of Hawaii 3, Inc.
USCOC of Idaho RSA #5, Inc.
USCOC of Illinois RSA #1, Inc.
Illinois RSA #3, Inc.
USCOC of Illinois RSA #4, Inc.
Indiana RSA #1, Inc.
USCOC of Indiana RSA #2, Inc.
Indiana RSA #4, Inc.
Indiana RSA #5, Inc.
USCOC of Indiana RSA #7, Inc.
USCOC of Iowa RSA #1, Inc.
Iowa RSA #3, Inc.
Ohio State Cellular Phone Company, Inc.
Iowa RSA #9, Inc.
United States Cellular Operating Company - Des Moines
Iowa RSA #12, Inc.
Iowa 13, Inc.
USCOC of Iowa RSA #16, Inc.
Kansas RSA #5, Inc.
Kentucky RSA #1, Inc.
Kentucky RSA #2, Inc.
Kentucky RSA #3, Inc.
Kentucky RSA #9-10, Inc.
Kentucky RSA #11, Inc.
Maine RSA #1, Inc.
Maine RSA #4, Inc.
Maine RSA No. 4 Limited Partnership
USCOC of Cumberland, Inc.
Michigan RSA #4, Inc.
6
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
CELLULAR COMPANIES (cont'd)
Mississippi RSA #9, Inc.
USCOC of Missouri RSA #1, Inc.
USCOC of Missouri RSA #5, Inc.
United States Cellular Operating Company of Columbia
USCOC of Missouri RSA #13, Inc.
Missouri #15 Rural Cellular, Inc.
Peace Valley Cellular Telephone Company
NH #1 Rural Cellular, Inc.
USCOC of New York RSA #6, Inc.
Hudson Cellular Limited Partnership
North Carolina RSA #4, Inc.
Randolph Cellular Telephone Company
North Carolina RSA No. 6, Inc.
USCOC of North Carolina RSA #7, Inc.
Ohio RSA #1, Inc.
USCOC of Ohio RSA #7, Inc.
United States Cellular Operating Company of Tulsa, Inc.
Oklahoma Opco. of RSA #8, Inc.
USCOC of Texahoma, Inc.
Texahoma Cellular Telephone Corporation
Texahoma Cellular Limited Partnership
Oklahoma #9 Rural Cellular, Inc.
USCOC of Oklahoma RSA #10, Inc.
Oregon RSA #2, Inc.
Oregon RSA #3, Inc.
Oregon RSA No. 3 Limited Partnership
USCOC of Oregon RSA #5, Inc.
Oregon RSA #6, Inc.
United States Cellular Operating Company of Williamsport
Canton Cellular Telephone Company
USCOC of Pennsylvania RSA #9, Inc.
Uniontown Cellular Telco, Inc.
Fayette-Greene Cellular Telco, Inc.
PA Rural Service Area No. 9 Limited Partnership
Block B Cellular Corporation
Laurel Highland Cellular Telephone Company
Tri-State Cellular Partnership
Pennsylvania RSA No. 10B (II) Limited Partnership
USCOC of South Carolina RSA #4, Inc.
United States Cellular Investment Co. of Nashville
Tennessee RSA #3, Inc.
Tennessee RSA #4 Sub 2, Inc.
Tennessee RSA #6 B, Inc.
United States Cellular Operating Company of Knoxville
United States Cellular Telephone Company (Greater Knoxville), L.P.
Texas #20 Rural Cellular, Inc.
TDS V2B Acquisition Corp.
7
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
CELLULAR COMPANIES (cont'd)
Lake Champlain Cellular Partnership
Vermont Independent Cellular Telephone General Partnership
USCOC of Virginia RSA #2, Inc.
USCOC of Virginia RSA #4, Inc.
Virginia RSA #4, Inc.
Virginia RSA #7, Inc.
USCOC of Washington-4, Inc.
Washington RSA #5, Inc.
Western Sub-RSA Limited Partnership
McDaniel Cellular Telephone Company
USCOC of West Virginia RSA #2, Inc.
Hardy Cellular Telephone Company
Georgia RSA #13, Inc.
USCOC of Wisconsin RSA #6, Inc.
Wisconsin RSA #7, Inc.
Wisconsin RSA #8, Inc.
Wisconsin RSA General Partner, Inc.
Wisconsin RSA No. 8 Limited Partnership
United States Cellular Investment Company of Fresno, Inc.
USCIC of Colorado RSA #3, Inc.
Western Colorado Cellular, Inc.
Western Colorado Cellular of Colorado Limited Partnership
Idaho Invco of RSA #1, Inc.
Idaho RSA No. 1 Limited Partnership
Minnesota Invco of RSA #5, Inc.
Minnesota Invco of RSA #7, Inc.
Minnesota Invco of RSA #8, Inc.
Minnesota Invco of RSA #9, Inc.
Minnesota Invco of RSA #10, Inc.
Minnesota Invco of RSA #11, Inc.
USCIC of North Carolina RSA #1, Inc.
North Carolina RSA 1 Partnership
Pennsylvania Invco of RSA #5, Inc.
Pennsylvania Invco of RSA #6, Inc.
Texas Invco of RSA #6, Inc.
Community Cellular Telephone Company
Texas Invco of RSA #17, Inc.
USCIC of Seattle, Inc.
Wisconsin Invco of RSA #7, Inc.
United States Cellular Investment Company of Rockford
United States Cellular Operating Company of Atlantic City, Inc.
United States Cellular Operating Company of Bangor
Bangor Cellular Telephone, L.P.
United States Cellular Operating Company of Biloxi
United States Cellular Operating Company of Cedar Rapids
Cedar Rapids Cellular Telephone, L.P.
USCOC of Charlottesville, Inc.
8
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
CELLULAR COMPANIES (cont'd)
Charlottesville Cellular Partnership
USCOC of Corpus Christi, Inc.
United States Cellular Operating Company - Quad Cities
Davenport Cellular Telephone Company, Inc.
Davenport Cellular Telephone Company
United States Cellular Operating Company of Dubuque
Dubuque Cellular Telephone, L.P.
United States Cellular Operating Company of Evansville, Inc.
Evansville Cellular Telephone Company
United States Cellular Operating Company of Ft. Pierce
Central Florida Cellular Telephone Company, Inc.
USCOC of Gainesville, Inc.
United States Cellular Operating Company of Joplin
Joplin Cellular Telephone Company, Inc.
Tri-States Cellular Communications, Inc.
Joplin Cellular Telephone Company, L.P.
United States Cellular Operating Company of LaCrosse, Inc.
LaCrosse Cellular Telephone Company, Inc.
Lar-Tex Cellular Telephone Company, Inc.
United States Cellular Operating Company of Lewiston-Auburn
Lewiston CellTelCo Partnership
United States Cellular Operating Company of Manchester-Nashua, Inc.
Manchester-Nashua Cellular Telephone, L.P.
United States Cellular Operating Company of Medford
United States Cellular Operating Company of Owensboro
Owensboro Cellular Telephone, L.P.
USCOC of Portland, Inc.
United States Cellular Operating Company of Poughkeepsie, Inc.
Dutchess County Cellular Telephone Company, Inc.
United States Cellular Operating Company of Richland
United States Cellular Operating Company of Rochester
DRGP, Inc.
Rochester Cellular Telephone Company, L.P.
USCOC of Tallahassee, Inc.
Tulsa General Partner, Inc.
United States Cellular Telephone Company (Greater Tulsa)
USCOC of Victoria, Inc.
Victoria Cellular Partnership
Victoria Cellular Corporation
United States Cellular Operating Company of Waterloo
Waterloo/Cedar Falls CellTelCo Partnership
United States Cellular Operating Company of Wausau, Inc.
Wausau Cellular Telephone Company Limited Partnership
United States Cellular Operating Company of Yakima
Yakima MSA Limited Partnership
Yakima Valley Paging Limited Partnership
United States Cellular Investment Co. of Allentown
9
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
CELLULAR COMPANIES (cont'd)
USCIC of Amarillo, Inc.
United States Cellular Investment Company of Baton Rouge
Capitol Cellular, Inc.
CSII of Baton Rouge, Inc.
Star Cellular Communications, Inc.
Star Cellular Telephone Company, Inc.
Baton Rouge MSA Limited Partnership.
United States Cellular Investment Company of Binghamton, Inc.
Cellular America Telephone Company
USCIC of Brownsville, Inc.
United States Cellular Investment Company of Eau Claire, Inc.
Univeral Cellular for Eau Claire MSA, Inc.
Chibardun Cellular Telephone Corporation
Lavaca Cellular Telephone Company
United States Cellular Investment Company of Galveston
United States Cellular Investment Company of Green Bay, Inc.
United States Cellular Investment Company of Huntsville, Inc.
United States Cellular Investment Company of Iowa City
USCIC of Jackson, Inc.
United States Cellular Investment Company of Lafayette
United States Cellular Investment Corporation of Los Angeles
USCIC of McAllen, Inc.
USCIC of Ocala, Inc.
Four D, Ltd.
United States Cellular Investment Co. of Oklahoma City, Inc.
United States Cellular Investment Company of Portsmouth, Inc.
United States Cellular Investment Company of Raleigh-Durham
Carolina Cellular, Inc.
United States Cellular Investment Company of Santa Cruz, Inc.
United States Cellular Investment Company of Sarasota
United States Cellular Investment Company of St. Cloud, Inc.
United States Cellular Investment Company of Wheeling
10
<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 6, 1996 (except with respect to the matter discussed in Note 17,
as to which the date is February 20, 1996), on the consolidated financial
statements of Telephone and Data Systems, Inc. and Subsidiaries (the "Company")
included in the Company's 1995 Annual Report to Shareholders, to the inclusion
in this Form 10-K of our report dated February 6, 1996 (except with respect to
the matter discussed in Note 17, as to which the date is February 20, 1996), on
the financial statement schedules of the Company, and to the inclusion in this
Form 10-K of our compilation report dated February 9, 1996, on the combined
financial statements of the Los Angeles SMSA Limited Partnership, the
Nashville/Clarksville MSA Limited Partnership, and the Baton Rouge MSA Limited
Partnership, and to the incorporation of such reports into the Company's
previously filed S-8 Registration Statements, File No. 33-1192, File No.
33-4420, File No. 33-35172, File No. 33-50747, File No. 33-57257, File No.
33-64035 and File No. 333-01041, 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, File No. 33-68456 and File No. 33-59435, and into the
Company's previously filed S-4 Registration Statements, File No. 33-45570, File
No. 33-64293, File No. 33-62925, File No. 33-61009 and File No. 333-00727.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 21, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-8564,
33-8857, 33-8858, 33-28348, 33-68456 and 33-59435) and Form S-4 (Nos. 33-45570,
33-64293, 33-62925, 33-61009 and 333-00727) and in the Registration Statements
on Form S-8 (Nos. 33-1192, 33-4420, 33-35172, 33-50747, 33-57257, 33-64035 and
333-01041) of Telephone and Data Systems, Inc. of our report dated January 25,
1996 relating to the financial statements of Los Angeles SMSA Limited
Partnership, which appears in Telephone and Data Systems, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1995.
PRICE WATERHOUSE LLP
San Francisco, California
March 21, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of Telephone and Data
Systems, Inc., of our report dated February 17, 1995, on our audits of the
financial statements of the Los Angeles SMSA Limited Partnership as of December
31, 1994, and for each of the two years in the period ended December 31, 1994;
such financial statements are not included separately in this Form 10-K.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
March 20, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of Telephone and Data
Systems, Inc., of our reports dated February 9, 1996, February 10, 1995 and
February 11, 1994, on our audits of the financial statements of the
Nashville/Clarksville MSA Limited Partnership as of December 31, 1995, 1994 and
1993, and for the years ended December 31, 1995, 1994 and 1993; such financial
statements are not included separately in this Form 10-K.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 20, 1996
<PAGE>
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 9, 1996, February 10, 1995 and
February 11, 1994, on our audits of the financial statements of the Baton Rouge
MSA Limited Partnership as of December 31, 1995, 1994 and 1993, and for the
years ended December 31, 1995, 1994 and 1993; such financial statements are not
included separately in this Form 10-K.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF
DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 55,116
<SECURITIES> 25,217
<RECEIVABLES> 110,254
<ALLOWANCES> 5,103
<INVENTORY> 20,738
<CURRENT-ASSETS> 261,210
<PP&E> 3,252,456
<DEPRECIATION> 780,621
<TOTAL-ASSETS> 3,469,082
<CURRENT-LIABILITIES> 427,724
<BONDS> 858,857
1,587
29,710
<COMMON> 58,030
<OTHER-SE> 1,626,335
<TOTAL-LIABILITY-AND-EQUITY> 3,469,082
<SALES> 0
<TOTAL-REVENUES> 954,386
<CGS> 0
<TOTAL-COSTS> 822,388
<OTHER-EXPENSES> (103,857)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,848
<INCOME-PRETAX> 185,007
<INCOME-TAX> 81,029
<INCOME-CONTINUING> 103,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,978
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
</TABLE>
