10-K405 1 FORM 10-K -------------------------------------------------------------------------------- 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, 1994 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) -------------------------------------------------------------------------------- IOWA 36-2669023 -------------------------------- -------------------------------- (State or other jurisdiction (IRS Employer Identification of incorporation or No.) organization)
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: Name of each exchange Title of each class on which registered ----------------------------- ----------------------------- Common Shares, $1 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.___X___ As of February 28, 1995, the aggregate market values of the registrant's Common Shares, Series A Common Shares and Preferred Shares held by nonaffiliates were approximately $2.3 billion, $14.6 million and $62.0 million, respectively. The closing price of the Common Shares on February 28, 1995, was $45.625, as reported by the American Stock Exchange. Because no market exists for the Series A Common Shares and Preferred Shares, the registrant has assumed for purposes hereof that (i) each Series A Common Share has a market value equal to one Common Share because the Series A Common Shares were initially issued by the registrant in exchange for Common Shares on a one-for-one basis and are convertible on a share-for-share basis into Common Shares, (ii) each nonconvertible Preferred Share has a market value of $100 because each of such shares had a stated value of $100 when issued, and (iii) each convertible Preferred Share has a value of $45.625 times the number of Common Shares into which it was convertible on February 28, 1995. The number of shares outstanding of each of the registrant's classes of common stock, as of February 28, 1995, is 50,147,231 Common Shares, $1 par value, and 6,876,432 Series A Common Shares, $1 par value. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1994 Annual Report to Shareholders described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Part II of this report. -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS --------------------------------------------------------------------------------
PAGE NUMBER OR REFERENCE(1) --------------- Item 1. Business............................................. 3 Item 2. Properties........................................... 31 Item 3. Legal Proceedings.................................... 32 Item 4. Submission of Matters to a Vote of Security Holders............................................ 33 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 33 (2) Item 6. Selected Financial Data.............................. 33 (3) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 33 (4) Item 8. Financial Statements and Supplementary Data.......... 33 (5) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 33 Item 10. Directors and Executive Officers of the Registrant... 34 Item 11. Executive Compensation............................... 34 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 34 Item 13. Certain Relationships and Related Transactions....... 34 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 35 --------- (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, 1994 ("Annual Report"). (2) Annual Report sections entitled "TDS Stock and Dividend Information" and "Market Price per Common Share by Quarter." (3) Annual Report section entitled "Selected Consolidated Financial Data." (4) Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Annual Report sections entitled "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)" and "Report of Independent Public Accountants."
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. 30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602 TELEPHONE (312) 630-1900 [LOGO] -------------------------------------------------------------------------------- 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. At December 31, 1994, the Company served approximately 1.5 million customer units in 37 states, including 421,000 cellular telephones, 392,500 telephone access lines and 652,800 pagers. For the year ended December 31, 1994, cellular operations provided 45% of the Company's consolidated revenues; telephone operations provided 42%; and paging operations provided 13%. 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 81.3%-owned subsidiary, United States Cellular Corporation (AMEX symbol "USM"), which is engaged through subsidiaries and joint ventures primarily in the development and operation of and the acquisition of interests in cellular markets. USM owns, operates, invests in and has the right to acquire interests in cellular telephone systems representing approximately 25.2 million population equivalents in 207 markets in 36 states. USM owns a controlling interest in and manages cellular systems serving 130 markets ("consolidated markets"). Since the beginning of 1990, the number of cellular customers in USM's consolidated markets has increased from 36,100 to 421,000. The Company conducts substantially all of its telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). TDS Telecom currently operates 96 telephone companies serving 392,500 access lines in 29 states. TDS Telecom is expanding through the selective acquisition of local exchange telephone companies serving rural and suburban areas and by offering additional lines of telecommunications products and services to existing customers. TDS Telecom has acquired 23 telephone companies since the beginning of 1990. These acquisitions added 64,800 access lines during this five-year period, while internal growth added 63,800 lines. The Company conducts substantially all of its radio paging operations through its 82.5%-owned subsidiary, American Paging, Inc. (AMEX symbol "APP"). APP offers radio paging and related services through its subsidiaries. Since the beginning of 1990, the number of pagers in service increased from 161,600 to 652,800 at December 31, 1994, primarily from internal growth. APP provides service through 36 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 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 3 Telecommunications Corporation and its subsidiaries; (iv) references to "APP" refer to American Paging, Inc. and its subsidiaries; (v) 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; (vi) references to "RSA" refer to the Rural Service Area, as used by the FCC in designating non-MSA cellular market areas; (vii) references to cellular "markets" or "systems" refer to MSAs, RSAs or both; and (viii) references to "population equivalents" mean the population of a market, based on 1994 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 Personal Communications Services ("PCS") system in such market. RECENT DEVELOPMENTS In March 1995, American Portable Telecommunications, Inc. ("APT"), a wholly owned subsidiary of TDS, was the successful bidder for eight broadband PCS licenses at an auction conducted by the FCC. These 30 Megahertz ("MHz") PCS licenses will, when granted, authorize the Company to provide two-way voice and data services on new wireless, digital networks. TDS's licenses will cover the Major Trading Areas of Minneapolis-St. Paul, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City, Columbus, Alaska and Guam-N. Mariana Islands, and account for 27.9 million population equivalents. APT's successful bid commitment totalled $289.2 million for the eight licenses, or $10.35 per population equivalent. As required by FCC auction procedures, the Company has made a 20% down payment (less its initial $20.4 million deposit) on the licenses, and will complete the payment five business days after the FCC has granted the licenses. Management anticipates that initial construction will begin in late 1995 or early 1996 following detailed engineering and site procurement. Marketing and selling activities along with commercial operations are anticipated to commence in late 1996 or early 1997. Management anticipates that construction, development and introduction of PCS networks and services in these new markets (excluding the cost of the licenses) may involve expenditures of $400 million to $500 million or more over the next five years. TDS is considering a variety of financing options that appropriately balance the interests of its shareholders and debtholders. These options include sales of non-strategic cellular interests, long-term debt at USM and equity in a balanced program structured with the goal of preserving the Company's investment-grade debt rating. At the present time, management anticipates the costs of financing the acquisition of the PCS licenses and preconstruction activities should not significantly reduce operating cash flow during 1995 and 1996. Financing costs may, however, reduce consolidated net income and earnings per share somewhat during 1995 and 1996. REGULATORY DEVELOPMENTS Each of the diversified telecommunications operations of TDS conducted by its cellular telephone, local telephone and radio paging subsidiaries is subject to FCC and state regulation. The licenses held by these subsidiaries are granted by the FCC for the use of radio frequencies and are an important component of the overall value of the assets of TDS. Recent Congressional legislation, legislative proposals under consideration and FCC regulatory proceedings may have significant impact on some or all of its diversified telecommunications operations by altering FCC and state regulatory responsibilities for mobile service, the procedures for the award by the FCC of licenses to conduct existing and new mobile services, the terms and conditions of business relationships between mobile service providers and Local Exchange Carriers ("LECs") and the scope of the competitive opportunities available to mobile service providers. In general, the trend of these developments is toward an increase in the number of competitors and of competitive services. For the most part, FCC regulations which implement changes in the law have not yet been adopted, or are subject to requests for reconsideration, and the Company is therefore not now able to predict the extent of such impact. The Omnibus Reconciliation Act of 1993 (the "Budget Act"), amended the Communications Act of 1934 (the "Communications Act") by eliminating legislatively enacted distinctions affecting FCC and 4 state regulation of common carrier and private carrier mobile operations and directed the FCC to classify all mobile services, including cellular, paging, Specialized Mobile Radio ("SMR") and other services under two categories: Commercial Mobile Radio Services ("CMRS"), subject to common carrier regulation; or Private Mobile Radio Services ("PMRS"), not subject to common carrier regulation. In 1994, the FCC released a decision classifying mobile service offerings as CMRS operations if they include a service offering to the public for a fee which is interconnected to the public switched network. Cellular, SMR and paging, among other services, will be classified as CMRS if they fit this definition. In addition, the FCC decision established a regulatory precedent for hybrid CMRS/PMRS regulation of mobile operations which offer both CMRS and PMRS service. The Company anticipates that most of its mobile service offerings will be classified as CMRS. The FCC decision also states that it would forebear from requiring that CMRS providers comply with a number of statutory provisions, otherwise applicable to common carriers, such as the filing of tariffs. It requires LECs to provide reasonable and fair interconnection to all CMRS providers, subject to mutual compensation, reasonable charges for interstate interconnection and reasonable forms of interconnection. Numerous petitions for reconsideration of this decision were filed and remain pending. The Budget Act also amended the Communications Act to authorize the FCC to use a system of competitive bidding to issue initial licenses for the use of radio frequencies for which there are mutually exclusive applications and where the principal use of the license will be to offer service in return for compensation from customers. In response, the FCC adopted generic rules for competitive bidding, defined eligibility criteria for small businesses, minority- and female-owned businesses and rural telephone companies which qualify for preferential bidding treatment, as required under the Budget Act, and described the bidding mechanisms to be used by businesses qualifying for preferential treatment in future spectrum auctions. Under other amendments to the Communications Act included in the Budget Act, states will generally be prohibited from regulating the entry of, or the rates charged by, any CMRS provider. The new law does not, however, prohibit a state from regulating other terms and conditions of CMRS offerings and permits states to petition the FCC for authority to continue rate regulation. These new statutory provisions took effect in August 1994, and eight states filed petitions. The FCC has adopted both substantive and competitive bidding rules for both narrowband and broadband PCS. It has completed its narrowband auctions covering the ten nationwide licenses and the thirty regional licenses the FCC assigned to this service. An APP subsidiary was high bidder with a total bid in excess of $53 million on the same frequency block in each of the five regions specified by the FCC, so that it has the potential to be able to provide a nationwide service. That subsidiary is now prosecuting its application for an appropriate license or licenses before the FCC. The Company believes that its ability to provide narrowband PCS service throughout the country will be of considerable value, but it is not now able to predict with certainty the nature and extent of competition it will face or the conditions and restrictions the FCC will place on its provision of service. The FCC has allocated a total of 140 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 Rand McNally Major Trading Areas ("MTA"), and one 30 MHz block and three 10 MHz blocks in each of 493 Rand McNally Basic Trading Areas. Cellular operators are permitted to participate in the award of these new PCS licenses, except for licenses reserved for rural, small, minority- and female-owned businesses and licenses for markets in which such cellular operator owns a 20% or greater interest in a cellular licensee which holds a license covering 10% or more of the population of the respective PCS licensed area. In the latter case, the cellular licensee is limited to one 10 MHz PCS channel block. Numerous requests for reconsideration of the FCC's decision have been filed and remain pending before the FCC and at least one appeal was filed. On March 15, 1995, the U.S. Court of Appeals for the District of Columbia issued an order delaying the commencement of the auction of the 30 MHz block for Basic Trading Areas pending a resolution of a challenge to the FCC's rules giving bidding preferences to certain participants. A September 1995 hearing is scheduled. The FCC has classified PCS as CMRS. In March 1995, APT was the successful bidder for eight broadband PCS licenses at an auction conducted by the FCC. See "Recent Developments" above. 5 PCS technology is currently under development and is expected to 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 each area of the Company's diversified telecommunications operations. The ability of these future PCS licensees to complement or compete with existing cellular licensees will be affected by future FCC rule-making. It is expected that the new wireless services will be both complementary services and competitive alternatives to current cellular and landline telephone services. These and other future technological developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the services currently offered by the Company and its subsidiaries. There can be no assurance that the Company will not be adversely affected by such technological developments. CELLULAR TELEPHONE OPERATIONS THE CELLULAR TELEPHONE INDUSTRY Cellular telephone technology provides high-quality, high-capacity communications services to in-vehicle and hand-held portable cellular telephones. Cellular technology is a major improvement over earlier mobile telephone technologies. Cellular telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Cellular telephone systems also offer a full range of ancillary services such as conference calling, call-waiting, call-forwarding, voice mail, facsimile and data transmission. Cellular telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers operating on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSO is connected to the conventional ("landline") telephone network and potentially other MTSOs. Each conversation on a cellular phone involves a transmission over a specific set of radio frequencies from the cellular phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSO and from there may be forwarded to the landline telephone network to complete the call. As the cellular telephone moves from one cell to another, the MTSO determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call. USM provides cellular telephone service under licenses granted by the FCC. The FCC grants only two licenses to provide cellular telephone service in each market. However, competition for customers includes competing communications technologies such as conventional landline and mobile telephone, SMR systems and radio paging. In addition, emerging technologies such as Enhanced Specialized Mobile Radio ("ESMR"), mobile satellite communication systems and PCS may prove to be competitive with cellular service in the future in some or all of the markets where USM has operations. The services available to cellular customers and the sources of revenue available to cellular system operators are similar to those provided by conventional landline telephone companies. Customers are charged a separate fee for system access, airtime, long-distance calls, and ancillary services. 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. Digital radio technology offers advantages, including less transmission noise, greater system capacity, and potentially lower incremental costs for additional customers. The conversion from analog to digital radio technology is expected to be an industry-wide process that will take a number of years. 6 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 in a commercial trial by the end of 1995. USM expects to deploy some CDMA digital radio channels in other markets in the near future. The cellular telephone industry is characterized by high initial fixed costs. Accordingly, if and when revenues less variable costs exceed fixed costs, incremental revenues should yield an operating profit. The amount of profit, if any, under such circumstances is dependent on, among other things, prices and variable marketing costs which in turn are affected by the amount and extent of competition. Until technological limitations on total capacity are approached, additional cellular system capacity can normally be added in increments that closely match demand and at less than the proportionate cost of the initial capacity. 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 very recently, USM has principally been in a start-up phase. USM's activities have been concentrated significantly on the acquisition of interests in entities licensed or designated to receive a license ("licensees") from the FCC to provide cellular service and on the construction and initial operation of cellular systems. The development of a cellular system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. USM has experienced operating losses and net losses from its inception until the past few quarters. Management anticipates accelerating growth in cellular units in service and revenues as USM continues its vigorous expansion and development programs. Marketing and systems operations expenses associated with this rapid expansion will most likely reduce the rate of growth in operating cash flow and operating income over the next several quarters. While there are numerous cellular systems operating in the United States and other countries, the industry has only a limited operating history. While USM produced operating income and net income during 1994, 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 percentage of customers who terminate service each month (the "churn rate"); (iv) the cost of providing cellular services, including the cost of attracting new customers; and (v) continuing technological advances which may provide competitive alternatives. 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/Minnesota, Missouri, Eastern North Carolina/Virginia/South Carolina, West Virginia/Pennsylvania/Maryland, Indiana/ Kentucky, Oregon/California, Washington/Oregon, Oklahoma/Missouri/Kansas, Texas/Oklahoma, Maine/New Hampshire/Vermont, Eastern Tennessee/Western North Carolina, Northern Florida/Georgia and Southwestern Texas. See "The Company's Cellular Interests." USM has acquired its cellular interests through the wireline application process (22%), including settlements and exchanges with other applicants, and through acquisitions (78%), including acquisitions from TDS and third parties. USM's management plans to retain minority interests in certain cellular markets which it believes will earn a favorable return on investment. Other minority interests may be traded for interests in markets which enhance USM's market clusters or may be sold for cash or other consideration. CELLULAR SYSTEMS DEVELOPMENT ACQUISITIONS. During the last 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 RSAs and has been based on obtaining interests with rights to manage the underlying market. The Company has more than doubled its population equivalents from approximately 11.8 million at December 31, 1989, to approximately 25.2 million at December 31, 1994. However, population equivalents grew at a compound annual rate of 10% over the last three years and only 5% in 1994. 7 Markets managed or to be managed by USM have increased from 50 markets at December 31, 1989, to 150 markets at December 31, 1994. As of December 31, 1994, almost 86% of the Company's population equivalents represented interests in markets USM manages or expects to manage compared to 70% at December 31, 1989. USM plans to acquire additional cellular interests through acquisitions or trades 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. USM also continues to evaluate the disposition of interests which are not essential to its corporate development strategy. USM, or TDS for the benefit of USM, will ordinarily make acquisitions using securities or cash or by exchanging cellular interests it already owns. While management believes that it will be succcessful in making additional acquisitions or trades, there can be no assurance that USM or TDS for the benefit of USM will be able to negotiate additional acquisitions or trades on terms acceptable to it or that regulatory approvals, where required, will be received. USM, or TDS for the benefit of USM, has negotiated acquisitions of cellular interests from third parties primarily in consideration for USM's Common Shares or TDS's Common or Preferred Shares. Cellular interests acquired by TDS are generally assigned to USM. At that time, USM reimburses TDS for the value of TDS securities issued in such transactions, generally by issuing Common Shares 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 are closed. The fair market value of the USM securities issued to TDS in connection with these transactions is equal to the fair market value of the TDS securities delivered in the transactions and is determined at the time the transactions are closed. COMPLETED ACQUISITIONS. During 1994, USM completed the acquisition of controlling interests in nine markets and several minority interests representing approximately 1.3 million population equivalents for an aggregate consideration of $140.3 million. The consideration consisted of 2.2 million TDS Common Shares, 53,000 USM Common Shares, $28.2 million in cash, $1.4 million cancellation of a note receivable and the obligation to deliver approximately 42,000 TDS Common Shares in the future. USM reimbursed TDS for TDS securities issued and cash paid in the acquisitions through an increase of $309,000 in the debt to TDS under the Revolving Credit Agreement and the issuance to TDS of 4.2 million USM Common Shares. PENDING ACQUISITIONS. At December 31, 1994, USM, or TDS for the benefit of USM had entered into agreements to acquire controlling interests in seven markets and several minority interests representing approximately 1.2 million population equivalents for an aggregate consideration estimated to be approximately $101.5 million. If all of the pending acquisitions are completed as planned, TDS and/or USM will deliver approximately 1.9 million TDS Common Shares, all of which are expected to be issued in 1995, and 102,000 USM Common Shares, and will pay approximately $12.8 million in cash. Any interests acquired by TDS in these transactions are expected to be assigned to USM and, at that time, USM will reimburse TDS for TDS's consideration delivered and costs incurred in such acquisitions in the form of USM Common Shares or increases in the balance under the Revolving Credit Agreement. USM has also entered into agreements to exchange markets with four other cellular operators. Pursuant to the exchange agreements, USM will receive majority interests in nine new markets in exchange for majority interests in seven markets and three market partitions USM currently owns. 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 63,879,673 shares of common stock of USM at December 31, 1994, representing over 81% of the combined total of USM's outstanding Common and Series A Common Shares and over 96% 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, 1994, TDS would have owned over 80% of the total outstanding common stock of USM and controlled over 95% of 8 the combined voting power of both classes of its common stock. In the event TDS's ownership of USM falls below 80% of the total value of all of the outstanding shares of USM's stock, TDS and USM would be deconsolidated for federal income tax purposes. TDS and USM have the ability to defer or prevent deconsolidation, if deferring or preventing deconsolidation would be advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's Common Shares in connection with certain acquisitions. CELLULAR INTERESTS AND CLUSTERS USM operates clusters of adjacent cellular systems wherever feasible, 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 sizes of each cluster and engineering considerations. USM's market clusters continue to grow rapidly. At December 31, 1994, USM's service territory covered approximately 18% of the geography and approximately 9% of the population of the United States. USM operated nine market clusters at that date, four of which have a population of two million or more. USM anticipates that it will continue to pursue strategic acquisitions and trades which will complement its established market clusters. From time to time, USM may also consider trading or selling its interests in markets which do not fit well with its long-term strategies. USM owned or had the right to acquire interests in cellular telephone systems in 207 markets at December 31, 1994, representing 25.2 million population equivalents. Of these population equivalents, 84% are in markets which will be consolidated, 2% are in managed but not consolidated markets and 14% are in markets in which USM holds an investment interest. The following table summarizes the growth in USM's population equivalents in recent years and the development status of these population equivalents. 9
DECEMBER 31, ------------------------------------------- 1994 1993 1992 1991 1990 ------- ------- ------- ------- ------- (THOUSANDS OF POPULATION EQUIVALENTS) (1) Operational Markets: Majority-Owned and Managed..................................................... 18,204 18,464 14,475 10,572 5,172 Minority-Owned and Managed (2)................................................. 1,191 1,157 2,039 1,783 1,310 Markets Under Construction and to be Managed: (3) Majority-Owned................................................................. 2,187 1,012 1,831 3,015 4,445 Minority-Owned (2)............................................................. -- 6 5 124 451 ------- ------- ------- ------- ------- Total Markets Managed and to be Managed 21,582 20,639 18,350 15,494 11,378 Minority Interests in Markets Managed by Others.................................. 3,619 3,429 3,517 3,274 3,480 ------- ------- ------- ------- ------- Total.......................................................................... 25,201 24,068 21,867 18,768 14,858 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------- (1) Based on 1994 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.
The following section details USM's cellular interests, including those it owned or had the right to acquire as of December 31, 1994. The table presented therein lists clusters of markets, including both MSAs and RSAs, 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. 10 THE COMPANY'S CELLULAR INTERESTS The table below sets forth certain information with respect to the interests in cellular markets which USM and TDS owned or had the right to acquire pursuant to definitive agreements as of December 31, 1994. 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. The fair market value of USM's cellular interests will ultimately depend on the success of its operations. There is no assurance that the value of cellular interests will not be significantly lower in the future than at present.
PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1994 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS -------------------------------------------- ---------- ----------- -------------- -------- ----------------- MARKETS MANAGED BY THE COMPANY: MIDWEST REGIONAL MARKET CLUSTER: IOWA: Des Moines, IA.......................... 413,000 100.00% 100.00% 413,000 Davenport, IA-IL........................ 362,000 97.37 97.37 353,000 Humboldt (IA 10)........................ 183,000 100.00 100.00 183,000 Cedar Rapids, IA........................ 173,000 94.90 %.34 95.24 165,000 Muscatine (IA 4)#....................... 156,000 100.00 100.00 156,000 Iowa (IA 6)#............................ 153,000 100.00 100.00 153,000 Waterloo-Cedar Falls, IA................ 150,000 88.59 88.59 133,000 Hardin (IA 11)#......................... 109,000 100.00 100.00 109,000 Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000 Iowa City, IA #......................... 98,000 1.95 98.05 100.00 98,000 Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000 Dubuque, IA............................. 88,000 70.41 .40 70.81 62,000 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)*(2)....................... 91,000 49.00 49.00 44,000 Winneshiek (IA 12)*..................... 115,000 24.50 24.50 28,000 Ida (IA 9)*............................. 63,000 16.67 16.67 11,000 ---------- ----------------- 2,495,000 2,249,000 ---------- ----------------- WISCONSIN/ILLINOIS/MINNESOTA: Peoria, IL.............................. 349,000 100.00 100.00 349,000 Jo Daviess (IL 1)....................... 316,000 100.00 100.00 316,000 Vernon (WI 8)(3)*....................... 228,000 100.00 100.00 228,000 Adams (IL 4)(4)*........................ 217,000 100.00 100.00 217,000 Mercer (IL 3)........................... 204,000 100.00 100.00 204,000 Rochester, MN*.......................... 115,000 100.00 100.00 115,000 Pierce (WI 5)........................... 92,000 100.00 100.00 92,000 Wausau, WI*............................. 119,000 71.76 71.76 86,000 Trempealeau (WI 6)(4)................... 82,000 100.00 100.00 82,000 LaCrosse, WI............................ 99,000 73.16 .71 73.87 73,000 ---------- ----------------- 1,821,000 1,762,000 ---------- ----------------- MISSOURI: Columbia, MO*........................... 122,000 100.00 100.00 122,000 Brown (KS 5)............................ 121,000 100.00 100.00 121,000 Callaway (MO 6)*........................ 85,000 100.00 100.00 85,000 DeKalb (MO 4)........................... 69,000 100.00 100.00 69,000 Linn (MO 5)............................. 68,000 100.00 100.00 68,000 Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000 Atchison (MO 1)......................... 43,000 100.00 100.00 43,000 ---------- ----------------- 564,000 564,000 ---------- ----------------- TOTAL MIDWEST REGIONAL MARKET CLUSTER.............................. 4,880,000 4,575,000 ---------- -----------------
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PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1994 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS -------------------------------------------- ---------- ----------- -------------- -------- ----------------- VIRGINIA/NORTH CAROLINA/SOUTH CAROLINA REGIONAL MARKET CLUSTER: EASTERN NORTH CAROLINA/VIRGINIA/SOUTH CAROLINA: Northampton (NC 8)...................... 286,000 100.00% 100.00% 286,000 Rockingham (NC 7)....................... 281,000 100.00 100.00 281,000 Harnett (NC 10)......................... 271,000 100.00 100.00 271,000 Greene (NC 13).......................... 238,000 100.00 100.00 238,000 Greenville (NC 14)...................... 236,000 100.00 100.00 236,000 Hoke (NC 11)............................ 215,000 100.00 100.00 215,000 Chesterfield (SC 4)..................... 209,000 100.00 100.00 209,000 Bedford (VA 4).......................... 175,000 100.00 100.00 175,000 Sampson (NC 12)......................... 123,000 100.00 100.00 123,000 Chatham (NC 6).......................... 149,000 81.16 81.16 121,000 Camden (NC 9)........................... 119,000 100.00 100.00 119,000 Buckingham (VA 7)....................... 89,000 100.00 100.00 89,000 Bath (VA 5)............................. 63,000 100.00 100.00 63,000 ---------- ----------------- 2,454,000 2,426,000 ---------- ----------------- 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 Greene (PA 9)........................... 188,000 100.00 100.00 188,000 Grant (WV 4)*........................... 168,000 100.00 100.00 168,000 Tucker (WV 5)*.......................... 130,000 100.00 100.00 130,000 Hagerstown, MD*......................... 127,000 100.00 100.00 127,000 Cumberland, MD-WV*...................... 103,000 100.00 100.00 103,000 Wetzel (WV 2)........................... 79,000 100.00 100.00 79,000 Bedford (PA 10)(4)*..................... 49,000 100.00 100.00 49,000 Garrett (MD 1)*......................... 30,000 100.00 100.00 30,000 ---------- ----------------- 1,398,000 1,398,000 ---------- ----------------- OTHER MARKETS: Tuscarawas (OH 7)....................... 255,000 100.00 100.00 255,000 Williams (OH 1)(5)...................... 127,000 75.00 25.00 100.00 127,000 Ross (OH 9)*............................ 247,000 49.00 49.00 121,000 Union (PA 8)*........................... (6) 100.00 (100.00) -- Williamsport, PA*....................... (6) 100.00 (100.00) -- ---------- ----------------- 629,000 503,000 ---------- ----------------- TOTAL VIRGINIA/NORTH CAROLINA/SOUTH CAROLINA REGIONAL MARKET CLUSTER..... 4,481,000 4,327,000 ---------- -----------------
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PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1994 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS -------------------------------------------- ---------- ----------- -------------- -------- ----------------- INDIANA/KENTUCKY REGIONAL MARKET CLUSTER: INDIANA/KENTUCKY: Meade (KY 3)............................ 304,000 100.00% 100.00% 304,000 Evansville, IN-KY....................... 318,000 78.13 78.13 249,000 Owen (IN 7)............................. 221,000 100.00 100.00 221,000 Fulton (KY 1)#.......................... 187,000 100.00% 100.00 187,000 Union (KY 2)............................ 128,000 100.00 100.00 128,000 Owensboro, KY........................... 90,000 79.11 .22 79.33 71,000 Warren (IN 5)*.......................... 120,000 33.33 33.33 40,000 Miami (IN 4)*........................... 184,000 14.29 14.29 26,000 ---------- ----------------- 1,552,000 1,226,000 ---------- ----------------- OTHER MARKETS: Newton (IN 1)........................... 212,000 60.50 39.50 100.00 212,000 Elliott (KY 9).......................... 206,000 100.00 100.00 206,000 Clay (KY 11)#........................... 170,000 100.00 100.00 170,000 Kosciusko (IN 2)........................ 164,000 100.00 100.00 164,000 Powell (KY 10).......................... 153,000 100.00 100.00 153,000 Cheboygan (MI 4)*....................... 129,000 100.00 100.00 129,000 ---------- ----------------- 1,034,000 1,034,000 ---------- ----------------- TOTAL INDIANA/KENTUCKY REGIONAL MARKET CLUSTER.............................. 2,586,000 2,260,000 ---------- ----------------- NORTHWEST REGIONAL MARKET CLUSTER: OREGON/CALIFORNIA: Coos (OR 5)............................. 250,000 100.00 100.00 250,000 Del Norte (CA 1)........................ 212,000 100.00 100.00 212,000 Medford, OR*............................ 160,000 100.00 100.00 160,000 Mendocino (CA 9)........................ 141,000 100.00 100.00 141,000 Crook (OR 6)*........................... 182,000 37.50 37.50 68,000 Modoc (CA 2)............................ 60,000 100.00 100.00 60,000 ---------- ----------------- 1,005,000 891,000 ---------- ----------------- WASHINGTON/OREGON: Pacific (WA 6)*......................... 178,000 49.00 51.00 100.00 178,000 Richland-Kennewick-Pasco, WA*........... 168,000 100.00 100.00 168,000 Yakima, WA*............................. 206,000 54.55 54.55 113,000 Okanogan (WA 4)......................... 112,000 100.00 100.00 112,000 Umatilla (OR 3)*........................ 147,000 60.42 60.42 89,000 Kittitas (WA 5)(4)*..................... 68,000 83.50 83.50 57,000 Hood River (OR 2)*...................... 69,000 30.32 30.32 21,000 Skamania (WA 7)*........................ 26,000 30.32 30.32 8,000 ---------- ----------------- 974,000 746,000 ---------- ----------------- OTHER MARKETS: Clark (ID 6)............................ 288,000 100.00 100.00 288,000 Butte (ID 5)............................ 153,000 100.00 100.00 153,000 ---------- ----------------- 441,000 441,000 ---------- ----------------- TOTAL NORTHWEST REGIONAL MARKET CLUSTER.............................. 2,420,000 2,078,000 ---------- -----------------
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PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1994 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS -------------------------------------------- ---------- ----------- -------------- -------- ----------------- TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER: OKLAHOMA/MISSOURI/KANSAS: Tulsa, OK*.............................. 791,000 55.06% 55.06% 436,000 Elk (KS 15)*............................ 155,000 99.00% 99.00 154,000 Joplin, MO*............................. 140,000 100.00 100.00 140,000 Seminole (OK 6)......................... 215,000 55.06 55.06 119,000 Nowata (OK 4)(4)*#...................... 105,000 100.00 100.00 105,000 ---------- ----------------- 1,406,000 954,000 ---------- ----------------- MISSOURI: Stone (MO 15)........................... 105,000 100.00 100.00 105,000 Laclede (MO 16)......................... 93,000 100.00 100.00 93,000 Washington (MO 13)...................... 89,000 100.00 100.00 89,000 Shannon (MO 17)*........................ 54,000 100.00 100.00 54,000 Madison (AR 1).......................... (6) 100.00 (100.00) -- ---------- ----------------- 341,000 341,000 ---------- ----------------- TEXAS/OKLAHOMA: Garvin (OK 9)........................... 198,000 100.00 100.00 198,000 Haskell (OK 10)......................... 82,000 100.00 100.00 82,000 Wichita Falls, TX*...................... 135,000 51.65 51.65 70,000 Lawton, OK*............................. 112,000 51.65 51.65 58,000 Jackson (OK 8)*......................... 97,000 51.65 51.65 50,000 Hardeman (TX 5)(4)*..................... 40,000 51.65 51.65 21,000 Briscoe (TX 4)(4)*...................... 11,000 51.65 51.65 6,000 Beckham (OK 7)(4)*...................... 10,000 51.65 51.65 5,000 Cherokee (TX 11)........................ (6) 100.00 (100.00) -- Tyler, TX............................... (6) 100.00 (100.00) -- ---------- ----------------- 685,000 490,000 ---------- ----------------- TOTAL TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER.............. 2,432,000 1,785,000 ---------- ----------------- NORTHEAST REGIONAL MARKET CLUSTER: MAINE/NEW HAMPSHIRE/VERMONT: Manchester-Nashua, NH................... 345,000 87.59 87.59 302,000 Coos (NH 1)*............................ 227,000 100.00 100.00 227,000 Kennebec (ME 3)......................... 222,000 100.00 100.00 222,000 Somerset (ME 2)......................... 159,000 100.00 100.00 159,000 Bangor, ME.............................. 147,000 89.58 .40 89.98 133,000 Addison (VT 2)(3)*...................... 104,000 100.00 100.00 104,000 Washington (ME 4)*...................... 85,000 100.00 100.00 85,000 Lewiston-Auburn, ME..................... 102,000 82.04 82.04 84,000 Oxford (ME 1)........................... 81,000 100.00 100.00 81,000 ---------- ----------------- 1,472,000 1,397,000 ---------- ----------------- OTHER MARKETS: Poughkeepsie, NY........................ 265,000 81.32 .79 82.11 217,000 Columbia (NY 6)......................... 110,000 100.00 100.00 110,000 Jefferson (NY 1)........................ (6) 100.00 (100.00) -- ---------- ----------------- 375,000 327,000 ---------- ----------------- TOTAL NORTHEAST REGIONAL MARKET CLUSTER.............................. 1,847,000 1,724,000 ---------- -----------------
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PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1994 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS -------------------------------------------- ---------- ----------- -------------- -------- ----------------- EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER: Knoxville, TN*.......................... 544,000 96.03% 96.03% 522,000 Whitfield (GA 1)........................ 212,000 100.00 100.00 212,000 Asheville, NC*.......................... 204,000 100.00 100.00 204,000 Henderson (NC 4)(4)(7)*................. 186,000 100.00 100.00 186,000 Bledsoe (TN 7)(4)*...................... 143,000 96.03 96.03 137,000 Hamblen (TN 4)(4)*...................... 127,000 100.00 100.00 127,000 Giles (TN 6)*........................... 157,000 80.00 80.00 126,000 Lake (TN 1)*............................ 78,000 16.33 83.67% 100.00 78,000 Macon (TN 3)*........................... 330,000 16.67 16.67 55,000 Yancey (NC 2)(4)*....................... 31,000 100.00 100.00 31,000 ---------- ----------------- TOTAL EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER.............. 2,012,000 1,678,000 ---------- ----------------- SOUTHEAST REGIONAL MARKET CLUSTER: NORTHERN FLORIDA/GEORGIA: Tallahassee, FL #....................... 272,000 100.00 100.00 272,000 Worth (GA 14)........................... 243,000 100.00 100.00 243,000 Gainesville, FL......................... 221,000 100.00 100.00 221,000 Toombs (GA 11).......................... 150,000 100.00 100.00 150,000 Walton (FL 10).......................... 108,000 100.00 100.00 108,000 Putnam (FL 5)(7)........................ 69,000 100.00 100.00 69,000 Jefferson (FL 8)........................ 53,000 100.00 100.00 53,000 Dixie (FL 6)............................ 51,000 100.00 100.00 51,000 Calhoun (FL 9).......................... 39,000 100.00 100.00 39,000 Early (GA 13)*.......................... (6) 100.00 (100.00) -- ---------- ----------------- 1,206,000 1,206,000 ---------- ----------------- OTHER MARKETS: Fort Pierce, FL (8)*.................... 279,000 49.00 49.00 137,000 Copiah (MS 9)........................... 118,000 100.00 100.00 118,000 Glades (FL 2)(7)........................ 83,000 100.00 100.00 83,000 ---------- ----------------- 480,000 338,000 ---------- ----------------- TOTAL SOUTHEAST REGIONAL MARKET CLUSTER.............................. 1,686,000 1,544,000 ---------- ----------------- SOUTHWESTERN TEXAS MARKET CLUSTER: Corpus Christi, TX #.................... 374,000 100.00 100.00 374,000 Atascosa (TX 19)........................ 218,000 100.00 100.00 218,000 Edwards (TX 18)......................... 207,000 100.00 100.00 207,000 Laredo, TX.............................. 154,000 92.76 92.76 143,000 Wilson (TX 20).......................... 139,000 100.00 100.00 139,000 Victoria, TX............................ 80,000 99.22 99.22 79,000 ---------- ----------------- TOTAL SOUTHWESTERN TEXAS MARKET CLUSTER.............................. 1,172,000 1,160,000 ---------- ----------------- OTHER OPERATIONS: Atlantic City, NJ#...................... 335,000 9.09 50.01 59.10 198,000 Hawaii (HI 3)........................... 140,000 100.00 100.00 140,000 Vineland-Millville-Bridgeton, NJ........ 142,000 78.73 .99 79.72 113,000 ---------- ----------------- 617,000 451,000 ---------- ----------------- Total Managed Markets................. 24,133,000 21,582,000 ---------- -----------------
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PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1994 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS -------------------------------------------- ---------- ----------- -------------- -------- ----------------- MARKETS MANAGED BY OTHERS: Los Angeles/Oxnard, CA*................. 15,416,000 5.50% 5.50% 848,000 Nashville/Clarksville-Hopkinsville, TN-KY*................................. 1,224,000 49.00 49.00 599,000 Baton Rouge, LA (9)*.................... 558,000 52.00 52.00 290,000 Seattle-Everett/Tacoma/Bremerton, WA*... 2,991,000 6.25 6.25 187,000 Biloxi/Pascagoula, MS*.................. 341,000 49.00 49.00 167,000 Oklahoma City, OK*...................... 973,000 14.60 14.60 142,000 Portland, ME*........................... 279,000 49.00 49.00 136,000 McAllen, TX............................. 431,000 26.20 26.20 113,000 Portsmouth-Dover-Rochester, NH-ME*...... 270,000 40.00 40.00 108,000 Others (Fewer than 100,000 population equivalents each)...................... 1,029,000 ----------------- Total Population Equivalents of Markets Managed by Others............ 3,619,000 ----------------- Total Population Equivalents.......... 25,201,000 ----------------- ----------------- ------------ * Designates wireline market. # Designates operational market operated by third parties until USM acquires a controlling interest. (1) Interests under these agreements are expected to be acquired at the various times specified therein following the satisfaction of customary closing conditions. (2) The licensee in this market will exchange the wireline license for the non-wireline license in the same market. (3) USM's interest in the license for this market has been set aside by the FCC. USM is currently operating the market under interim operating authority granted by the FCC. See Item 3., "Legal Proceedings -- La Star and Wisconsin RSA 8 Applications." (4) These markets have been or will be partitioned into more than one licensed area. The 1994 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. (5) USM currently owns a 75% interest in the wireline license in this market and has an agreement to divest this interest. USM also has an agreement to acquire a 100% interest in the nonwireline license in this market. (6) USM has agreements to divest its 100% ownership interests in these markets. The 1994 populations of these markets are not included in the related cluster or group totals. (7) USM has agreements to divest partitioned areas in these markets. The 1994 population, percentage ownership and number of population equivalents shown are for the licensed areas within the markets which USM will continue to own upon completion of each divestiture. (8) USM owns 80% of the entity which owns and operates this market but has only a 49% interest in its earnings and profits. (9) 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 each cell site. USM has implemented such microwave interconnection in most of the cellular systems it manages. In other systems in which USM owns or has an option to purchase a majority interest and where it is believed to be cost-efficient, such microwave technology will also be implemented. Otherwise, such systems will rely upon landline telephone connections or microwave links owned by others to link cell sites with the MTSO. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, 16 a microwave network enables a system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company, while generally improving system reliability. In addition, microwave facilities can be used to connect separate cellular systems to allow shared switching, which reduces the aggregate cost of the equipment necessary to operate both systems. USM has continued to expand its internal network in 1994 to encompass over 100 markets in the United States. This network provides automatic call delivery for USM's customers and handoff between adjacent markets. The network has also been extended, using IS-41 technology, through links with certain systems operated by several other carriers, including GTE, US West, Ameritech, BellSouth, Centennial Cellular Corp., Southwestern Bell, McCaw Cellular Communications, 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 Independent Telephone Network and the North American Cellular Network. During 1995, 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 fraud due to the pre-call validation feature of the IS-41 technology. USM believes that currently available technologies will allow sufficient capacity on USM's networks to meet anticipated demand over the next few years. 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 which are designed to meet the needs of a variety of customer usage patterns. USM's distribution channels include direct sales personnel and agents and USM has recently added retail service centers in many of its markets. These USM-owned and managed locations are designed to market cellular service to the consumer segment in a setting which is familiar to these potential customers. USM manages each cluster of markets out of one administrative office with a local staff, including marketing, customer service, engineering and in some cases installation personnel. Direct sales consultants market cellular service to potential 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 commit customers to pay for a minimum amount of usage at discounted rates per minute, even if usage falls below a defined monthly minimum amount. USM also relies on 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. 17 USM opened its own retail locations in late 1993, expanding to over 140 locations by the end of 1994. These USM-owned and operated businesses utilize rental facilities located in high-traffic areas. USM is working toward a uniform appearance in these stores, with all having similar displays and layouts. The retail centers' hours of business match those of the retail trade in the local marketplace, often staying open on weekends and later in the evening than a typical business supplier. 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 which may potentially yield new customer additions in multiple markets. Agreements have been entered into with such national distributors as 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 cellular service and to establish familiarity with USM's name. Advertising is directed at gaining customers, increasing usage by existing customers and increasing the public awareness and understanding of the cellular services offered by USM. USM attempts to select the advertising and promotion media that are most appealing to the targeted groups of potential customers in each local market. USM utilizes local advertising media and public relations activities and establishes programs to enhance public awareness of USM, such as providing telephones and service for public events and emergency uses. CUSTOMERS AND SYSTEM USAGE Cellular customers come from a wide range of occupations. They typically include a large proportion of individuals who work outside of their offices such as people in the construction, real estate, wholesale and retail distribution businesses and professionals. Most of USM's customers use in-vehicle cellular telephones. However, more customers are selecting portable cellular telephones as these units become more compact and fully featured as well as more attractively priced. USM's cellular systems are used most extensively during normal business hours between 7:00 am and 6:00 pm. On average, the local retail customers in USM's majority-owned and managed systems used their cellular systems approximately 95 minutes per unit each month and generated retail revenue of approximately $47 per month during 1994, compared to 103 minutes and $49 per month in 1993. 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 $80 during 1994. Average monthly service revenue per customer unit decreased approximately 6% during 1994, reflecting both the decline in average local minutes per customer unit and slower growth in roaming revenues. USM anticipates that average monthly service revenue per customer unit will continue to decline as its distribution channels provide additional customers who generate fewer local minutes of use and as roaming revenues grow more slowly. Roaming is a service offered by USM which allows a customer to place or receive a call in a cellular service area away from the customer's home market area. USM has entered into "roaming agreements" with operators of other cellular systems covering virtually all systems in the United States and Canada. These agreements offer customers the opportunity to roam in these systems. These reciprocal agreements automatically pre-register the customers of USM's systems in the other carriers' systems. Also, a customer of a participating system roaming (i.e. travelling) in a USM market where this arrangement is in effect is able to 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. 18 The following table summarizes certain information about customers and market penetration in USM's managed operations.
YEAR ENDED OR AT DECEMBER 31, ------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ------- ------- ------- (DOLLARS IN THOUSANDS) Majority-owned and managed markets: Cellular markets in operation (1)............... 130 116 92 67 32 Total population of markets in service (000s)... 21,314 19,383 15,014 11,481 6,314 Customer Units: at beginning of period (2).................... 261,000 150,800 97,000 57,300 36,100 additions during period (2)................... 250,000 165,300 88,600 59,800 31,800 disconnects during period (2)................. 90,000 55,100 34,800 20,100 10,600 at end of period (2).......................... 421,000 261,000 150,800 97,000 57,300 Market penetration at end of period (3)(4)...... 1.98% 1.35% 1.00% 0.84% 0.91% Consolidated revenues............................. $ 332,404 $ 214,310 $139,929 $84,956 $54,621 Depreciation expense.............................. 39,520 25,665 16,606 8,814 4,363 Amortization expense.............................. 25,934 19,362 13,033 10,455 7,287 Operating income (loss)........................... 17,385 (8,656) (12,705) (16,831) (9,141) Construction expenditures......................... 158,453 94,088 58,832 66,037 21,189 Identifiable assets............................... $1,584,142 $1,275,569 $858,795 $612,981 $293,368 --------- (1) Represents the number of markets in which USM owned at least a 50% interest and which it managed, including its reseller operation in 1990-1992. The revenues and expenses of these cellular markets are included in USM's consolidated revenues and expenses. (2) Represents the approximate number of revenue-generating cellular telephones served by the cellular markets referred to in footnote (1). The revenue generated by such cellular telephones is included in consolidated revenues. (3) Computed by dividing the number of customer units at the end of the period by the total population of markets in service as estimated by Donnelley Marketing Service for the respective years. (4) The decrease from 1990 to 1991 is due to the addition of 32 majority-owned and managed RSAs in 1991. Market penetration for majority-owned and managed MSAs was 1.48% in 1991 and 1.07% in 1990.
19 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, 1994.
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION --------------------------------------------------------------------------- ---------- --------- ----------- Iowa....................................................................... 1,710,000 43,000 2.51% Wisconsin/Illinois/Minnesota............................................... 1,821,000 29,600 1.63% Missouri................................................................... 976,000 12,800 1.31% Eastern North Carolina/Virginia/South Carolina............................. 2,454,000 36,600 1.49% West Virginia/Pennsylvania/Maryland........................................ 1,143,000 17,000 1.49% Indiana/Kentucky........................................................... 1,061,000 24,700 2.33% Oregon/California.......................................................... 823,000 13,500 1.64% Washington/Oregon.......................................................... 701,000 12,300 1.75% Oklahoma/Missouri/Kansas................................................... 1,146,000 51,500 4.49% Texas/Oklahoma............................................................. 1,126,000 25,700 2.28% Maine/New Hampshire/Vermont................................................ 1,472,000 29,200 1.98% Eastern Tennessee/Western North Carolina................................... 1,693,000 41,500 2.45% Northern Florida/Georgia................................................... 1,117,000 21,500 1.92% Southwestern Texas......................................................... 798,000 11,800 1.48% Other Operations........................................................... 3,273,000 50,300 1.54% ---------- --------- --- 21,314,000 421,000 1.98% ---------- --------- --- ---------- --------- ---
CELLULAR TELEPHONES AND INSTALLATION There are a number of different types of cellular telephones, all of which are currently compatible with cellular systems nationwide. USM offers a full range of vehicle-mounted, transportable and hand-held portable cellular telephones. Features offered in some of the cellular telephones include hands-free calling, repeat dialing, horn alert and others. USM has established service and/or installation facilities in many of its local markets to ensure quality installation and service of the cellular telephones it sells. These facilities allow USM to improve its service by promptly assisting customers who experience equipment problems. USM negotiates volume discounts from its cellular telephone suppliers. USM discounts cellular telephones in most markets to meet competition or to stimulate sales by reducing the cost of becoming a cellular customer. In these instances, where permitted by law, customers are generally required to sign an extended service contract with USM. USM also cooperates with cellular equipment manufacturers in local advertising and promotion of cellular equipment. PRODUCTS AND SERVICES USM's customers are able to choose from a variety of packaged pricing plans which are designed to fit different calling patterns. USM's customer bills typically show separate charges for custom-calling features, airtime in excess of the packaged amount, and toll calls. Custom-calling features provided by USM include wide-area call delivery, call forwarding, call waiting, three-way calling and no-answer transfer. USM also offers a voice message service in many of its markets. This service, which functions like a sophisticated answering machine, allows customers to receive messages from callers when they are not available to take calls. REGULATION The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act. The FCC has promulgated regulations governing construction and operation of cellular systems, and licensing (including renewal of licenses) and technical standards for the provision of cellular telephone service. For licensing purposes, the FCC divided the United States into separate geographic markets (MSAs and RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the application process, the FCC reserved one block of frequencies for nonwireline applicants and 20 another block for wireline applicants. Subject to FCC approval, a cellular system may be sold to either a wireline or nonwireline entity, but no entity which controls a cellular system may own an interest in another cellular system in the same MSA or RSA. The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the USM's application for approval of the proposed transfer. When the first cell of a cellular system has been constructed, the licensee is required to notify the FCC that construction has been completed. Immediately upon this notification, but not before, FCC rules authorize the licensee to offer commercial service to the public. The licensee is then said to have "operating authority." Initial operating licenses are granted for ten-year periods. The FCC must be notified each time an additional cell is constructed 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 other cellular users and licensees in order to avoid electrical interference between adjacent systems. The height and power of base stations in the cellular system are regulated by FCC rules, as are the types of signals emitted by these stations. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration regulations with respect to the siting and construction of cellular transmitter towers and antennas. In a series of actions, most recently on July 7, 1994, 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: (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 renewal applications filed in 1994 were unopposed and USM expects its licenses in these markets to be renewed. The next USM renewal applications are due to be filed in 1996. See "Legal Proceedings -- La Star and Wisconsin RSA 8 Applications" for a discussion of certain FCC proceedings which have set aside the Company's licensing authority in a Wisconsin market pending the outcome of an FCC hearing. USM conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and anticipates being able to qualify for a renewal expectancy, if applicable. 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 nonwireline 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. USM is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. However, certain states require cellular system operators to go through a state certification process to serve communities within their borders. All such certificates can be revoked for cause. In addition, certain state authorities regulate several aspects of a cellular operator's business, including the 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. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters may 21 also be subject to state or local zoning, land use and other local regulations. Public utility or public service commissions (or certain of the commissioners) in several states have expressed an interest in examining whether the cellular industry should be more closely regulated by such states. Media reports have suggested that certain radio frequency ("RF") emissions from portable cellular telephones might be linked to cancer. USM is not aware of any scientific information or 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 only competitor for cellular telephone service in each market is the licensee of the second cellular system in that market. Competition for customers between the two systems in each market is principally on the basis of quality of service, price, size of area covered, services offered, and responsiveness of customer service. The competing entities in many of the markets in which USM has an interest have financial resources which are substantially greater than those of USM and its partners in such markets. The FCC's rules require all operational cellular systems to provide, on a nondiscriminatory basis, cellular service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public. In addition to competition from the other cellular licensee in each market, there is also competition from, among other technologies, conventional mobile telephone and SMR systems, both of which are able to connect with the landline telephone network. USM believes that conventional mobile telephone systems and conventional SMR systems are competitively disadvantaged because of technological limitations on the capacity of such systems. The FCC has recently given approval, through waivers of its rules, to ESMR, an enhanced SMR system. ESMR systems may have cells and frequency reuse like cellular, thereby potentially eliminating any current technological limitation. The first ESMR systems were implemented in 1993 in Los Angeles. Although less directly a substitute for cellular service, wireless data services and one-way paging service (and in the future, two-way paging services) may be adequate for those who do not need full two-way voice service. Continuing technological advances in the communications field make it difficult to predict the extent of additional future competition for cellular systems. For example, the FCC has allocated radio channels to a mobile satellite system in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites, and several consortia to provide such service have been formed. Such a system is designed primarily to serve the communications needs of remote locations and a mobile satellite system could provide viable competition for land-based cellular systems in such areas. It is also possible that the FCC may in the future assign additional frequencies to cellular telephone service to provide for more than two cellular telephone systems per market. PCS may prove to be competitive with cellular service in the future. PCS providers are expected to offer digital, wireless communications services. PCS trials are in process throughout the United States. PCS is not anticipated to be a significant source of competition in USM's markets in the near future, but may become a significant source of competition in USM's markets once PCS systems have been built and developed. Similar technological advances or regulatory changes in the future may make available other alternatives to cellular service, thereby creating additional sources of competition. TELEPHONE OPERATIONS The Company's telephone operations are conducted through TDS Telecom and 96 telephone subsidiaries. These telephone companies, ranging in size from less than 500 to more than 40,000 access lines, serve 392,500 access lines in 29 states. The Company provides modern, high-quality local and long-distance telephone service. Local service is provided by the Company's operating telephone subsidiaries. Long-distance or toll service is 22 provided through connections with long-distance carriers, primarily AT&T and the Regional Bell Operating Companies ("RBOCs"). The Company anticipates that it will need to make arrangements with AT&T, the RBOCs and other large companies in order to offer certain software-intensive services such as information gateway services. There is no assurance that the Company will be able to obtain such arrangements or that such arrangements, if obtained, will be on terms favorable to the Company. Future growth in telephone operations is expected to be derived from the acquisition of additional telephone companies, from providing service to new or presently unserved establishments, from business expansion in the areas served by the Company, from upgrading existing customers to higher grades of service, from increased usage of the network through both local and long-distance calling and from providing additional services made possible by advances in technology. The following table summarizes certain information regarding the Company's telephone operations.
YEAR ENDED OR AT DECEMBER 31, -------------------------------------------------------------------- 1994 1993 1992 1991 1990 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Telephone Operations Access lines*.......................................... 392,500 356,200 321,700 304,000 278,700 % Residential........................................ 81.3 82.0 83.1 83.8 84.3 % Business (nonresidential).......................... 18.7 18.0 16.9 16.2 15.7 % Single-party....................................... 99.8 99.5 99.1 98.8 98.3 Total revenues......................................... $ 306,341 $ 268,122 $ 238,095 $ 211,232 $ 194,101 % Local service...................................... 26.8 26.9 27.4 29.0 28.9 % Network access and long-distance................... 60.0 59.3 57.9 57.0 57.2 Depreciation and amortization expense.................. $ 68,878 $ 59,562 $ 51,946 $ 43,425 $ 38,281 Operating income....................................... 91,606 79,110 72,217 65,242 62,707 Construction expenditures.............................. 117,867 82,233 67,357 67,856 70,308 Total identifiable assets.............................. $ 984,563 $ 829,489 $ 723,855 $ 674,712 $ 567,498 --------- * 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, 1990, TDS has acquired 23 telephone companies serving a total of 64,800 access lines for an aggregate consideration totalling $220.0 million. The consideration consisted of $55.1 million in cash and notes, 210,000 Preferred Shares and 3.8 million Common Shares of the Company. At December 31, 1994, the Company had agreements, awaiting regulatory or other approvals, to acquire four telephone companies which serve 12,100 access lines and which own minority cellular interests representing approximately 45,000 population equivalents. These acquisitions are expected to be completed for an aggregate consideration of approximately $40.7 million, consisting of approximately 897,000 Common Shares of the Company and $250,000 in cash. 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. 23 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 aggressive schedule to upgrade its central office and outside plant facilities continued in 1994 as it prepared for the provisioning of new services. The Company has made significant investments in new switching equipment pursuant to its strategic relationships with AT&T and Siemens Stromberg-Carlson to provide all of its customers state of the art calling capabilities such as advanced calling services, Integrated Services Digital Network ("ISDN"), and Signaling System 7 ("SS7") by the year 2000. The AT&T and Siemens Stromberg-Carlson alliances should give the Company leading edge equipment and technical expertise that will help to direct it in its campaign to be the first to its customers with multimedia services. In its effort to bring new services to its customers, the Company deployed new technology as part of a 1994 primary objective that will continue to remain fundamental in 1995. By the end of 1994, the Company had deployed 18 host and 14 remote AT&T 5ESS and Siemens Stromberg-Carlson EWSD premier switches covering 26 exchanges and equipping 112,000 lines. By the end of 1995, an additional 17 hosts and 34 remotes serving 54 more exchanges and 93,000 additional lines will have been converted. At the end of 1995, less than 3 years into its 8 year switch conversion plan, the Company will have converted approximately half of its access lines to its new switching platform ahead of schedule. The Company also plans to increase its lines equipped with capabilities for CLASS services (call waiting, call forwarding, abbreviated dialing and 3-way calling), ISDN and SS7 to 240,700 lines, 212,800 lines, and 265,300 lines, respectively, at the end of 1995; as compared to the 134,600 lines, 109,200 lines, and 159,100 lines, respectively, equipped at the end of 1994. This surge of technology deployment will permit TDS Telecom to increase its deployment of the CLASS services, ISDN, and SS7 to 56%, 49%, and 61% of its customers, respectively, by the end of 1995 as compared to 34%, 28%, and 41% of its customers, respectively, at the end of 1994. By the end of 1995, virtually all of the Company's switches will be digital. In the mid 1980s, the Company initiated a long-term program to design its cable and fiber distribution networks on a digital serving area ("DSA") basis to accommodate ISDN service and at the same time, improve network reliability. The Company continued to aggressively deploy its DSA design in 1994 and expects to continue this program for the next several years until its distribution network is fully capable of accommodating high speed digital signals. In 1994, 370 route miles of fiber optic cable, primarily used for local service distribution, were installed. During the year, the Company's first self-healing fiber rings were constructed in Michigan and Indiana. This advanced technology and network design significantly increases network capabilities for new services, lowers costs and increases service reliability. In 1995, the Company will continue to install advanced technology, including the deployment of a network management center, that is expected to increase operating efficiencies through systems integration, better workforce management, and improved business processes, all leading to increased customer satisfaction. The Company estimates that the project and routine capital upgrades to its network will be $110 million in 1995 as compared to $117.9 million in 1994, $82.2 million in 1993, $67.4 million in 1992, $67.9 million in 1991 and $70.3 million in 1990. The Company continues to finance its construction and plant development programs with internally generated cash supplemented by long-term financing from the federal government's Rural Utilities Service program. 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. The RUS is authorized to make hardship loans at a 5% interest rate and cost of money loans at a rate not greater than 7%. The RTB, established in 1971, makes loans at interest rates based on its average cost of 24 money (6.15% and 6.40% for its fiscal year ended September 30, 1994), 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 (7.897% for a 35-year note at December 31, 1994). 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 $364.3 million of underlying retained earnings of the telephone subsidiaries at December 31, 1994, $110.2 million was available for the payment of dividends on the subsidiaries' common stock. At December 31, 1994, the Company's operating telephone companies had unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating approximately $110.6 million, at a weighted average annual interest rate of 6.01%, to finance specific construction activities in 1995 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. If funds were unavailable through the RUS, RTB and FFB programs in the future and the subsidiaries were to borrow from conventional lenders at market rates, their cost of new loans might increase significantly. In that event, the Company would expect to seek higher local service rates to cover higher interest expense in order to maintain a reasonable balance between service to customers and local service rates. A number of the telephone subsidiaries recover a proportion of their costs via interstate support mechanisms. Probable modification of those mechanisms is expected. As an interim measure, the interstate Universal Service Fund ("USF") has been capped and indexed for years 1995 and 1996 pending regulatory proceedings. Accordingly, the FCC has undertaken an extensive review of support mechanisms, including USF, which could involve the development of new mechanisms and changes in eligibility criteria. In addition, Congress is expected to introduce bills in 1995 to address similar issues. There is no assurance that cost recovery through direct and indirect interstate mechanisms will remain at current levels. Some telephone subsidiaries are in states where support and rate structures are under reevaluation or have been changed. There is no assurance that the states will continue to provide for cost recovery from current sources. The Company would expect to seek higher local service rates to recover costs for which current interstate or intrastate recovery may become unavailable. REGULATION Operating telephone companies, in most instances, are regulated by state regulatory agencies with respect to local rates, intrastate toll rates, intrastate access charges billed to intrastate interexchange carriers, service areas, service standards, accounting and related matters. In a number of states, construction plans, 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 is also proactive in maintaining current revenue streams in light of increasing earnings review activity at the state level. Although still operating in a regulated environment, the Company is taking steps to prepare for eventual competition. For example, with the onset of local competition, the Company is setting pricing and policy directives to align rate structures more appropriate in a competitive environment. The FCC regulates interstate toll rates, interstate access charges paid by interexchange carriers to local exchange carriers and other matters relating to interstate telephone service. The FCC also regulates the use of radio frequencies in telephone operations. The Company's telephone subsidiaries concur in the National Exchange Carrier Association ("NECA") common line and traffic sensitive tariffs and participate in the access revenue pools administered by NECA for interstate 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 intra- and inter-LATA (Local Access Transport Area) services. Such interstate and intrastate arrangements are intended to compensate 25 LECs, such as the Company's operating telephone companies, for the costs, including a fair rate of return, of facilities furnished in originating and terminating interstate and intrastate long-distance services. Various aspects of federal and state telephone regulation have, in recent years, been subject to re-examination and ongoing modification. For example, 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. 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 is conducting an inquiry into this subject which could lead to a reduction of this source of revenue. On September 19, 1990, the FCC approved a mandatory price cap plan on interstate access rates for the seven RBOCs and GTE, leaving the plan optional for all other local telephone operating companies. This followed a March 16, 1989 FCC decision allowing price cap regulation for AT&T's interstate services. The price cap approach differs from traditional rate-of-return regulation by focusing primarily on the prices of communications services. The intention of price cap regulation is to focus on productivity and the approved plan for telephone operating companies allows for the sharing with its customers of profits, achieved by increased productivity, that exceed allowed returns. Alternatives to rate-of-return regulation have also been adopted or proposed primarily for the RBOCs in some of the states in which the Company's operating subsidiaries do business. On May 13, 1993, the FCC approved an alternative regulation plan for small and mid-sized telephone operating companies not electing price caps. This plan reduces regulatory filing burdens under a form of modified rate-of-return. The Company's telephone subsidiaries have not elected the new FCC plan for 1995 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 rate-of-return regulation. On November 5, 1993, NECA filed with the FCC a Petition for Rulemaking proposing rule revisions to allow incentive settlement options within the NECA pools. The settlement options are designed to provide companies wishing to remain in the NECA pools with incentives similar to those previously adopted by the FCC but only available to non-NECA participants. This filing is still pending with the FCC. Management has been involved in providing comments on this plan and continues to evaluate opportunities under all forms of regulation. COMPETITION As a result of a series of FCC, court and state regulatory agencies' decisions, competition has been introduced in certain sectors of the telephone industry, including interstate and intrastate toll, switched and special access services and customer premises equipment. Landline facilities-based competition in intrastate intra-LATA markets is making greater inroads in more state proceedings (and this trend is expected to continue). However, either through legislation or the adoption of proposed rules, states have generally offered additional protection to rural areas, such as in Tennessee, Vermont and Wisconsin. On February 15, 1994, an FCC order became effective which gives competitive access providers, interexchange carriers and others the right to directly interconnect facilities in the central offices of tier one telephone companies for the provision of interstate switched access transport services. In reaching their decision that interconnection should not apply to small carriers, the FCC recognized that the smaller carriers who operate in limited geographic areas with limited subscriber bases would not be able to efficiently offer interconnection services. Subsequently, the FCC's virtual collocation requirements, which were part of the interconnection order were overturned by the United States Circuit Court of Appeals. Less than seven percent of the Company's consolidated telephone revenues are derived from switched access transport services. Further, the rules do not apply to the Company's telephone subsidiaries, but could lead to changes in other FCC rules and policies that affect the way certain services are priced. Both Houses of Congress are likely to consider, and may adopt legislation to open local exchange and other telecommunications services to competition and apply expanded interconnection requirements to some or all local exchange telephone companies. Technological developments in 26 cellular telephone, digital microwave, coaxial cable, fiber optics and other wireless and wired technologies may further permit the development of alternatives to traditional landline service. The Company and many other members of the local exchange carrier industry are seeking to maintain a strong universally affordable public telecommunications network through regulatory policies and programs that are sensitive to the needs of small communities and rural areas serviced by many of the Company's telephone subsidiaries. The FCC has initiated a Notice of Inquiry in Docket No. 80-286 on August 30, 1994 on the future of the USF and other high cost assistance mechanisms and has also requested every local exchange carrier to provide financial information in conjunction with its Notice of Inquiry. 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 today by which users of toll service may bypass the Company's switching services. First, users may construct and operate or lease facilities to transmit their traffic to an interexchange carrier. Second, certain interexchange carriers provide services which allow users to divert their traffic from the LEC's usage-sensitive services to their flat-rate services. Third, users may choose to use cellular telephone service to bypass the LEC's switching services. The Company's telephone subsidiaries have experienced only a small loss of traffic to such bypass. The Company and the exchange carrier industry are seeking to address bypass by advocating adequate interstate and state cost recovery mechanisms for high cost rural telephone service and flexible pricing, including reduced pricing of access and toll services, where appropriate. The FCC released other significant orders and proposed rulemakings during 1993 and 1994 which are intended to further promote competition in video and voice communications and which may provide the Company with increased communications opportunities. The Company actively monitors these proceedings seeking to protect its interests, and continues to evaluate new business opportunities that arise out of these regulatory decisions. Consistent with the 1993 Federal District Court's decision that declared the telephone/cable cross-ownership ban unconstitutional for Bell Atlantic, other telephone operating companies have similarly filed lawsuits challenging the ban. At this time, favorable summary judgment rulings that the FCC's ban on telephone companies' provision of video programming violates the First Amendment rights of the telephone companies to free speech have also been granted for U.S. West, BellSouth and for the United States Telephone Association's small and mid-size members. Cases filed by Ameritech and NYNEX are pending. Because of legislation under consideration by each house of Congress and the Administration's initiatives for the creation of a broadband interactive national information infrastructure, the Company expects that there eventually will be open entry in nearly every aspect of communications. The Company believes, however, that consistent with open entry is the realization by policymakers that high-cost support funds and similar cost-averaging methods must continue to be employed to ensure that advanced services reach rural areas. The Company plans to compete by providing high-quality advanced voice, video, data and image services. 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. Until the 1980s, the 27 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. The Company currently estimates that the ten largest Radio Common Carrier ("RCC") paging companies, including APP, serve approximately 50 percent of the estimated 24.5 million paging subscribers in the United States, with no single provider serving more than 18 percent of the United States marketplace. The FCC completed its narrowband PCS auction covering ten nationwide licenses and thirty regional licenses allocated to certain radio spectrum blocks. APP was the successful bidder for five regional licenses, providing equivalent coverage to that of a nationwide license, each consisting of a 50 kHz outbound channel paired with a 12.5 kHz return channel all on the same frequency. The licenses will authorize APP to introduce two-way wireless messaging communication services including acknowledgement paging, data and telemetry services, wireless E-Mail and digitized voice messaging. Additional innovations in technology combined with further reduced costs of equipment are expected to continue to broaden the potential market size for paging services and support the industry's rapid growth rate. Management also believes that future developments in the wireless communications industry will produce additional consolidations of smaller operators with larger, multi-market paging companies. APP provides one-way wireless 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 201,200 at the end of 1990 to 652,800 at year-end 1994, a compound annual growth rate of 34.2% The following table summarizes certain information about APP's operations.
YEAR ENDED OR AT DECEMBER 31, -------------------------------------------------------------------- 1994 1993 1992 1991 1990 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Pagers in service...................................... 652,800 460,900 322,200 236,800 201,200 Total revenues......................................... $92,065 $75,363 $54,716 $43,972 $38,021 Depreciation and amortization expense.................. 17,178 13,392 10,412 9,047 8,304 Operating (loss)....................................... (169) (721) (5,447) (7,750) (6,442) Additions to property and equipment.................... 27,403 24,813 15,501 13,322 14,347 Identifiable assets.................................... $ 146,107 $ 74,923 $ 57,080 $ 41,726 $ 38,067
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. On May 27, 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. On March 17, 1995 the FCC granted applications filed by the APP for SMR licenses in five markets and dismissed the remainder of APP's pending SMR applications. An SMR license consists of a 25 kHz outbound channel paired with a 25 kHz inbound channel. APP received channels in the following cities: five each in Tucson and Prescott, Arizona; two in Dubuque, Iowa; one in Champaign, Illinois and one in Eau Claire, Wisconsin. These licenses will provide additional capacity to allow APP to offer some or all of a broader range of innovative mobile data services, such as one- and two-way messaging, high resolution graphics, wireless E-Mail and facsimile. Prior to making grants of these applications, the FCC amended its rules to eliminate wireline eligibility restrictions applicable to SMR licensing and ordered that all pending waiver requests such as those filed by APP be dismissed as moot. 28 APP is a joint venture partner with Nexus Telecommunications Systems Ltd. of Israel ("Nexus") in American Messaging Services, Inc., which was formed to develop multiple applications and distribution channels for its proprietary wireless technologies. As part of this arrangement, APP has the exclusive right to market two-way lower-speed data messaging, vehicle location and inventory management services using patented spread spectrum technology in the Western Hemisphere. Management believes its alliance with Nexus has the potential to result in advanced two-way messaging services. Services which may require additional capacity, such as E-mail, will require higher-speed networks to support the customer base. This, in turn, may require more transmitter sites, more complex communication switches, and other enhancements to APP's infrastructure. Many of the services such as information services are currently offered in several of APP's operations. The time-frame for new two-way services is projected to be early 1996, but there can be no assurance at this early stage of development of such services that APP will be willing or able to invest in some or all of such services or that, if implemented, such services will be commercially successful. PAGING OPERATIONS APP provides local, wide-area, regional and nationwide paging services to customers through its operations centers. It offers local and regional paging coverage throughout Florida, 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. Nationwide paging is offered through APP's alliance with nonaffiliated service providers. APP currently provides four types of pagers in all of its markets: digital display, alphanumeric text display, voice and tone. A digital display pager permits a caller to transmit to the customer a numeric message that may consist of a telephone number, an account number or coded information. It has the memory to store several numeric messages that can be recalled by the customer when desired. Alphanumeric text display service allows customers to receive, store, and display full text messages of between 80 and 160 characters, which are sent from either a data entry device or an operator. In the case of voice service, the notification is followed by a brief voice message. A tone pager notifies the customer that a message has been received by emitting an audible beep, displaying a flashing light or vibrating. Since 1986, APP has made a limited number of selective acquisitions of paging companies which had been providing service in the same areas as APP, or in areas adjacent to APP's service areas. In 1994, APP obtained approximately 35,000 customers from its acquisition of Sunshine Beeper Company in Florida. In total, APP has added 59,000 net customers through acquisitions since 1990. As the industry continues to consolidate, APP expects to evaluate attractive acquisition opportunities and continue to make selective acquisitions on an ongoing basis. MARKETING STRATEGY APP directs its marketing efforts at value-oriented customers who appreciate APP's 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 and also help control 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 contracts and repair, (iv) loss protection, (v) voice mail usage on a flat rate or measured service basis, (vi) activation fees, (vii) the sale of 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 wireless networks, wide-area coverage, value-priced selection of pagers and ancillary services, and responsive sales and customer service staff. 29 APP offers its services to third-party resellers under marketing agreements. APP offers paging airtime in bulk quantities at wholesale rates to resellers who then "re-sell" APP's airtime 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 technologies, including cellular, broadband and narrowband PCS, SMR and others, are competitive forms of technology used in, or projected to be used for, wireless one-way and two-way communications. Cellular telephone technology provides an alternative communications system for customers who are frequently away from fixed-wire communications systems (i.e., ordinary telephones). APP believes that paging will remain one of the lowest-cost forms of wireless messaging due to the low-cost infrastructure associated with paging systems, as well as advances in technology that will provide for reduced paging costs. Future technological developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the paging services currently offered by APP. There can be no assurance that APP would not be adversely affected by such technology changes. GOVERNMENT REGULATION APP's message paging operations are subject to regulation by the FCC under the Communications Act. Currently, paging services are offered primarily over radio frequencies that the FCC has allocated for either common carriage (licensees are known as RCCs) or private carriage (licensees are known as private carrier paging operators ("PCP")). An RCC license is an exclusive license to a specific radio frequency in a particular locality or region and the licensee is regulated as a common carrier. A PCP license may be designated by the FCC as exclusive or non-exclusive, and may be subject to frequency sharing and coordination procedures. These procedures are designed to avoid interference with the operation of communications by other carriers using the same frequency. PCP licensees are private carriers, not subject to common carrier regulation. The FCC has granted APP licenses to use the radio frequencies required to conduct its paging operations and these licenses define the technical parameters under which APP is authorized to use those frequencies. APP primarily provides paging services directly to customers over its own transmission facilities, and is currently regulated as an RCC for some of its current services. APP also holds PCP licenses. The FCC licenses granted to APP are issued for up to ten years in the case of both RCC and PCP licenses, at the end of which time renewal applications must be approved by the FCC. Most of APP's current licenses expire between 1997 and 2001. FCC renewals are generally granted as long as APP is in compliance with FCC regulations. Although APP is unaware of any circumstances which would prevent the approval of any pending or future renewal applications, no assurance can be given that APP's licenses will be renewed by the FCC in the future. Moreover, although revocation and involuntary modification of licenses are extraordinary regulatory measures, the FCC has the authority to restrict the operation of licensed facilities or revoke or modify licenses. No license of APP has ever been revoked or 30 modified involuntarily. See "Legal Proceedings -- La Star and Wisconsin RSA 8 Applications" for a discussion of certain FCC proceedings which have set aside the Company's licensing authority in a Wisconsin market pending the outcome of an FCC hearing. The Communications Act requires licensees such as APP to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license, or any rights thereunder. The Communications Act also requires prior approval by the FCC of acquisitions of other paging companies by APP. The FCC has approved all transfers of control for which APP has sought approval. APP also routinely applies for FCC authority to use frequencies, modify the technical parameters of existing licenses, expand its service territory and provide new services. Although there can be no assurance that any future requests for approval or applications filed by APP will be approved or acted upon in a timely manner by the FCC, or that the FCC will grant the relief requested, APP has no reason to believe that any such requests, applications or relief will not be approved or granted. 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, 1994, 5,322 persons were employed by the Company, 126 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, 1994, TDS's gross property, plant and equipment of approximately $1.6 billion consisted of the following: Cellular telephone................................. 29.5 % Telephone Telephone lines.................................. 30.0 Central office equipment......................... 17.2 Telephone instruments and related equipment...... 1.3 Land and buildings............................... 3.2 Miscellaneous.................................... 6.2 Plant under construction......................... 3.3 ----- Total Telephone.............................. 61.2 Radio paging....................................... 5.2 Other.............................................. 4.1 ----- 100.0 % ----- -----
"Telephone lines" consists primarily of buried cable and also includes aerial cable, poles, and wire. "Central office equipment" consists of switching equipment, carrier equipment, and related facilities. "Telephone instruments and related equipment" consists of equipment located on the subscribers' premises and includes private branch exchanges. "Land and buildings" consists of land owned in fee simple and improvements thereto. "Miscellaneous" consists of tools, furnishings, fixtures, motor vehicles, work equipment, and plant held for future use. "Plant under construction" includes property of the foregoing categories which had not been placed in service because it was still under construction. The plant and equipment of TDS is maintained in good operating condition and is suitable and adequate for the Company's business operations. The properties of the operating telephone subsidiaries and most of 31 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. The more significant proceedings involving the Company are described in the following paragraphs. LA STAR AND WISCONSIN RSA 8 APPLICATIONS. USM indirectly owns 49% of La Star Cellular Telephone Company ("La Star"), which was an applicant for a construction permit for a cellular system in the New Orleans MSA. In June 1992, the FCC affirmed an Administrative Law Judge's order which had granted the application of another applicant and dismissed La Star's application. The basis for the FCC's action was its finding that USM improperly controlled La Star. In a footnote to its decision, the FCC stated that questions regarding the conduct of USM in that proceeding may be revisited in future proceedings. As a result of that footnote, FCC authorizations in uncontested FCC proceedings have been granted to TDS and its subsidiaries subject to any subsequent action the FCC might take concerning its findings and conclusions in the La Star decision. La Star, TDS and USM appealed the FCC's decision in the La Star proceeding. On March 29, 1994, the United States Court of Appeals for the District of Columbia Circuit vacated the FCC's decision in the La Star proceeding and remanded the matter to the FCC for further proceedings. On remand, the FCC affirmed the dismissal of the La Star application but did not address the subject matter of its footnote in the original La Star decision. As a result, the Wisconsin RSA 8 case, discussed below, now constitutes the only FCC expression calling for conditions on authorizations to TDS and its subsidiaries. On February 1, 1994, in a proceeding involving a license originally issued to TDS for Wisconsin RSA 8, the FCC instituted a hearing to determine whether in the La Star case USM had misrepresented facts to, lacked candor in its dealings with or attempted to mislead the FCC, and, if so, whether TDS possesses the requisite character qualifications to hold that Wisconsin license. The FCC stated in its decision that, pending resolution of the issues in the Wisconsin proceeding, subsequent authorizations to TDS and its subsidiaries would be conditioned on the outcome of that proceeding. TDS was granted interim authority to continue to operate that Wisconsin system pending completion of the hearing. Following extensive discovery by the FCC and other parties, TDS and USM have reached preliminary and definitive settlement agreements with parties to the proceeding contemplating a summary decision finding TDS and its affiliates fully qualified to be FCC licensees. Pending the negotiation of a definitive settlement agreement with a group of Wisconsin telephone companies who are parties to the proceeding, the hearing has been postponed. Final settlement will also be subject to the action of the judge presiding in the proceeding. TOWNES TELECOMMUNICATIONS, INC., ET. AL. V. TDS, ET AL. Plaintiffs Townes Telecommunications, Inc., Tatum Telephone Company and Tatum Cellular Telephone Company filed a suit on September 4, 1991 in the District Court of Rusk County, Texas, against both TDS and USM as defendants. Plaintiffs made a number of allegations, including usurpation, breach of fiduciary duty, civil conspiracy, breach of contract, tortious interference and other claims, and sought a variety of remedies, including unspecified damages not to exceed $33 million and as much as $200 million in punitive damages. The case went to trial on April 25, 1994. On May 5, 1994, the jury returned a verdict in favor of TDS and USM on all issues. The plaintiffs filed an appeal of the case on September 12, 1994. The parties have executed an agreement which settles all matters related to this litigation and this case has been dismissed with prejudice on February 14, 1995. The settlement agreement requires plaintiffs to purchase 32 a minority cellular interest from the Company at a negotiated purchase price which the Company believes approximates fair market value, and does not require the payment of any money by 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 1994. -------------------------------------------------------------------------------- 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. 33 -------------------------------------------------------------------------------- PART III -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from Exhibit 99 sections entitled "Election of Directors" and "Executive Officers." -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from Exhibit 99 section entitled "Executive Compensation" and "1994 Long-Term Incentive Plan," 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 Exhibit 99 sections entitled "Security Ownership of Management" and "Principal Shareholders." -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from Exhibit 99 section entitled "Certain Relationships and Related Transactions." 34 -------------------------------------------------------------------------------- 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 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* --------- * Incorporated by reference from Exhibit 13.
(2) Schedules
LOCATION ----------- Report of Independent Public Accountants on Financial Statement Schedules..................................... page 38 I. Condensed Financial Information of Registrant-Balance Sheets as of December 31, 1994 and 1993 and Statements of Income and Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 1994.................................................................................. page 39 II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1994............................................................................................... page 43 Los Angeles SMSA, Nashville/Clarksville MSA, and Baton Rouge MSA Limited Partnership Combined Financial Statements.................................................................................................. page 44 Compilation Report of Independent Public Accountants on Combined Financial Statements............................................................................. page 45 Reports of Other Independent Accountants........................................................... page 46 Combined Statements of Operations (Unaudited)...................................................... page 51 Combined Balance Sheets (Unaudited)................................................................ page 52 Combined Statements of Cash Flows (Unaudited)...................................................... page 53 Combined Statements of Changes in Partners' Capital (Unaudited).................................... page 54 Notes to Unaudited Combined Financial Statements................................................... page 55 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.
35 (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.
EXHIBIT NUMBER DESCRIPTION ---------- -------------------------------------------------------------------- 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).
36 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.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1994. No reports on Form 8-K were filed during the quarter ended December 31, 1994. 37 -------------------------------------------------------------------------------- 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 7, 1995 (except with respect to the matters discussed in Note 12 and Note 14, as to which the date is March 14, 1995). Our report on the consolidated financial statements includes an explanatory paragraph with respect to the change in the method of accounting for postretirement benefits other than pensions as discussed in Note 1 of the Notes to Consolidated Financial Statements. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The financial statement schedules listed in Item 14(a)(2) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois February 7, 1995 (except with respect to the matters discussed in Note 12 and Note 14, as to which the date is March 14, 1995) 38 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) BALANCE SHEETS ASSETS --------------------------------------------------------------------------------
DECEMBER 31, -------------------------------- (DOLLARS IN THOUSANDS) 1994 1993 ---------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 291 $ 24,651 Temporary investments 184 57 Notes receivable from affiliates 189,820 119,786 Advances to affiliates 22,016 1,616 Accounts receivable Due from subsidiaries--Income taxes 7,682 9,008 Due from subsidiaries--Other 8,624 9,618 Other 2,555 1,130 Other current assets 650 632 -------------------------------- 231,822 166,498 ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT IN SUBSIDIARIES Underlying book value 1,605,813 1,242,274 Cost in excess of underlying book value at date of acquisition 1,907 49,821 -------------------------------- 1,607,720 1,292,095 ---------------------------------------------------------------------------------------------------------------------------------- OTHER INVESTMENTS Minority interests in telephone and cellular companies and other investments 31,648 57,187 ---------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES Debt issuance expenses 2,027 2,020 Development and acquisition expenses 599 1,036 Other 7,239 3,138 -------------------------------- 9,865 6,194 ---------------------------------------------------------------------------------------------------------------------------------- $ 1,881,055 $ 1,521,974 ---------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 39 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------------------------------------------------
DECEMBER 31, -------------------------------- (DOLLARS IN THOUSANDS) 1994 1993 ---------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt and preferred stock $ 13,053 $ 3,339 Notes payable 97,629 6,000 Notes payable to affiliates 2,852 1,818 Advances from affiliates 345 348 Accounts payable Due to subsidiaries--Federal income taxes 5,959 4,212 Due to subsidiaries--Other 1,395 472 Other 811 1,722 Accrued interest 9,234 8,078 Accrued taxes (2,124) 2,463 Other 3,427 1,257 -------------------------------- 132,581 29,709 ---------------------------------------------------------------------------------------------------------------------------------- DEFERRED LIABILITIES AND CREDITS Investment tax credits (1,694) (2,117) Income taxes 14,368 6,218 Postretirement benefits obligation other than pensions (Note D) 12,067 12,856 Other 3,903 3,526 -------------------------------- 28,644 20,483 ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT, excluding current portion (Note B) 203,764 205,032 ---------------------------------------------------------------------------------------------------------------------------------- REDEEMABLE PREFERRED SHARES, excluding current portion (Note A) 13,209 25,632 ---------------------------------------------------------------------------------------------------------------------------------- NONREDEEMABLE PREFERRED SHARES 29,819 16,833 ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding 47,937,570 and 43,503,584 shares, respectively 47,938 43,504 Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,886,684 and 6,881,001 shares, respectively 6,887 6,881 Common Shares issuable, 41,908 and 304,328 shares, respectively 1,995 15,189 Capital in excess of par value 1,288,453 1,069,022 Retained earnings 127,765 89,689 -------------------------------- 1,473,038 1,224,285 ---------------------------------------------------------------------------------------------------------------------------------- $ 1,881,055 $ 1,521,974 ---------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 40 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) STATEMENTS OF INCOME --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ---------------------------------------- (DOLLARS IN THOUSANDS) 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------------- Operating sales and service revenues $ 17,402 $ 17,179 $ 14,849 Cost of sales and expenses 18,189 17,109 14,896 ---------------------------------------- Net operations (787) 70 (47) Other income Interest income received from affiliates 13,840 27,333 15,792 Other, net (1,507) (1,128) (2,969) ---------------------------------------- 12,333 26,205 12,823 Interest expense (22,107) (18,934) (16,428) Federal income tax credit (expense) (1,411) 2,602 (4,710) ---------------------------------------- Corporate operations (11,972) 9,943 (8,362) Equity in net income of subsidiaries and other investments 71,793 23,953 46,882 ---------------------------------------- Net income before extraordinary item and cumulative effect of accounting changes 59,821 33,896 38,520 Extraordinary item (Note C) -- -- (769) Cumulative effect of accounting changes (Note D) -- -- (6,866) ---------------------------------------- Net income $ 59,821 $ 33,896 $ 30,885 --------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. Note A: The annual requirements for redemption of Redeemable Preferred Shares are $11.8 million, $11.8 million, $1.2 million, $79,000 and $79,000 for the years 1995 through 1999, respectively. Note B: The annual requirements for principal payments on long-term debt are $1.3 million, $419,000, $394,000, $476,000 and $372,000 for the years 1995 through 1999, respectively. Note C: During 1992 the Company retired at a premium $20.8 million of its Senior Notes. The notes carried interest rates of 9.75% to 13.75% and were due in 1996 through 2004. The transaction resulted in an extraordinary loss of $769,000, net of income tax benefits of $491,000. Note D: The Company implemented SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," effective January 1, 1992 and SFAS No. 112 "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. See Note 1 of Notes to Consolidated Financial Statements, included in the Annual Report, for a discussion of the Company's postretirement benefit plans.
41 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------------------- (DOLLARS IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 59,821 $ 33,896 $ 30,885 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Extraordinary item -- -- 769 Cumulative effect of accounting change -- -- 6,866 Depreciation and amortization 1,080 2,547 1,568 Deferred taxes 8,572 4,563 3,459 Equity income (71,793) (23,953) (46,882) Other noncash expense 691 6 3,156 Change in accounts receivable 1,859 1,076 (6,440) Change in accounts payable 1,769 (4,603) 5,430 Change in accrued taxes (4,587) 2,463 428 Change in other assets and liabilities (1,236) 2,689 (447) ------------------------------------------- (3,824) 18,684 (1,208) ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings (130) 91,601 7,235 Repayment of long-term debt (1,611) (11,935) (28,780) Premium on retirement of long-term debt -- -- (1,117) Change in notes payable 91,629 (40,140) 6,511 Change in notes payable to affiliates 1,034 (175) (5,727) Change in advances from affiliates (3) -- (6,103) Common stock issued 11,185 109,972 78,592 Redemption of preferred shares (644) (220) (407) Dividends paid (20,906) (17,830) (13,902) ------------------------------------------- 80,554 131,273 36,302 ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions Value of assets acquired (215,658) (331,225) (154,569) Common Shares issued 173,658 281,605 134,612 Preferred Shares issued 12,500 3,000 -- ------------------------------------------- Net cash paid for acquisitions (29,500) (46,620) (19,957) Investments in subsidiaries (527) (126,108) (2,923) Dividends from subsidiaries 17,373 16,266 21,544 Other investments (3,058) 1,424 (5,884) Change in notes receivable from affiliates (64,850) 28,040 (28,460) Change in advances to affiliates (20,400) 1,073 127 Change in temporary investments (128) 114 17 ------------------------------------------- (101,090) (125,811) (35,536) ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,360) 24,146 (442) CASH AND CASH EQUIVALENTS-- Beginning of period 24,651 505 947 ------------------------------------------- End of period $ 291 $ 24,651 $ 505 ------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 42 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS --------------------------------------------------------------------------------
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 ------------ ------------ ------------ ----------- ------------ 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 (1) (6,452) $ -- $ (2,252) $ -- $ (8,704) Deducted from accounts receivable: For doubtful accounts (1,608) (5,837) -- 5,352 (2,093) Deducted from marketable equity securities: For unrealized loss -- -- (626) -- (626) FOR THE YEAR ENDED DECEMBER 31, 1992 Deducted from accounts receivable: For doubtful accounts $ (1,200) $ (4,457) $ -- $ 4,049 $ (1,608) -------------------------------------------------------------------------------------------------------------------------------
Note: (1) The beginning balance represents the implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" on January 1, 1993. 43 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, 1994 are set forth in the following table.
THE PERIODS COMPANY'S INCLUDED LIMITED IN COMBINED PARTNERSHIP CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST ------------------------------------------------------------------------------------------------------ ------------ ------------- Los Angeles SMSA Limited Partnership.................................................................. 1992-94 5.5% Nashville/Clarksville MSA Limited Partnership......................................................... 1992-94 49.0% Baton Rouge MSA Limited Partnership................................................................... 1992-94 52.0%
44 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, 1994 and 1993 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, 1994, 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 46 through 50. The report of the other auditors of the Los Angeles SMSA Limited Partnership contains explanatory paragraphs with respect to the uncertainties discussed in the second, third, fourth and fifth paragraphs of Note 7. We have not been engaged to audit either the separate financial statements of the aforementioned limited partnerships or the related combined financial statements in accordance with generally accepted auditing standards and to render an opinion as to the fair presentation of such financial statements in accordance with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois February 17, 1995 45 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 1993, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1994; 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 1993, and results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 9 to the financial statements, the Partnership has been named in two separate actions, now consolidated, and a separate complaint served by cellular agents. The outcome of these matters is uncertain and, accordingly, no accrual for these matters has been made in the financial statements. In addition, as discussed in Note 9, four class action suits were filed against the Partnership alleging violations of state and federal antitrust laws. The outcome of these matters is uncertain and, accordingly, no accrual for these matters has been made in the financial statements. COOPERS & LYBRAND L.L.P. Newport Beach, California February 17, 1995 46 REPORT OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1994, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 10, 1995 47 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 48 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1992, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1992, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1993 To The Partners of 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 49 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1993, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1993, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1994 To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1992, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1992, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1993 50 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1993 1992 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Revenues................................................................... $ 640,798 $ 506,028 $ 400,738 Expenses Selling, general and administrative...................................... 362,840 287,299 235,038 Depreciation and amortization............................................ 66,234 57,357 46,740 ----------- ----------- ----------- Total expenses........................................................... 429,074 344,656 281,778 ----------- ----------- ----------- Operating income........................................................... 211,724 161,372 118,960 Other income............................................................... 573 272 477 ----------- ----------- ----------- Net Income................................................................. $ 212,297 $ 161,644 $ 119,437 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. 51 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED BALANCE SHEETS (UNAUDITED) ASSETS
DECEMBER 31, ------------------------ 1994 1993 ----------- ----------- (DOLLARS IN THOUSANDS) Current Assets Cash.................................................................................. $ 38 $ 27 Accounts receivable--customers, net................................................... 95,630 81,656 Accounts receivable--affiliates....................................................... 16,016 29,981 Notes receivable--affiliates.......................................................... 402 3,756 Other current assets.................................................................. 18,523 5,689 ----------- ----------- 130,609 121,109 Property, Plant and Equipment, net...................................................... 380,473 304,926 Other................................................................................... 1,640 1,631 ----------- ----------- Total Assets............................................................................ $ 512,722 $ 427,666 ----------- ----------- ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL DECEMBER 31, ------------------------ 1994 1993 ----------- ----------- (DOLLARS IN THOUSANDS) Current Liabilities Accounts payable--other............................................................... $ 58,210 $ 38,776 Accounts payable--affiliates.......................................................... 1,431 1,039 Notes payable......................................................................... 692 -- Customer deposits..................................................................... 4,060 2,996 Other current liabilities............................................................. 39,323 22,101 ----------- ----------- 103,716 64,912 ----------- ----------- Deferred Rent........................................................................... 5,019 4,571 Capital Lease Obligation................................................................ 520 713 Partners' Capital....................................................................... 403,467 357,470 ----------- ----------- Total Liabilities and Partners' Capital................................................. $ 512,722 $ 427,666 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. 52 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
DECEMBER 31, ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................ $ 212,297 $ 161,644 $ 119,437 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization....................................... 66,234 57,357 46,740 Deferred revenue and other credits.................................. 1,387 497 (3) Loss on asset dispositions.......................................... 3,542 3,838 4,294 Change in prepaid expenses.......................................... (105) (22) 4 Change in accounts receivable....................................... (9) (37,422) (3,417) Change in accounts payable and accrued expenses..................... 25,919 6,097 17,307 Change in other assets and liabilities.............................. (1,556) 4,942 3,967 ------------ ------------ ------------ 307,709 196,931 188,329 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Change in notes payable............................................. 692 -- (2,305) Change in notes receivable.......................................... 3,354 (5) (3,751) Principal payments on capital lease obligations..................... (800) (612) (442) Capital contribution................................................ -- -- 2,474 Capital distribution................................................ (166,300) (111,461) (114,876) ------------ ------------ ------------ (163,054) (112,078) (118,900) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment, net of retirements...... (143,807) (86,011) (68,595) (Increases) decreases in other assets............................... (44) 1,335 (856) Change in deferred charges.......................................... (827) (202) (36) Proceeds from sale of assets........................................ 34 26 61 ------------ ------------ ------------ (144,644) (84,852) (69,426) ------------ ------------ ------------ NET INCREASE IN CASH.................................................... 11 1 3 CASH Beginning of period................................................. 27 26 23 ------------ ------------ ------------ End of period....................................................... $ 38 $ 27 $ 26 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these combined financial statements. 53 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED) (DOLLARS IN THOUSANDS) Balance at January 1, 1992...................................................... $ 300,252 Contributions................................................................. 2,474 Distributions................................................................. (114,876) Net Income for the year ended December 31, 1992............................... 119,437 --------- Balance at December 31, 1992.................................................... 307,287 Distributions................................................................. (111,461) Net Income for the year ended December 31, 1993............................... 161,644 --------- Balance at December 31, 1993.................................................... 357,470 Distributions................................................................. (166,300) Net Income for the year ended December 31, 1994............................... 212,297 --------- Balance at December 31, 1994.................................................... $ 403,467 --------- ---------
The accompanying notes are an integral part of these combined financial statements. 54 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 1. BASIS OF COMBINATION: The combined financial statements and notes thereto were compiled from the individual financial statements of cellular limited partnerships listed below in which United States Cellular Corporation (AMEX symbol "USM") has a noncontrolling ownership interest and which it accounts for using the equity method. The cellular partnerships, the period each partnership is included in the combined financial statements and USM's ownership interest in each partnership are set forth in the table below. The combined financial statements and notes thereto present 100% of each partnership whereas USM's ownership interest is shown in the table.
PERIOD INCLUDED LIMITED IN COMBINED PARTNERSHIP STATEMENTS INTEREST --------------- ------------- Los Angeles SMSA Limited Partnership................................................................ 1992-94 5.5% Nashville/Clarksville MSA Limited Partnership....................................................... 1992-94 49.0% Baton Rouge MSA Limited Partnership................................................................. 1992-94 52.0%
Profits, losses and distributable cash are allocated to the partners based upon respective partnership interests. Distributions are made quarterly at the discretion of the General Partner for one of the Partnerships. Of the partnerships included in the combined financial statements, the Los Angeles SMSA Limited Partnership is the most significant, accounting for approximately 89% of the combined total assets at December 31, 1994, and substantially all of the combined net income for the year then ended. USM's investment in and advances to Los Angeles SMSA Limited Partnership totalled $17,675,000 as of December 31, 1994, of which $19,402,000 represents its proportionate share of net assets of the Partnership. USM's investment in and advances to the Nashville/Clarksville MSA Limited Partnership totalled $17,360,000 as of December 31, 1994, which represents its proportionate share of net assets. USM's investment in and advances to the Baton Rouge MSA Limited Partnership totalled $10,660,000 as of December 31, 1994, $7,932,000 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: Buildings.............................................. 10-15 years Equipment.............................................. 3-10 years Furniture and Fixtures................................. 5-10 years Leasehold Improvements................................. 10 years
Property, Plant and Equipment consists of:
DECEMBER 31, ------------------------ 1994 1993 ----------- ----------- (DOLLARS IN THOUSANDS) Land.................................................................................... $ 2,987 $ 1,819 Buildings and Leasehold Improvements.................................................... 100,312 79,704 Equipment............................................................................... 432,949 355,376 Furniture and Fixtures.................................................................. 33,602 19,734 Under Construction...................................................................... 55,176 32,052 ----------- ----------- 625,026 488,685 Less Accumulated Depreciation........................................................... 244,553 183,759 ----------- ----------- $ 380,473 $ 304,926 ----------- ----------- ----------- -----------
55 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) Included in buildings are costs relating to the acquisition of cell site leases; such as legal, consulting, and title fees. Lease acquisition costs are capitalized when incurred and amortized over the period of the lease. Costs related to unsuccessful negotiations are expensed in the period the negotiations are terminated. Gains and losses on disposals are included in income at amounts equal to the difference between net book value and proceeds received upon disposal. During 1994, 1993 and 1992, one of the Partnerships recorded capital lease additions of $687,000, $827,000 and $514,000, respectively. Commitments for future equipment acquisitions amounted to $55,187,000 at December 31, 1994. 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, 1994, approximately $11 million in equipment had been purchased by the Partnership under the agreement. OTHER ASSETS Other assets consist primarily of the costs of acquiring the right to serve certain customers previously served by resellers and are being amortized over three years using the straight-line method. Accumulated amortization was $5,656,000 and $4,806,000 at December 31, 1994 and 1993, respectively. 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. 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, 1994, are as follows: (DOLLARS IN THOUSANDS) 1995.............................................................. $ 14,366 1996.............................................................. 13,836 1997.............................................................. 12,800 1998.............................................................. 12,240 1999.............................................................. 10,930 Thereafter........................................................ 20,916 --------- $ 85,088 --------- ---------
56 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) 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 $17,750,000, $15,119,000 and $10,938,000 for the years ended December 31, 1994, 1993 and 1992, respectively. One of the Partnerships leases office facilities under a ten-year lease agreement which provides for free rent incentives for six months and rent escalation over the ten-year period. The Partnership recognizes rent expense on a straight-line basis and recorded the related deferred rent as a noncurrent liability to be amortized as an adjustment to rental costs over the life of the lease. 4. CAPITAL LEASE OBLIGATION: One of the Partnerships leases equipment under capital lease agreements. At December 31, 1994 and 1993, respectively, the amount of such equipment included in property, plant and equipment is $3,645,000 and $3,324,000 less accumulated amortization of $2,356,000 and $1,914,000. Future minimum annual lease payments on noncancellable capital leases are as follows:
(DOLLARS IN THOUSANDS) 1995............................................................... $ 829 1996............................................................... 452 1997............................................................... 88 --------- Total future minimum lease payments................................ 1,369 Less amounts representing interest............................... 80 --------- Present value of net future minimum lease payments................. 1,289 Less current portion............................................. 769 --------- Lease obligation, noncurrent....................................... $ 520 --------- ---------
5. RELATED PARTY TRANSACTIONS: Certain affiliates of these cellular limited partnerships provide services for the system operations, legal, financial, management and administration of these entities. These affiliates are reimbursed for both direct and allocated costs (totaling $57.6 million in 1994, $57.1 million in 1993 and $52.2 million in 1992) 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, 1994 and 1993, the interest-bearing balance amounted to $16,016,000 and $29,981,000, 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 1994, 1993 and 1992 was $1,480,000, $1,294,000 and $1,396,000, respectively. 6. REGULATORY INVESTIGATIONS: On December 21, 1993, the California Public Utilities Commission ("CPUC") adopted a new Order Instituting Investigation into the regulation of mobile telephone service and wireless communications, Order Number I.93-12-007. The investigation proposes a regulatory program which would encompass all forms of mobile telephone service. On August 22, 1994, the CPUC issued an interim Decision that imposes a methodology in which existing cellular carriers be subject to rate cap regulation and other regulations, and requiring carriers, upon request, to permit resellers to operate reseller switches interconnected to the cellular carrier's facilities, to unbundle cellular access charges to resellers on a market basis and to subsidize resellers' roaming revenues. The Decision further authorized the CPUC to file a petition with the Federal Communications Commission ("FCC") to extend the CPUC's jurisdiction over cellular carriers for at least 18 months. Application for Rehearing and Suspension has been filed by various carriers and is 57 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) pending with the CPUC. Currently, one of the Partnerships is unable to quantify the precise impact of this Order on its future operations, but that impact may be material to one of the Partnerships under certain circumstances. In 1993, Congress amended Section 332 of the Communications Act in order to, among other things, mandate a general federal preemption of state regulation of entry and rates for cellular service providers. Congress established a mechanism for states to petition for permission to continue whatever state rate regulation actually existed as of June 1, 1993 for a period of time. It also established a mechanism for those states that wanted to petition for the right to establish new or modified rate regulations. On August 8, 1994, the CPUC filed a petition with the FCC seeking to retain regulatory authority over cellular service rates in California. In September 1994, opposition to this petition was filed. This matter is pending with the FCC. In January 1992, the CPUC commenced a separate investigation of all cellular companies operating in the State to determine their compliance with General Order number 159 (G.O. 159). This investigation addresses whether cellular utilities have complied with local, state or federal regulations governing the approval and construction of cellular sites in the State. The CPUC may advise other agencies of violations in their jurisdictions. Currently, certain carriers have agreed to monetary settlements as a result of this investigation. One of the Partnerships has prepared and filed the information requested by the CPUC. The CPUC will review the information provided by one of the Partnerships and, if violations of G.O. 159 are found, it may assess penalties against one of the Partnerships. The outcome of this investigation is uncertain and, accordingly, no accrual for this matter has been made. 7. CONTINGENCIES AND COMMITMENTS: One of the Partnerships filed for its 10-year license renewal for the Los Angeles market on August 30, 1993. The Partnership had been operating with FCC authority while the renewal application was pending. In January 1995, the Partnership's license was renewed for a 10-year period. In two separate actions filed, on October 7, 1993, and February 15, 1994, now consolidated, two agents of the competing carrier have named one of the Partnerships as a defendant. The general allegations include violations of California Unfair Practices Act and price fixing. At a recent mandatory settlement conference, plaintiffs asked for $6 million from all defendants to settle the above claims ($2.5 million from one of the defendants, including the Partnership). The proposed settlement offer has not been accepted. The ultimate outcome of both of these actions is uncertain at this time. Accordingly, no accrual for these contingencies has been made. The Partnership intends to defend its position vigorously. In May 1994, several former and current agents of the competing carrier have named one of the Partnerships in only one cause of action. This cause of action alleges a conspiracy with the competing carrier to fix the prices of cellular service in violation of state antitrust laws. The plaintiffs are seeking damages in excess of $100,000 for each of the plaintiff agents. The outcome of this matter is uncertain and accordingly, the Partnership has not recorded an accrual. The Partnership intends to defend its position vigorously. On November 24, 1993, October 17, 1994 and November 30, 1994, three separate class action (not yet certified) suits were filed against one of the Partnerships alleging conspiracy with a competing carrier to fix the price of cellular service in violation of state and federal antitrust laws. The plaintiffs are seeking injunctive relief and substantial monetary damages in excess of $100 million before trebling. The outcome of this matter is uncertain and, accordingly, the Partnership has not recorded an accrual. The Partnership intends to defend its position vigorously. 58 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) On July 18, 1994, a partner in one of the Partnerships was served with a class action (not yet certified) suit on behalf of the Partnership's authorized agents. The complaint alleges "predatory practices" and seeks damages in excess of $1.6 million per agent, plus statutory treble damages. The outcome of this matter is uncertain and, accordingly, the Partnership has not recorded an accrual. The Partnership intends to defend its position vigorously. In January 1995, the United States Department of Justice asserted that one of the partners' parent company, including the Partnership, is a "successor" to a Bell Operating Company and bound by Section II of the Modification of Final Judgment entered in 1984 in the AT&T divestiture case. Section II imposes certain restrictions relating to interexchange telecommunications and telecommunications equipment manufacturing, among other things. A Complaint in Intervention has been filed and is still pending. A standstill agreement has been entered into which enables one of the partners' parent company, including the Partnership, to operate as is. In the event of an adverse order in the Complaint in Intervention proceeding, management does not expect that the impact would be material to the Partnership's current operations. The outcome of this matter is uncertain and, accordingly, the Partnership has not recorded an accrual. The Partnership intends to defend its position vigorously. One of the Partnerships is a party to various other lawsuits arising in the ordinary course of business. In the opinion of management, based on a review of such litigation with legal counsel, any losses resulting from these actions are not expected to materially impact the financial condition of the Partnership. Two of the Partnerships provide cellular service and sell cellular telephones to diversified groups of consumers within concentrated geographical areas. The general partner performs credit evaluations of the Partnerships' customers and generally does not require collateral. Receivables are generally due within 30 days. Credit losses related to customers have been within management's expectations. One of the Partnerships purchases substantially all of its equipment from one supplier. The General Partner of two of the Partnerships entered into agreements with an equipment vendor on behalf of the Partnerships to replace the Partnerships' cellular equipment with new cellular technology which will support both analog and digital voice transmissions. Prior to replacement the Partnerships are renting certain cellular equipment in order to meet demands relating to current market growth. 59 [LOGO] TELEPHONE AND DATA SYSTEMS, INC. 30 North LaSalle Street Chicago, Illinois 60602 312/630-1900 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. 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)
Dated March 24, 1995 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.
SIGNATURE TITLE DATE -------------------------------------------------------------------- ----------- --------------------- /S/ LEROY T. CARLSON DIRECTOR March 24, 1995 ----------------------------------------------- LeRoy T. Carlson /S/ LEROY T. CARLSON, JR. DIRECTOR March 24, 1995 ----------------------------------------------- LeRoy T. Carlson, Jr. /S/ MURRAY L. SWANSON DIRECTOR March 24, 1995 ----------------------------------------------- Murray L. Swanson /S/ RUDOLPH E. HORNACEK DIRECTOR March 24, 1995 ----------------------------------------------- Rudolph E. Hornacek /S/ JAMES BARR III DIRECTOR March 24, 1995 ----------------------------------------------- James Barr III /S/ LESTER O. JOHNSON DIRECTOR March 24, 1995 ----------------------------------------------- Lester O. Johnson /S/ DONALD C. NEBERGALL DIRECTOR March 24, 1995 ----------------------------------------------- Donald C. Nebergall /S/ HERBERT S. WANDER DIRECTOR March 24, 1995 ----------------------------------------------- Herbert S. Wander /S/ WALTER C.D. CARLSON DIRECTOR March 24, 1995 ----------------------------------------------- Walter C.D. Carlson /S/ DONALD R. BROWN DIRECTOR March 24, 1995 ----------------------------------------------- Donald R. Brown /S/ ROBERT J. COLLINS DIRECTOR March 24, 1995 ----------------------------------------------- Robert J. Collins
-------------------------------------------------------------------------------- INDEX TO EXHIBITS --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION OF DOCUMENT ------------ ------------------------------------------------------------------------------------------------------------------ 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. 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. 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.
EXHIBIT NO. DESCRIPTION OF DOCUMENT ------------ ------------------------------------------------------------------------------------------------------------------ 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(c) 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. 11 Statement regarding computation of per share earnings. 12 Statements regarding computation of ratios. 13 Incorporated portions of 1994 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 99 Incorporated portions of items as expected to be included in the 1995 Proxy Statement.
EX-10.9 2 EXHIBIT 10.9 Exhibit 10.9 TELEPHONE AND DATA SYSTEMS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TELEPHONE AND DATA SYSTEMS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS PAGE SECTION 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Title and Purpose. . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Gender and Number. . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2 ELIGIBILITY AND BENEFITS . . . . . . . . . . . . . . . . . . . . . 4 2.1 Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.3 Earnings and Other Adjustments . . . . . . . . . . . . . . . . . . 5 SECTION 3 PAYMENT OF BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Vesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Commencement of Payments . . . . . . . . . . . . . . . . . . . . . 7 3.3 Schedule of Payments . . . . . . . . . . . . . . . . . . . . . . . 7 3.4 Survivor Benefits. . . . . . . . . . . . . . . . . . . . . . . . . 9 3.5 Distributions to Minor and Disabled Persons. . . . . . . . . . . . 10 3.6 Small Benefits Paid in Lump Sum. . . . . . . . . . . . . . . . . . 10 SECTION 4 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1 Employment Rights. . . . . . . . . . . . . . . . . . . . . . . . . 11 4.2 Rights Not Secured . . . . . . . . . . . . . . . . . . . . . . . . 11 4.3 Administration . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.4 Effect on Other Plans. . . . . . . . . . . . . . . . . . . . . . . 12 4.5 Interests Not Transferable . . . . . . . . . . . . . . . . . . . . 12 4.6 Adoption by Employers. . . . . . . . . . . . . . . . . . . . . . . 12 4.7 Tax Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.8 Controlling Law. . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5 CLAIMS PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 6 AMENDMENT AND TERMINATION. . . . . . . . . . . . . . . . . . . . . 15 6.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.2 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 TELEPHONE AND DATA SYSTEMS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (EFFECTIVE JANUARY 1, 1994) SECTION 1 INTRODUCTION 1.1 TITLE AND PURPOSE. The title of this Plan shall be the "Telephone and Data Systems, Inc. Supplemental Executive Retirement Plan". This Plan is established by Telephone and Data Systems, Inc. (the "Company") to supplement the benefits under the Telephone and Data Systems, Inc. Employees' Pension Trust I (the "TDS Plan") and the United States Cellular Corporation Money Purchase Pension Plan (the "USCC Plan"), each of which is intended to operate as a "qualified" plan as defined under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"). Qualified plans must comply with Section 401(a)(17) of the Code, which limits the annual compensation of each employee which can be taken into account under a qualified plan. This Plan is established to offset the Code mandated reduction of benefits caused by the limitation on annual employee compensation to be considered under Section 401(a)(17) of the Code for eligible employees participating in the TDS Plan and the USCC Plan. This Plan is intended to be unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. 1.2 DEFINITIONS. All capitalized terms used herein shall have the meanings set forth below, except as otherwise provided in the preamble to or text of this Plan: (a) "BENEFICIARY" means the beneficiary designated by the Participant or otherwise entitled to payment of benefits hereunder. If no separate designation is made by a Participant under this Plan, the Beneficiary shall be his beneficiary under the Company Pension Plan. (b) "BENEFITS DEPARTMENT" means the employee benefits department of the Company, located at 8401 Greenway Boulevard, Post Office Box 628010, Middleton, Wisconsin 53562-8010. (c) "CAUSE" means (i) the continued failure by a Participant to substantially perform the Participant's duties with the Company or an Employer, or (ii) the willful engaging by the Participant in conduct which is clearly injurious to the Company or USCC or any of their respective affiliates, monetarily or otherwise. For purposes of clause (ii) of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith or without reasonable belief that such act, or failure to act, was in the best interest of the Company or an Employer. -2- (d) "COMMITTEE" means, unless otherwise appointed by the Board of Directors of the Company, the Trustees of the TDS Plan, who shall administer the Plan. (e) "COMPANY PENSION PLAN" means the TDS Plan with respect to a Participant who participates in the TDS Plan and the USCC Plan with respect to a Participant who participates in the USCC Plan. (f) "EMPLOYER" means the Company, USCC, and any other entity that participates in the TDS Plan or the USCC Plan and adopts this Plan pursuant to Section 4.6. (g) "PARTICIPANT" means any employee who meets the eligibility for participation requirements set forth in Section 2.1. (h) "PLAN" means this Telephone and Data Systems, Inc. Supplemental Executive Retirement Plan, as from time to time amended. (i) "PLAN YEAR" means the calendar year. (j) "USCC" means United States Cellular Corporation, a Delaware corporation, and any corporation which shall succeed to the business of such corporation and adopt this Plan pursuant to Section 4.6. -3- (k) "YEAR OF SERVICE" means, with respect to a Participant who participates in the TDS Plan, a Year of Vesting Service as defined in Article 2 of the TDS Plan, and with respect to a Participant who participates in the USCC Plan, a Year of Service as defined in Article 2 of the USCC Plan. 1.3 GENDER AND NUMBER. Where the context permits, words in the masculine shall include the feminine and neutral; words in the plural shall include the singular and the singular shall include the plural. SECTION 2 ELIGIBILITY AND BENEFITS 2.1 ELIGIBILITY. An employee who is a participant under the TDS Plan or the USCC Plan shall commence participation under this Plan as a Participant if his compensation (as defined in the Company Pension Plan) for the Plan Year exceeds the limit set forth in Section 401(a)(17) of the Code for such Plan Year (adjusted for changes in the cost of living pursuant to Section 401(a)(17)). 2.2 BENEFITS. If Employer contributions that would otherwise have been made on behalf of the Participant under the provisions of the Company Pension Plan are limited in a Plan Year because of Section 401(a)(17) of the Code, such Employer shall credit to an account for the Participant as of the last day of such Plan -4- Year, for bookkeeping purposes only, an amount equal to the difference between (i) the amount of Employer contributions that would have been allocated to the Participant's account under the Company Pension Plan without regard to Section 401(a)(17) of the Code for such Plan Year and (ii) the amount of Employer contributions actually allocated to the Participant's account under the Company Pension Plan for that Plan Year. When calculating the amount described in part (i) of the previous sentence with respect to TDS Plan benefits based on a Participant's compensation in excess of the limitation under Section 401(a)(17) of the Code, amounts credited to the account for such Participant for prior plan years must be considered. For calculating benefits under this Section, the actuarial assumptions and methods from the TDS Plan will be applied. 2.3 EARNINGS AND OTHER ADJUSTMENTS. For bookkeeping purposes only, the account established for each Participant pursuant to Section 2.2 shall be adjusted at the end of each Plan Year to reflect (i) an assumed rate of earnings on all items other than the contributions for the current Plan Year equal to the interest rate on ten year United States Treasury Bills on the first business day of each Plan Year, as quoted in THE WALL STREET JOURNAL, plus 100 basis points and (ii) any payments made pursuant to Section 3. -5- SECTION 3 PAYMENT OF BENEFITS 3.1 VESTING. (a) TERMINATION OF EMPLOYMENT UNDER CIRCUMSTANCES ENTITLING THE PARTICIPANT TO DISTRIBUTION OF HIS FULL ACCOUNT. A Participant shall be entitled to distribution of his entire account balance under the Plan if the Participant's employment is terminated, without Cause, after either of the following events: (i) his attainment of age 65; or (ii) his completion of at least fifteen Years of Service, with Years of Service being determined without regard to Years of Service completed prior to the year in which he attained age 43. (b) TERMINATION OF EMPLOYMENT UNDER CIRCUMSTANCES RESULTING IN COMPLETE OR PARTIAL FORFEITURE OF THE PARTICIPANT'S ACCOUNT. If a Participant terminates employment under circumstances other than those set forth in paragraph (a) above, without Cause, the Participant shall be entitled to distribution of the following percentage of his account balance, with Years of Service described below being determined without regard to Years of Service completed prior to the year in which the Participant attained age 43: -6- Nonforfeitable Years of Service Percentage ---------------- -------------- Less than 1 0% At least 1, but less than 2 5% At least 2, but less than 3 10% At least 3, but less than 4 15% At least 4, but less than 5 20% At least 5, but less than 6 25% At least 6, but less than 7 30% At least 7, but less than 8 35% At least 8, but less than 9 40% At least 9, but less than 10 45% At least 10, but less than 11 50% At least 11, but less than 12 60% At least 12, but less than 13 70% At least 13, but less than 14 80% At least 14, but less than 15 90% 15 years or more 100% If a Participant's employment is terminated for Cause, such Participant shall be entitled to no portion of his account balance under this Plan. 3.2 COMMENCEMENT OF PAYMENTS. The nonforfeitable portion of the Participant's account determined under Section 3.1, adjusted for the assumed rate of earnings in the manner described in Section 2.3 (including periods after the Participant's termination of employment), shall be payable to the Participant, beginning on the first day of the month next following the later of his termination of employment and his completion of all forms and applications requested by the Committee. 3.3 SCHEDULE OF PAYMENTS. The nonforfeitable portion of the Participant's account determined under Section 3.1, -7- adjusted each Plan Year (including periods after any annual installment payments begin) for the assumed rate of earnings in the manner described in Section 2.3 and reduced for annual installments previously paid under the Plan, shall be payable in one of the forms described in the following sentence selected by the Participant on the date he first becomes a Participant and shall commence being paid on the date determined pursuant to Section 3.2. The forms available for payment hereunder are the following: (a) a single lump sum payment; or (b) annual installments over a period of 5, 10, 15, 20 or 25 years. Notwithstanding the Participant's selection of the payment method on the date he becomes a Participant, the Participant may make a one-time request that payments be made in accordance with a different form provided under this Section, provided that such form results in payments over a shorter period than the period formerly selected by him. This request shall be irrevocable, must be made to the Committee prior to the date of the first payment under Section 3.2 and shall be subject to the approval of the Committee. The approval of the request shall be at the sole discretion of the Committee. If a Participant fails to designate a payment schedule in accordance with this Section, the nonforfeitable portion of his account shall be paid in annual installments for a period of ten years. Notwithstanding anything contained herein to the contrary, in the event that the Participant owes any amount to an Employer (an "Obligation"), the payments due hereunder shall be -8- used to offset any Obligation in accordance with the payment schedule selected by the Participant. Any amounts not used to offset an Obligation shall be paid to the Participant or his Beneficiary. 3.4 SURVIVOR BENEFITS. If a Participant dies before payment of his account balance commences, his Beneficiary shall receive the nonforfeitable portion of his account balance determined under Section 3.1 (after offset of any Obligation as provided in Section 3.3) in the form selected by the Participant for payment of his account. If a Participant dies after payment of his account balance commences, his Beneficiary shall receive the remaining portion of the Participant's account balance to which the Participant would have been entitled had he survived, payable in the same form as payments would have been made to the Participant had he survived. Notwithstanding the preceding two sentences, a Beneficiary entitled to payment under this Section may make a one-time request that payments be made in accordance with a different form provided under Section 3.3, provided that such form results in payments over a shorter period than the period formerly selected by the Participant. This request shall be irrevocable, must be made to the Committee prior to the date of the first payment to the Beneficiary and shall be subject to the approval of the Committee in the same manner as provided in Section 3.3. -9- 3.5 DISTRIBUTIONS TO MINOR AND DISABLED PERSONS. If a distribution is to be made to a minor or to a person who, in the opinion of the Committee, is unable to manage his affairs by reason of illness or mental incompetency, such distribution may be made to or for the benefit of any such person in such of the following ways as the Committee shall direct: (a) directly to any such minor person if, in the opinion of the Committee, he is able to manage his affairs, (b) to the legal representative of any such person, (c) to a custodian under a Uniform Gifts to Minors Act for any such minor person, or (d) to some near relative of any such person to be used for the latter's benefit. Neither the Committee nor the Employer shall be required to see to the application by any third party of any distribution made to or for the benefit of a Participant or Beneficiary pursuant to this Section. 3.6 SMALL BENEFITS PAID IN LUMP SUM. Notwithstanding any provision in the Plan to the contrary, if the amount of a Participant's account balance to be distributed under Article 3 is not more than $10,000, such amount shall be distributed, as soon as administratively feasible on or after the date on which such Participant's termination of service occurs, by payment in a lump sum. -10- SECTION 4 GENERAL PROVISIONS 4.1 EMPLOYMENT RIGHTS. This Plan shall not be construed to give any Participant the right to be retained in the employ of any Employer nor any right to benefits not specifically provided for in this Plan. 4.2 RIGHTS NOT SECURED. All payments to be made pursuant to this Plan shall be an obligation of the general assets of the Employers, and no Employer shall be required to segregate any of its assets in order to provide for the satisfaction of the obligations hereunder or to make any investment of assets. Although the amounts credited to each Participant's account shall be reflected in the Employers' accounting records, this Plan shall not be construed to create a trust, custodial, or escrow account nor shall the Participant have any right, title, or interest in any specific investment reserves, accounts, funds or a trust that any Employer may accumulate or establish to aid it in providing benefits under this Plan. Nothing contained in this Plan shall create a trust or fiduciary relationship between any Employer and any Participant or Beneficiary. Neither a Participant nor his Beneficiary shall acquire any interest greater than that of an unsecured creditor. -11- 4.3 ADMINISTRATION. This Plan shall be administered by the Committee. The Committee shall have the same rights and duties with respect to this Plan as the plan administrator of the TDS Plan has with respect to the TDS Plan. The Committee will apply uniform rules to all Participants similarly situated. The determination of the Committee as to any question arising under this Plan shall be final and binding upon all persons. The expenses of administering the Plan shall be borne by the Employers. 4.4 EFFECT ON OTHER PLANS. Amounts credited or paid under this Plan shall not be considered to be compensation for the purposes of any qualified plan maintained by any Employer. 4.5 INTERESTS NOT TRANSFERABLE. Except as provided in Section 3.3 with respect to an Obligation, the interests of the Participants and their Beneficiaries under the Plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily assigned or encumbered in any way, including any assignment, division or awarding of property under state domestic relations law (including community property law). 4.6 ADOPTION BY EMPLOYERS. Any corporation which is or becomes an "Employer" under the Company Pension Plan may, with the consent of the Company, become an Employer in this Plan by delivery to the Company of a resolution of its board of directors or duly authorized committee to such effect, which resolution -12- shall specify the first Plan Year for which this Plan shall be effective in respect of the employees of such corporation. 4.7 TAX LIABILITY. An Employer may withhold from any payment under this Plan any taxes required to be withheld plus such sums as such Employer may reasonably estimate to be necessary to cover any taxes for which the Employer may be liable and which may be assessed with regard to such payment. 4.8 CONTROLLING LAW. The law of Illinois and, where applicable, the provisions of the Employee Retirement Income Security Act of 1974, as amended, shall be controlling in all matters relating to the Plan. SECTION 5 CLAIMS PROCEDURE If any Participant or Beneficiary believes he is entitled to benefits in an amount greater than those which he is receiving or has received, he may file a claim with the Benefits Department. Such a claim shall be in writing and state the nature of the claim, the facts supporting the claim, the amount claimed and the address of the claimant. The Benefits Department shall review the claim and, unless special circumstances require an extension of time, within 90 days after receipt of the claim, give written notice by registered or certified mail to the claimant of its decision with respect to the claim. If special -13- circumstances require an extension of time, the claimant shall be so advised in writing within the initial 90-day period and in no event shall such an extension exceed 90 days. The notice sent by the Benefits Department shall be written in a manner calculated to be understood by the claimant and, if the claim is wholly or partially denied, set forth the specific reasons for the denial, specific references to the pertinent Plan provisions on which the denial is based, a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and an explanation of the claim review procedure under this Plan. The Benefits Department shall also advise the claimant that he or his duly authorized representative may request a review by the Committee of the denial by filing with the Committee within 60 days after notice of the denial has been received by the claimant, a written request for such review. The claimant shall be informed that he may have reasonable access to pertinent documents and submit comments in writing to the Committee within the same 60-day period. If a request is so filed, review of the denial shall be made by the Committee and the claimant shall be given written notice of the Committee's final decision within sixty days after receipt of such request, unless special circumstances require an extension of time. If special circumstances require an extension of time, the claimant shall be so advised in writing within the initial 60-day period and in no event shall such an extension exceed 60 days. The notice of the Committee's final decision shall include specific reasons for the -14- decision and specific references to the pertinent Plan provisions on which the decision is based and shall be written in a manner calculated to be understood by the claimant. SECTION 6 AMENDMENT AND TERMINATION 6.1 AMENDMENT. The Company may amend this Plan at any time by resolution duly adopted by its board of directors. No such amendment shall reduce or otherwise adversely affect the rights of Participants or Beneficiaries with respect to amounts accrued hereunder as of the date of such amendment. 6.2 TERMINATION. Although the Company expects to continue this Plan indefinitely, it must necessarily reserve the right to terminate this Plan at any time by a resolution duly adopted by its board of directors. -15- IN WITNESS WHEREOF, the Company has caused this instrument to be executed on December 27, 1994, by its duly authorized officer to be effective as of January 1, 1994. TELEPHONE AND DATA SYSTEMS, INC. By: /s/ LeRoy T. Carlson, Jr. ---------------------------- LeRoy T. Carlson, Jr. ATTEST: By: /s/ Michael G. Hron ---------------------------- Secretary -16- EX-11 3 EXHIBIT 11 EXHIBIT 11 TELEPHONE AND DATA SYSTEMS, INC. COMPUTATION OF EARNINGS PER COMMON SHARE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRIMARY EARNINGS Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes......... $ 60,544 Dividends on Preferred Shares............................................................ (1,809) Minority income adjustment assuming issuance of a subsidiary's issuable securities....... (411) --------- Net income before Extraordinary Item and Cumulative Effect of Accounting Changes applicable to Common.................................................................... 58,324 Cumulative Effect of Accounting Changes.................................................. (723) --------- Net Income Available to Common........................................................... $ 57,601 --------- --------- PRIMARY SHARES Weighted average number of Common and Series A Common Shares Outstanding................. 53,295 Additional shares assuming issuance of: Options and Stock Appreciation Rights.................................................. 182 Convertible Preferred Shares........................................................... 680 Common Shares Issuable................................................................. 40 --------- Primary Shares........................................................................... 54,197 --------- --------- PRIMARY EARNINGS PER COMMON SHARE Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes......... $ 1.07 Cumulative Effect of Accounting Changes.................................................. (.01) --------- Net Income............................................................................... $ 1.06 --------- --------- FULLY DILUTED EARNINGS* Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes......... $ 60,544 Dividends on Preferred Shares............................................................ (1,554) Minority income adjustment assuming issuance of a subsidiary's issuable securities....... (413) --------- Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes applicable to Common.................................................................... 58,577 Cumulative Effect of Accounting Changes.................................................. (723) --------- Net Income Available to Common........................................................... $ 57,854 --------- --------- FULLY DILUTED SHARES Weighted average number of Common and Series A Common Shares Outstanding................. 53,295 Additional shares assuming issuance of: Options and Stock Appreciation Rights.................................................. 191 Convertible Preferred Shares........................................................... 949 Common Shares issuable................................................................. 40 --------- Fully Diluted Shares..................................................................... 54,475 --------- --------- FULLY DILUTED EARNINGS PER COMMON SHARE Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes......... $ 1.07 Cumulative Effect of Accounting Changes.................................................. (.01) --------- Net Income............................................................................... $ 1.06 --------- --------- ---------- * 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%.
EX-12 4 EXHIBIT 12 EXHIBIT 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES FOR THE YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) EARNINGS: Income from Continuing Operations before Income Taxes.......................... $ 101,257 Add (Deduct): Minority Share of Losses................................................... (336) Earnings on Equity Method.................................................. (30,083) Distributions from Minority Subsidiaries................................... 17,375 Amortization of Non-Telephone Capitalized Interest......................... 28 Minority share of income in majority-owned subsidiaries that have fixed charges................................................................... 4,411 --------- 92,652 Add fixed charges: Consolidated interest expense.............................................. 41,061 Interest Portion (1/3) of Consolidated Rent Expense........................ 5,103 Amortization of debt expense and discount on indebtedness.................. 189 --------- $ 139,005 --------- --------- FIXED CHARGES: Consolidated interest expense.................................................. $ 41,061 Interest Portion (1/3) of Consolidated Rent Expense............................ 5,103 Amortization of debt expense and discount on indebtedness...................... 189 --------- $ 46,353 --------- --------- RATIO OF EARNINGS TO FIXED CHARGES............................................... 3.00 --------- --------- Tax-Effected Redeemable Preferred Dividends.................................... $ 2,166 Fixed Charges.................................................................. 46,353 --------- Fixed Charges and Redeemable Preferred Dividends............................. $ 48,519 --------- --------- RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS............ 2.86 --------- --------- Tax-Effected Preferred Dividends............................................... $ 4,112 Fixed Charges.................................................................. 46,353 --------- Fixed Charges and Preferred Dividends........................................ $ 50,465 --------- --------- RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS....................... 2.75 --------- ---------
EX-13 5 EXHIBIT 13 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 nearly 1.5 million consolidated cellular telephone, 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 symbol "USM"), TDS Telecommunications Corporation ("TDS Telecom"), and American Paging, Inc. (AMEX symbol "APP"), as well as TDS and its service subsidiaries. TDS's long-term business development strategy is to expand its operations through internal growth and acquisitions, and to explore and develop other telecommunications services. CONSOLIDATED Consolidated operating results for 1994 and 1993 reflect primarily the effects of rapid expansion and development of cellular operations, steady growth in telephone operations, dynamic increases in paging units in service, the impact of acquisitions and trades and the costs of financing these high-growth activities. USM and APP are achieving improving economies of scale while upgrading their business processes and systems. During 1994 and 1993, the Company's wireline telephone operations provided a growing foundation of operating cash flow and earnings to support development of its cellular and paging operations. USM achieved net income in 1994, a $41.8 million improvement from 1993's net loss. APP, while not profitable in 1994 or 1993, improved its 1994 net loss by $1.9 million from 1993's net loss. Both USM and APP contributed strongly to TDS's rapidly growing operating cash flow in 1994. Results for 1994 include a $1.6 million net-of-tax gain on sales of minority cellular interests, a $4.1 million gain on sale of a minority telephone interest, a $2.7 million reduction in income taxes related to certain acquisitions closed in prior years and a $723,000 net-of-tax charge to adopt a new accounting standard for postemployment benefits. On a comparable basis, excluding nonrecurring and unusual items in 1994 and 1993, net income available to common increased 69% to $50.3 million and earnings per share rose 48% to $.93. USM, TDS's 81%-owned subsidiary, has added 38 markets to consolidated operations through acquisitions and the initiation of cellular operations since December 31, 1992. USM currently provides cellular service through systems serving 130 majority-owned and managed markets. TDS Telecom has acquired seven telephone companies since December 31, 1992. These acquisitions added 39,800 access lines while internal growth added 31,000 lines. APP, TDS's 83%-owned subsidiary, has acquired two paging systems which added approximately 45,700 pagers since December 31, 1992. APP provides service to its customers through 36 sales and service operating centers. OPERATING REVENUES increased 31% ($173.0 million) during 1994 and 29% ($125.1 million) during 1993 primarily as a result of increases in customers served. The rapid increase in cellular telephone revenues reflects strong growth in customer units in majority-owned and managed markets, increases in keeper roaming revenues and declines in average monthly service revenue per customer averaging 5% over the two-year period ended December 31, 1994. Growth in telephone revenues is the result of acquisitions, recovery of increased costs of providing long-distance services, internal access line growth averaging 5% and growth in average revenue per access line averaging 4% during the two-year period. The rapid growth in paging revenues is due to increases in paging units in service of 42% during 1994 and 43% during 1993 offset somewhat by continuing decreases in average monthly service revenue per unit averaging 11% over the two-year period. thirty-four MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING EXPENSES rose 27% ($133.9 million) in 1994 and 29% ($109.4 million) in 1993 as a result of the continued rapid growth in USM's cellular telephone operations and the steady growth in TDS Telecom's and APP's operations. Operating expenses increased in all three business units, but at a slower rate than revenues due to increasing economies of scale in the cellular and paging units and cost-containment measures implemented in all three businesses.
Year Ended December 31, 1994 1993 1992 ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Operating Income Cellular telephone $ 17,385 $ (8,656) $(12,705) Telephone 91,606 79,110 72,217 Radio paging (169) (721) (5,447) ----------------------------------------- $ 108,822 $ 69,733 $ 54,065 ----------------------------------------- ----------------------------------------- Operating Margins Cellular telephone* 5% (4%) (10%) Telephone 30% 30% 30% Radio paging* -- % (1%) (11%) Consolidated 15% 13% 12% ------------------------------------------------------------------------- ------------------------------------------------------------------------- * COMPUTED ON SERVICE REVENUES
1993 AND 1992 OPERATING MARGINS HAVE BEEN RESTATED TO CONFORM TO CURRENT YEAR PRESENTATION OF CERTAIN REVENUES. OPERATING INCOME increased 56% ($39.1 million) in 1994 and 29% ($15.7 million) in 1993 due to improved operating results in all three business units. Management anticipates accelerating growth in cellular and paging units and revenues as USM and APP continue their vigorous expansion and development programs. Marketing and systems operations expenses associated with this rapid expansion will most likely reduce the rate of growth in operating cash flow and operating income over the next several quarters. CELLULAR INVESTMENT INCOME, representing the Company's share of income of markets in which the Company has a minority interest and follows the equity method of accounting, increased 66% ($10.3 million) in 1994 and 70% ($6.5 million) in 1993. GAIN ON SALE OF CELLULAR AND TELEPHONE INTERESTS reflects the sale or exchange of minority cellular interests in 1994, 1993 and 1992, the sale of a minority interest in a telephone company in 1994 and the sale of a majority-owned and managed cellular system in 1992. MINORITY SHARE OF INCOME includes (a) the minority shareholders' share of USM's net income (1994 and 1992) or loss (1993), (b) the minority partners' share of income or loss of the cellular markets majority-owned by USM, (c) the minority shareholders' share of income of a telephone company majority-owned by TDS, and (d) the minority shareholders' share of APP's loss in 1994.
Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Minority Share of Income United States Cellular Minority Shareholders' Share $ (2,740) $ 4,270 $ (1,088) Minority Partners' Share (5,152) (3,496) (2,615) ----------------------------------------- (7,892) 774 (3,703) TDS Telecom (1,420) (1,249) -- American Paging 233 -- -- ----------------------------------------- $ (9,079) $ (475) $ (3,703) ------------------------------------------------------------------------ -------------------------------------------------------------------------
INTEREST EXPENSE increased 10% ($3.8 million) in 1994 and 15% ($4.9 million) in 1993. Long-term interest expense increased 7% ($2.4 million) in 1994 and 16% ($5.0 million) in 1993. Long-term debt increased in 1994 primarily due to $14.1 million in additional net borrowings from federal government programs at TDS Telecom (mainly from acquisitions) and to increased interest rates. Long-term debt increased in 1993 primarily due to $92.5 million in additional borrowings under TDS's Medium-Term Note ("MTN") program. Short-term interest expense increased 77% ($1.4 million) in 1994 and declined 8% ($154,000) in 1993, as notes payable increased $92.3 million and interest rates increased in 1994. The average amount of short-term debt outstanding totalled $50.5 million in 1994, $32.3 million in 1993 and $31.1 million in 1992. The average interest rate on such short-term debt was 5.2% in 1994, 3.9% in 1993 and 4.5% in 1992. See "Financial Resources and Liquidity" for a further discussion of short- and long- term debt. thirty-five MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INCOME TAX EXPENSE increased 54% ($14.2 million) in 1994 and decreased 11% ($3.3 million) in 1993, reflecting primarily changes in pretax income. The effective income tax rates were 40% in 1994, and 44% in 1993 and 1992. The decrease in the 1994 rate over 1993 includes the effects of a $2.7 million reduction in income taxes to record the effects of additional tax basis that is now available to the Company in connection with certain acquisitions closed in prior years. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 1, 1993. Income tax expense for 1994 and 1993 reflects the new accounting principle; income tax expense for 1992 has not been restated. NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES was $60.5 million in 1994, $33.9 million in 1993 and $38.5 million in 1992. The increase in 1994 from 1993 reflects the significant improvement in operating results for the cellular and telephone segments. The decrease in 1993 from 1992 reflects a $14.7 million (after income taxes and minority shareholders' share) gain on the sales of cellular interests in 1992 (as discussed below), offset by the significant improvement in operating results of all three business segments. EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES were $1.07 in 1994, $.67 in 1993 and $.91 in 1992. Changes in earnings per share reflect changes in net income and 15% and 21% increases in weighted average common shares outstanding in 1994 and 1993, respectively. Approximately 3.7 million and 6.8 million Common Shares were issued in 1994 and 1993, respectively, in connection with acquisitions. In addition, TDS sold 100,000, 1,320,000 and 2,000,000 Common Shares for cash in 1994, 1993 and 1992, respectively. EXTRAORDINARY ITEM: During 1992, the Company retired at a premium $20.8 million of its Senior Notes. The transaction resulted in an extraordinary loss of $769,000 ($.02 per share), net of income tax benefits of $491,000. CUMULATIVE EFFECT OF ACCOUNTING CHANGES: Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires employers to recognize the obligation to provide postemployment benefits to former or inactive employees after employment but before retirement. The cumulative effect of the new principle on years prior to 1994 reduced net income and earnings per share by $723,000 and $.01, respectively. Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The $6.9 million cumulative effect, net of related income tax benefits of $4.4 million, reduced earnings per share by $.17 in 1992. EARNINGS PER COMMON SHARE were $1.06 in 1994, $.67 in 1993 and $.72 in 1992, reflecting results of operations, the accounting changes in 1994 and 1992, and the 1992 extraordinary item. Excluding significant nonrecurring and unusual items, net income available to common and earnings per share were approximately $50.3 million and $.93 for 1994, $29.8 million and $.63 for 1993 and $20.6 million and $.53 for 1992, as shown in the accompanying table. NET INCOME AVAILABLE TO COMMON
Year Ended December 31, 1994 1993 1992 --------------------------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) As Reported $ 58.0 $ 31.5 $ 28.6 Nonrecurring and Unusual Items (estimated net-of-tax): Gain on sale of minority telephone interest (4.1) -- -- Income tax adjustment to record the effects of additional acquisition- related tax basis (2.7) -- -- Gain on sales or exchanges of cellular interests (net of USM minority share) (1.6) (2.3) (14.7) Cumulative effect of accounting changes .7 -- 6.9 Extraordinary loss on retirement of debt -- -- .8 Provision for discontinuance of national retailer distribution of pagers through APN -- .6 -- TDS Telecom directory revenue settlement -- -- (1.0) Excluding Nonrecurring --------------------------------- and Unusual Items $ 50.3 $ 29.8 $ 20.6 --------------------------------- --------------------------------- Earnings Per Share, Excluding Nonrecurring and Unusual Items $ .93 $ .63 $ .53 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
CELLULAR TELEPHONE OPERATIONS USM owns, operates and invests in cellular markets. USM owned or had the right to acquire interests, both majority and minority, in 207 cellular telephone markets at December 31, 1994, representing 25.2 million population equivalents ("pops") as summarized in the accompanying table. Consolidated revenues and expenses include 100% of the revenues and expenses of USM's majority-owned markets. The December 31, 1994 consolidated results of operations include 130 markets compared to 116 markets in 1993 and 92 markets in 1992. Investment and Other Income includes thirty-six MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION USM's pro rata share of the net income or loss of 11 minority-owned and managed markets and 17 minority-owned markets managed by others. USM's investments in 40 additional minority-owned markets managed by others, which are being held for sale or exchange, are accounted for by the cost method of accounting.
December 31, 1994 1993 1992 ---------------------------------------------------------------------------- POPULATION EQUIVALENTS (1) Majority-Owned and Managed (2) 18,204 18,464 14,475 Minority-Owned and Managed (3) 1,191 1,157 2,039 To Be Managed (4) 2,187 1,018 1,836 ------------------------------- Total Managed by USM 21,582 20,639 18,350 ------------------------------- Managed by Others (5) 3,619 3,429 3,517 ------------------------------- Total 25,201 24,068 21,867 ------------------------------- ------------------------------- TDS's proportionate share (6) 20,229 19,136 16,232 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
December 31, 1994 1993 1992 ----------------------------------------------------------------------------- Markets Majority-Owned and Managed (2) 130 116 92 Minority-Owned and Managed (3) 15 20 24 To Be Managed (4) 5 8 13 ------------------------------- Total Managed by USM 150 144 129 ------------------------------- Managed by Others (5) 57 61 64 ------------------------------- Total 207 205 193 --------------------------------------------------------------------------- --------------------------------------------------------------------------- (1) 1994 Donnelley Marketing Service estimates are used for all years. Includes pops relating to interests which are acquirable in the future. (2) Includes two markets managed by third parties in 1994, one in 1993 and 1992, and one wholly owned reseller operation in 1992. (3) Includes markets where USM has the right to acquire an interest but did not own an interest at the respective dates (four markets in 1994, two in 1993 and six in 1992). (4) Represents markets which are not yet operational or which are managed by third parties until USM acquires a majority interest in the markets, net of seven markets in 1994 to be divested. (5) Represents markets in which USM owns or has the right to acquire a minority or other noncontrolling interest and which are managed by others. (6) Based on TDS's ownership of USM, assuming all pending acquisitions have been completed.
thirty-seven MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CELLULAR TELEPHONE OPERATIONS
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS) OPERATING REVENUES Service* $ 318,649 $ 203,800 $ 130,666 Equipment sales 13,755 10,510 9,263 ---------------------------------- 332,404 214,310 139,929 ---------------------------------- OPERATING EXPENSES System operations* 46,869 34,301 24,218 Marketing and selling 69,072 43,478 30,643 Cost of equipment sold 39,431 25,688 17,311 General and administrative 94,193 74,472 50,823 Depreciation 39,520 25,665 16,606 Amortization 25,934 19,362 13,033 ---------------------------------- 315,019 222,966 152,634 ---------------------------------- OPERATING INCOME (LOSS) $ 17,385 $ (8,656) $ (12,705) ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Cellular telephone revenues as a percent of total revenues 45% 38% 32% Additions to property, plant and equipment** $ 158,453 $ 94,088 $ 58,832 Identifiable assets $ 1,584,142 $ 1,275,569 $ 858,795 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Majority-Owned, Managed and Consolidated Markets: Customers 421,000 261,000 150,800 Market penetration 1.98% 1.35% 1.00% Cell sites in service 790 522 320 Average monthly service revenue per customer* $ 80 $ 85 $ 88 Churn rate per month 2.3% 2.3% 2.4% Marketing cost per net customer addition $ 667 $ 677 $ 765 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- * AMOUNTS FOR 1993 AND 1992 HAVE BEEN RECLASSIFIED TO CONFORM TO CURRENT YEAR PRESENTATION. ** DOES NOT INCLUDE CASH EXPENDITURES (IN THOUSANDS) OF $9,761 IN 1994, WHICH RELATE TO ADDITIONS IN PRIOR PERIODS. INCLUDES NONCASH EXPENDITURES (IN THOUSANDS) OF $6,611 AND $2,799 IN 1993 AND 1992, RESPECTIVELY.
Operating results for 1994 and 1993 primarily reflect the rapid improvement in USM's consolidated markets. Operating revenues, driven by the 61% and 73% growth in consolidated customers in 1994 and 1993, respectively, increased 55% to $332.4 million in 1994 from $214.3 million in 1993. Operating expenses increased 41% to $315.0 million in 1994 due to increased customer usage and the costs associated with operating the increased number of cellular systems and cell sites. Operating expenses increased at a slower rate than the increase in revenues due to improved economies of scale and continued improvements in business processes. Operating cash flow more than doubled to $82.8 million in 1994 from $36.4 million in 1993. USM achieved operating income for the first time in 1994 of $17.4 million compared to operating losses of $8.7 million in 1993 and $12.7 million in 1992. USM changed its financial reporting presentation for outbound, or pass- through, roaming revenue during 1994 to allow more comparability to other cellular companies. Pass-through roaming revenue is now treated as an offset to the expense charged by other cellular carriers, with the net amount included in system operations expense. Prior years' pass-through roaming revenue and expense have been reclassified to conform to the current year's presentation. OPERATING REVENUES increased 55% ($118.1 million) in 1994 and 53% ($74.4 million) in 1993. Acquisitions and start-ups increased revenues 12% ($25.5 million) in 1994 and 17% ($23.2 million) in 1993. Service revenues increased 56% ($114.8 million) in 1994 and 56% ($73.1 million) in 1993. Service revenues include monthly service fees for providing access, airtime and value-added services to customers ("local customer usage"); charges to customers of other systems who use USM's cellular systems when roaming ("inbound roaming"); and long-distance charges. The service revenue increases in 1994 and 1993 were primarily attributable to increases in the number of local retail customers and growth in inbound roaming revenues. While the number of customers and amount of revenues earned continued to grow, average revenue per customer and monthly local minutes of use per customer declined. Service revenues increased 66% ($135.2 million) due to growth in customers and declined 10% ($20.3 million) due to declines in average monthly service revenue per customer. Average monthly service revenue per customer was $80 in 1994, $85 in 1993 and $88 in 1992. Monthly local minutes of use averaged 95 per month in 1994 compared to 103 in 1993 and 121 in 1992. The decline in average local minutes of use follows an industry-wide trend and is believed to be related to the tendency of the early subscribers in a market to be the heaviest users. It also reflects USM's and the cellular industry's continued penetration of the consumer market, which tends to include more lower-usage customers. Management anticipates that average local minutes of use and average monthly revenue per customer will continue to decline as USM adds more customers. Service revenues from local customers' usage of USM's systems increased 60% ($70.4 million) in 1994 and 53% ($40.5 million) in 1993. The revenue increases were primarily the result of the 61% and 73% customer growth, respectively, in majority-owned markets, offset somewhat by the decrease in average monthly local minutes of use. The decrease in average minutes of use resulted in a decrease in average monthly retail revenue per customer, to $47 in 1994 from $49 in 1993 and $52 in 1992. Inbound roaming revenues increased 48% ($33.9 million) in 1994 and 67% ($28.1 million) in thirty-eight MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 1993. The increase is attributable to an increase in the number of customers from other systems using USM's systems as well as an increased number of USM- managed systems and cell sites within those systems offset somewhat by a reduction in the average price per minute. Monthly inbound roaming revenue per customer averaged $26, $29 and $28 in 1994, 1993 and 1992, respectively. Long- distance revenues increased 63% ($8.8 million) in 1994 and 46% ($4.4 million) in 1993 as the volume of long-distance calls billed by USM increased. Equipment sales revenue reflects the sale of 153,000 cellular telephone units in 1994 compared to 83,000 in 1993 and 44,400 in 1992. The average revenue per telephone unit sold was $90 in 1994, $127 in 1993 and $208 in 1992. The average revenue per unit decline partially reflects USM's decision to reduce sales prices on cellular telephones to stimulate customer growth as well as reduced manufacturers' prices. Also, during 1994 and the second half of 1993, USM used promotions which were based on increased equipment discounting. The success of these promotions led to both an increase in units sold and a decrease in average equipment sales revenue per unit. USM will continue to discount equipment prices in its markets, as it has done in the past, to maintain its market position, to meet competitive prices and to increase the number of customers. OPERATING EXPENSES increased 41% ($92.1 million) in 1994 and 46% ($70.3 million) in 1993. The increases in expenses were primarily due to increased customer activations, acquisitions and increased depreciation and amortization expense related to increases in fixed assets and license costs. Acquisitions and start-ups increased operating expenses 14% ($30.9 million) in 1994 and 20% ($30.5 million) in 1993. System operations expenses increased 37% ($12.6 million) in 1994 and 42% ($10.1 million) in 1993 as a result of increases in customer usage expenses and costs associated with operating USM's increased number of cellular systems and the growing number of cell sites within those systems. Costs are expected to continue to increase as the number of cell sites within these systems increases. Customer usage expenses represent charges from other telecommunications service providers for local interconnection to the landline network, toll charges and roaming expenses from USM's customers' use of systems other than their local systems, offset somewhat by increased pass-through roaming revenue. Customer usage expenses grew 19% ($3.5 million) in 1994 and 36% ($4.8 million) in 1993. Maintenance, utility and cell site expenses grew 56% ($9.1 million) in 1994 and 49% ($5.3 million) in 1993 reflecting growth in the number of cell sites to 790 in 1994 from 522 in 1993 and 320 in 1992, growth in the number of switches in service, and the effects of acquisitions and start-ups. Marketing and selling expenses increased 59% ($25.6 million) in 1994 and 42% ($12.8 million) in 1993. Marketing and selling expenses consist primarily of personnel costs, agent commissions and promotional expenses. These expenses grew in 1994 and 1993 due to the increased number of gross customer activations and the effects of acquisitions and start-ups. Management expects that marketing and selling costs will continue to increase as additional customers are added to USM's systems. Cost of equipment sold reflects the increased unit sales discussed above, offset somewhat by falling manufacturers' prices per unit. The average cost of a telephone unit sold was $258 in 1994, $309 in 1993 and $390 in 1992. General and administrative expenses increased 26% ($19.7 million) in 1994 and 47% ($23.6 million) in 1993. These expenses include the cost of operating USM's local business offices and its corporate expenses. The increases result from the increase in the number of consolidated markets due to acquisitions as well as the growth in personnel necessary to serve the greater number of customers. USM is using an ongoing clustering strategy to combine local operations wherever feasible in order to gain operational efficiencies and reduce its administrative expenses. General and administrative expenses also increased approximately $1.5 million in 1994 due to legal expenses incurred to defend the Company against various legal claims. Depreciation expense increased 54% ($13.9 million) in 1994 and 55% ($9.1 million) in 1993, reflecting increases in average fixed asset balances of 54% and 56%, respectively. Amortization expense, primarily amortization of license costs, increased 34% ($6.6 million) in 1994 and 49% ($6.3 million) in 1993 due to increases in license costs. OPERATING INCOME was $17.4 million in 1994, compared to operating losses of $8.7 million in 1993 and $12.7 million in 1992. Operating margin on service revenues improved to 5% in 1994 from (4%) in 1993 and (10%) in 1992. The improvement in 1994 and 1993 was primarily due to improved results in the more established markets and increased revenues from growth in the customer base, offset somewhat by costs associated with the growth of USM's operations and increased losses on equipment sales. The Company expects service revenues to continue to grow in 1995 as customers are added to USM's existing markets, as it realizes a full year of revenue from customers and cell sites added in 1994, and as it completes acquisitions of operational systems and begins operations in new markets. Additionally, the Company thirty-nine MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION expects expenses to continue to increase significantly in 1995 as it incurs a full year of expenses for markets and cell sites added in 1994, incurs expenses associated with customer and system growth, and acquires existing markets. At least nine additional markets are expected to be added to consolidated operations during 1995. The Company expects that the costs related to acquiring, constructing and operating new markets may exceed their revenues over the next few quarters. Additionally, management believes there exists a seasonality in both service revenues and operating expenses, especially marketing expenses. As a result, the rate of growth in operating income could be reduced over the next several quarters. CELLULAR INVESTMENT INCOME includes USM's and TDS's share of the net income or loss of cellular markets in which they have a minority interest and for which they follow the equity method of accounting. Investment income is net of amortization of license costs relating to these minority interests.
Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Cellular Investment Income Cellular Markets Managed by USM $ 900 $ (307) $ (976) Managed by Others 25,118 16,011 10,200 ----------------------------------- $ 26,018 $ 15,704 $ 9,224 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
TDS's share of USM's net income (loss) was $13.7 million in 1994, ($21.2) million in 1993 and $5.1 million in 1992. The net income (loss) excludes the USM minority shareholders' share of such income (loss). The net income (loss) from cellular telephone operations does not include federal income taxes from the inclusion of USM in TDS's consolidated federal tax return. Under a tax allocation agreement, TDS does not reimburse USM currently for income tax benefits and credits. Instead, such benefits and credits are being carried forward until they can be used by USM. TDS owned an aggregate of 63,879,673 shares of common stock of USM at December 31, 1994, representing over 81% of the combined total of USM's outstanding Common and Series A Common Shares and over 96% of their combined voting power. Assuming USM's Common Shares are issued in all instances in which USM has the choice to issue its Common Shares or other consideration and assuming all issuances of USM's common stock to be issued to TDS and third parties for completed and pending acquisitions and Preferred Stock conversions had been completed at December 31, 1994, TDS would have owned approximately 80.3% of the total outstanding common stock of USM and controlled over 95% of the combined voting power of both classes of its common stock. In the event TDS's ownership of USM falls below 80% of the total value of all of the outstanding shares of USM's stock, TDS and USM would be deconsolidated for federal income tax purposes. TDS and USM have the ability to defer or prevent deconsolidation, if deferring or preventing deconsolidation would be advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's Common Shares in connection with certain acquisitions. TELEPHONE OPERATIONS
Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS) OPERATING REVENUES Local service $ 81,986 $ 72,191 $ 65,131 Network access and long-distance 183,953 159,111 137,747 Miscellaneous 40,402 36,820 35,217 ------------------------------------ 306,341 268,122 238,095 ------------------------------------ OPERATING EXPENSES Network operations 51,939 42,524 36,100 Depreciation 64,781 56,024 48,830 Amortization 4,097 3,538 3,116 Customer operations 43,324 39,416 35,103 Corporate and other 50,594 47,510 42,729 ------------------------------------ 214,735 189,012 165,878 ------------------------------------ OPERATING INCOME $ 91,606 $ 79,110 $ 72,217 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Telephone revenues as a percent of total revenues 42% 48% 55% Construction expenditures* $ 117,867 $ 82,233 $ 67,357 Identifiable assets 984,563 829,489 723,855 Telephone plant in service per access line $ 2,312 $ 2,205 $ 2,149 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Companies 96 94 90 Access lines 392,500 356,200 321,700 Growth in access lines from prior year-end: Acquisitions 19,700 20,100 4,000 Internal growth 16,600 14,400 13,700 Average monthly revenue per access line $ 69 $ 65 $ 64 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- *INCLUDES NONCASH AMOUNTS (IN THOUSANDS) OF $2,384, $1,415 AND $1,705, IN 1994, 1993 AND 1992, RESPECTIVELY.
Operating results for 1994 and 1993 primarily reflect increases in access lines of 10% in 1994 and 11% in 1993 due to internal growth and acquisitions. Operating revenues increased 14% to $306.3 million in 1994 and 13% to $268.1 million in 1993. Operating expenses increased 14% in 1994 and 1993. TDS Telecom is continually trying to reduce its operating expenses through ongoing cost- reduction programs. Operating cash flow increased 16% to $160.5 million in 1994 compared to an increase of 12% to $138.7 million in 1993. TDS Telecom continues to provide a growing operating cash flow and earnings to support its construction activities forty MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION as well as the development of the Company's wireless operations. OPERATING REVENUES from telephone operations increased 14% ($38.2 million) in 1994 and 13% ($30.0 million) in 1993. The increases in revenues were due to internal access line growth, recovery of increased costs of providing long- distance services and the effects of acquisitions. Acquisitions increased telephone revenues 7% ($19.4 million) in 1994 and 5% ($11.7 million) in 1993. Local service revenues increased 14% ($9.8 million) in 1994 and 11% ($7.1 million) in 1993, with acquisitions increasing these revenues 2% ($1.7 million) in 1994 and 4% ($2.5 million) in 1993. Internal growth in access lines and sales of custom-calling and other features increased local service revenues approximately $4.8 million in 1994 and $3.3 million in 1993. Certain extended community calling revenues previously reported as network access revenues and changes in settlement plans increased local service revenues approximately $1.6 million in 1994. Rate increases combined with temporary rate reductions and refunds increased local service revenues by $912,000 in 1994 and $743,000 in 1993. Network access and long-distance revenues increased 16% ($24.8 million) in 1994 and 16% ($21.4 million) in 1993. Acquisitions increased these revenues 10% ($16.4 million) in 1994 and 6% ($7.6 million) in 1993. An August 1994 acquisition added a long-distance carrier to TDS Telecom's operations. Recovery of increased costs of providing access to long-distance carriers increased revenues $4.1 million in 1994 and $4.4 million in 1993. Changes in Federal Communications Commission ("FCC")-mandated cost separations rules increased revenues $1.3 million in 1994 and $2.1 million in 1993. Certain settlements relating to prior periods, due primarily to retroactively billed access services and finalization of cost separation studies, increased these revenues 1% ($1.0 million) in 1994 and 2% ($3.0 million) in 1993. The remainder of the revenue increase in 1994 and 1993 was primarily due to increased minutes of use, increases in access lines served and changes in rates of return. Miscellaneous revenues increased 10% ($3.6 million) in 1994 and 5% ($1.6 million) in 1993. Acquisitions increased miscellaneous revenues 4% ($1.3 million) in 1994 and 5% ($1.7 million) in 1993. Increased sales and leases of customer premise equipment increased revenues 3% ($1.2 million) in 1994. A new contract for billing and collection services decreased these revenues 2% ($550,000) in 1993. The remaining increases in 1994 and 1993 are due to increased message volumes, provision of billing and collection services for Alternate Operator Service providers, and additional non-regulated revenues as a result of increased marketing efforts and access line growth. OPERATING EXPENSES increased 14% ($25.7 million) in 1994 and 14% ($23.1 million) in 1993. The effects of acquisitions increased expenses 9% ($16.6 million) in 1994 and 5% ($9.0 million) in 1993. Network forty-one MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION operations expense increased 22% ($9.4 million) in 1994 and 18% ($6.4 million) in 1993, with acquisitions increasing these expenses 21% ($8.9 million) in 1994 and 8% ($2.9 million) in 1993. As discussed above, an August 1994 acquisition added a long-distance carrier to TDS Telecom's operations. The remaining increases in 1994 and 1993 were primarily due to salary and work force changes along with the effects of general inflation. Depreciation and amortization expense increased 16% ($9.3 million) in 1994 and 15% ($7.6 million) in 1993, with acquisitions increasing such expense 6% ($3.3 million) in 1994 and 5% ($2.7 million) in 1993. Lump-sum depreciation adjustments and increases in certain depreciation rates increased these expenses 4% ($2.4 million) in 1994 and 4% ($2.2 million) in 1993. The remainder of the increase in depreciation expense is due to growth in plant and equipment. The composite depreciation rate was 7.5% in 1994, 7.3% in 1993 and 7.2% in 1992. Customer operations expense increased 10% ($3.9 million) in 1994 and 12% ($4.3 million) in 1993, with acquisitions providing 5% ($1.9 million) of the increase in 1994 and 4% ($1.4 million) in 1993. The remainder of the increase is due primarily to increases in salary and workforce changes, customer billing and programming costs and increased marketing activities. Corporate and other expenses increased 6% ($3.1 million) in 1994 and 11% ($4.8 million) in 1993, with acquisitions increasing these expenses 5% ($2.6 million) in 1994 and 5% ($2.0 million) in 1993. The remainder of the increases are due primarily to the effects of inflation, employee-related costs, additional staffing and increases in legal and other costs related to new business development and long-range planning activities. OPERATING INCOME from telephone operations increased 16% ($12.5 million) in 1994 and 10% ($6.9 million) in 1993. The effects of acquisitions increased operating income 4% ($2.8 million) in 1994 and 4% ($2.8 million) in 1993. The telephone operating margin was 30% in 1994, 1993 and 1992. The 1994 increase in operating income reflects additional 1994 revenues from recovery of increased costs of providing long-distance services and from growth in access lines and minutes of use. These increases in revenues were offset somewhat by increased costs for network operations and customer billing and by increased depreciation. TDS Telecom's revenues are expected to continue to increase in 1995. However, due to expected increases in customer operations expense (primarily due to increased marketing activities), accelerated depreciation on certain switching equipment and the long-distance company acquired, which has lower margins than the telephone operations, the 1995 operating margin may be lower than the 1994 level. TDS Telecom currently complies with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Recently several large companies in the telephone industry have announced that they will no longer apply the provisions of SFAS 71. 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. While management is studying the impact the discontinuance of SFAS No. 71 might have on TDS Telecom's results of operations, the Company has no current plans to change its method of accounting. RADIO PAGING OPERATIONS
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------ (Dollars in thousands, except per unit amounts) SERVICE OPERATIONS REVENUES $ 77,520 $ 64,384 $ 48,582 Costs and expenses Cost of services 19,347 15,837 12,147 Selling and advertising 13,249 11,131 10,419 General and administrative 27,947 24,783 20,585 Depreciation 14,537 11,182 9,335 Amortization 2,641 2,210 1,077 ------------------------------------ 77,721 65,143 53,563 ------------------------------------ Service Operating (Loss) (201) (759) (4,981) ------------------------------------ EQUIPMENT SALES REVENUES 14,545 10,979 6,134 Cost of equipment sold 14,513 10,941 6,600 ------------------------------------ Equipment Sales Income (Loss) 32 38 (466) ------------------------------------ OPERATING (LOSS) $ (169) $ (721) $ (5,447) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Radio paging revenues as a percent of total revenues 13% 14% 13% Additions to property and equipment* $ 27,403 $ 24,813 $ 15,501 Identifiable assets $ 146,107 $ 74,923 $ 57,080 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Pagers in service 652,800 460,900 322,200 Average monthly service revenue per unit $ 12 $ 14 $ 15 Transmitters in service 943 685 532 Churn rate per month 2.6% 2.9% 2.9% Marketing cost per net customer unit addition $ 86 $ 87 $ 138 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ *DOES NOT INCLUDE CASH EXPENDITURES (IN THOUSANDS) OF $2,248 IN 1994, WHICH RELATE TO ADDITIONS IN PRIOR PERIODS. INCLUDES NONCASH AMOUNTS (IN THOUSANDS) OF $2,177 AND $1,128 IN 1993 AND 1992, RESPECTIVELY.
forty-two MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION APP continued its strong growth in customer units in service and revenue in 1994 and 1993. Improved economies of scale and continuing improvements in business processes and systems provided support for the improvement in the operating results. As a result, operating loss in 1994 improved to ($169,000) from ($721,000) in 1993. Service Revenues increased 20% ($13.1 million) in 1994 and 33% ($15.8 million) in 1993, primarily as a result of growth in the number of pagers in service, offset somewhat by a decline in average monthly service revenue per unit. In 1994, service revenues increased 38% ($24.4 million) due to growth in customer units and declined 7% ($4.7 million) due to a decrease in average monthly service revenue per unit and 10% $6.6 million) due to a shift in distribution channels. Pagers in service increased 42% (191,900, including 35,000 from an acquisition) in 1994 and 43% (138,700, including 10,700 from an acquisition) in 1993. Average monthly service revenue per unit was $12 in 1994, $14 in 1993 and $15 in 1992. The decline in APP's average service revenue per unit is consistent with the industry trend. Declining average monthly service revenue per unit is related to a shift toward lower revenue distribution channels such as resellers and retail stores as well as competitive factors. Reseller units in service as a per-cent of total units increased to 29% in 1994, from 19% in 1993. SERVICE EXPENSES increased 19% ($12.6 million) in 1994 and 22% ($11.6 million) in 1993 primarily as a result of the costs of system expansion and serving new customers. However, average monthly operating cost per unit improved to $7 in 1994 from $9 in 1993 and $10 in 1992 as a result of achieving increasing economies of scale and operating efficiencies. Cost of services increased 22% ($3.5 million) in 1994 and 30% ($3.7 million) in 1993. The additional costs of providing service to the increased customer base, which includes alphanumeric transcription, nationwide and local reseller and telephone expenses, increased cost of services approximately $1.2 million in 1994 and $3.0 million in 1993. The remainder of the increases in cost of services were due primarily to the costs of upgrading and expanding APP's transmission systems to improve reliability and coverage. APP had 943 transmitters in service at year-end 1994, 685 at year-end 1993 and 532 at year- end 1992. Selling and advertising expense increased 19% ($2.1 million) in 1994 and 7% ($712,000) in 1993. Commission expense increased approximately $1.0 million in 1994 due to commissions associated with APP's movement into the retail market. Selling and advertising expense increased at a slower rate than the rate of growth in pagers in service due to improved productivity of sales personnel and increased use of lower-cost distribution channels such as resellers and retail outlets. forty-three MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Cost per gross customer unit added, excluding acquisitions, was $41 in 1994, $42 in 1993 and $62 in 1992. General and administrative expense increased 13% ($3.2 million) in 1994 and 20% ($4.2 million) in 1993. Increases in employee-related costs increased general and administrative expenses $420,000 in 1994 and $1.6 million in 1993. Costs related to maintenance of APP's customer billing system as well as costs associated with billing additional customers increased these expenses $660,000 in 1994. Bad debt expense increased $670,000 in 1994 and $1.1 million in 1993 due to APP's increased use of retail distribution and the increase in the customer base. Somewhat offsetting these increases was a refund of health and life insurance premiums totalling $540,000 in 1994. Certain amounts included as general and administrative expenses in 1992 have been reclassified as equipment sales revenues and cost of equipment sold to conform to 1994's and 1993's presentation. Depreciation and amortization charges increased 28% ($3.8 million) in 1994 and 29% ($3.0 million) in 1993, reflecting increased investment in pagers and related equipment and acquisitions. APP's gross fixed assets grew 25% in 1994 and 20% in 1993, primarily due to increases in terminals, transmitters and pagers. Based on a study of useful lives, APP shortened the estimated useful lives of pagers and transmitters beginning July 1, 1994. The change in estimated useful lives increased depreciation expense by approximately $1.5 million in 1994 and is expected to increase depreciation expense approximately $3.8 million in 1995. EQUIPMENT SALES REVENUES increased 32% ($3.6 million) in 1994 and 79% ($4.8 million) in 1993 due to APP's increased emphasis on selling rather than leasing pagers to customers, particularly through retail stores, resellers and Company- operated retail outlets. Cost of equipment sold increased 33% ($3.6 million) in 1994 and 66% ($4.3 million) in 1993. While APP generally plans to make a profit on equipment sales, it may discount paging equipment due to competitive pressures, sales promotions or sales of discontinued pagers. In June 1993, APP elected to cease national retailer distribution of pagers through its wholly owned subsidiary, American Paging Network ("APN"). The decision to cease operations at APN resulted in a pretax charge of $1.0 million, included in other income, net in the Consolidated Statements of Income. OPERATING LOSS was $169,000 in 1994, compared to $721,000 in 1993 and $5.4 million in 1992. Operating margin improved to nearly break even in 1994 from (1%) in 1993 and (11%) in 1992. The improvement in operating loss reflects a) rapid growth in revenues due to the growth in the customer base, offset somewhat by a continuing decline in average monthly service revenue per unit and APP's increased use of lower revenue but higher margin distribution channels and b) increasing economies of scale and process improvements which resulted in operating expenses increasing at a slower rate than revenues. The lower revenue distribution channels, while reducing the rate of revenue growth, are associated with lower customer acquisition costs. The Company expects service revenues to continue to grow in 1995 as customers are added to APP's existing service areas and as it realizes a full year of revenue from customers added in 1994. The industry trend of declining average monthly service revenue per unit is expected to continue in 1995. The Company expects expenses to continue to increase in 1995 as the customer base grows and as APP continues to upgrade and expand its transmission systems to further improve reliability and coverage. PARENT AND SERVICE COMPANY OPERATIONS OTHER INCOME, NET includes the gross income of TDS's computer, printing and other service companies and costs of corporate operations.
Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Additions to property and equipment* $ 7,754 $ 7,386 $ 20,555 Identifiable assets $ 75,315 $ 79,202 $ 56,756 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ * DOES NOT INCLUDE CASH EXPENDITURES (IN THOUSANDS) OF $333 AND $426 IN 1994 AND 1993, RESPECTIVELY, WHICH RELATE TO PRIOR PERIODS. INCLUDES NONCASH EXPENDITURES (IN THOUSANDS) OF $7,994 IN 1992.
INFLATION Management believes that inflation affects TDS's business to no greater extent than the general economy. FINANCIAL RESOURCES AND LIQUIDITY TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid growth has caused financing requirements for construction, expansion and acquisition programs to exceed internally generated cash flow in recent years. Accordingly, TDS and USM have obtained substantial funds from external sources to finance construction and development of cellular telephone systems and to fund acquisitions during the past three years. Continued requirements for construction, expansion and acquisition activities will require substantial additional funds from external sources. CASH FLOWS FROM OPERATING ACTIVITIES, as presented in the Consolidated Statements of Cash Flows, increased 40% ($64.5 million) in 1994 and 39% ($44.8 million) in 1993. The increases represent primarily improved operating results in all three business segments and increases in operating payables. Operating forty-four MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION cash flow (operating income plus depreciation and amortization) totalled $260.3 million in 1994, $187.7 million in 1993 and $146.1 million in 1992. Cash flows for other operating activities (investment and other income, interest and income tax expense, and changes in working capital and other assets and liabilities) required $35.6 million in 1994, $27.5 million in 1993 and $30.7 million in 1992.
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Operating cash flow Cellular telephone $ 82,839 $ 36,371 $ 16,934 Telephone 160,484 138,672 124,164 Radio paging 17,009 12,671 4,964 ------------------------------------ 260,332 187,714 146,062 Other operating activities (35,646) (27,518) (30,703) ------------------------------------ $ 224,686 $ 160,196 $ 115,359 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES totalled $144.0 million in 1994, $131.0 million in 1993 and $83.2 million in 1992. TDS has used short-term debt to finance its cellular telephone and radio paging operations, for acquisitions and for general corporate purposes. Proceeds from the sale of long-term debt and equity securities from time to time have retired such short-term debt. The Company's external financing requirements for 1994, 1993 and 1992 were met as follows: 1994: TDS sold 100,000 Common Shares for cash. The $4.9 million proceeds were used to reduce short-term debt by $4.2 million and for general corporate purposes. APP issued 3.5 million Common Shares in an initial public offering at a price of $14.00 per share. TDS used the $45.6 million proceeds (after underwriting discount) to reduce short-term debt and for general corporate purposes. Short-term bank debt provided an additional $92.3 million, net of repayments, in financing during 1994. 1993: TDS sold 1.3 million Common Shares for cash. The $65.6 million net proceeds were used to retire short-term bank debt totalling $58.9 million and for general corporate purposes. Also in 1993, the Company sold $92.5 million under its MTN program, most of which was used to retire short-term debt. Additionally, USM sold approximately 1.1 million of its Common Shares in 1993 to parties other than TDS pursuant to a rights offering. TDS used the $37 million proceeds to retire existing short-term debt. forty-five MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 1992: Sales of common stock by TDS provided most of the Company's external financing requirements during 1992. TDS and USM have also issued TDS Common Shares, TDS Preferred Shares and USM Common Shares to third parties to acquire cellular interests and telephone companies. 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 $18.0 million in 1994 and $36.6 million in 1992 under vendor financing arrangements. Loans under these programs bear interest at 2.25% to 2.3% over the 90-day Commercial Paper Rate and have terms of seven to eight years. Telephone subsidiaries borrowed $16.8 million in 1994, $28.2 million in 1993 and $14.4 million in 1992 under the Rural Utility Service and the Rural Telephone Bank long-term federal government loan programs. Financing under these programs comprises 96% of total outstanding telephone subsidiary long-term debt at an average annual interest rate of 5.39%. Consolidated equity capital increased to 62% of total capitalization at December 31, 1994, compared to 55% at the end of 1991, primarily as a result of equity offerings and stock issuances in connection with acquisitions. TDS targets a ratio of equity to total capital in the range of 55% to 65%. CASH FLOWS FROM INVESTING ACTIVITIES required cash totalling $399.6 million in 1994, $276.3 million in 1993 and $194.8 million in 1992. Such activities primarily consisted of additions to property, plant and equipment, acquisitions and investments in cellular telephone partnerships. Cash expenditures for property, plant and equipment additions totalled $321.4 million in 1994, $198.7 million in 1993 and $148.6 million in 1992. USM constructed 225 cell sites in 1994, 138 in 1993 and 107 in 1992. TDS Telecom installed 32 digital switches in 1994, 54 in 1993 and 18 in 1992, 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 258 new transmitters in 1994, 153 in 1993 and 48 in 1992 to improve signal quality and expand the coverage areas of its paging systems. During the past three years, TDS purchased cellular telephone, telephone and paging interests as part of its ongoing acquisition program. During 1994, the Company completed the purchase of cellular interests representing 1.3 million population equivalents, including controlling interests in nine cellular markets and several minority interests, three telephone companies (which also own cellular interests representing 182,000 population equivalents), and one paging company. During 1993, the Company completed the purchase of cellular interests representing 3.8 million population equivalents, including controlling interests in 25 cellular markets and several minority cellular interests, four telephone companies (which also own cellular interests representing 416,000 population equivalents), and one paging company. During 1992, the Company completed the purchase of cellular interests representing 2.6 million population equivalents including controlling interests in 13 cellular markets and several minority interests, five telephone companies and two paging companies. Some of the entities acquired during 1994, 1993 and 1992 were subject to acquisition agreements prior to the year acquired. The consideration paid for these acquisitions is shown in the following table.
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------ (DOLLARS IN MILLIONS) Cash $ 40.4 $ 58.8 $ 27.6 Cancellation of a Note Receivable 1.4 -- -- TDS Common Shares (3.7 million, 6.8 million and 3.7 million, respectively) 171.7 277.1 134.5 TDS Series A Common Shares (199,000) -- -- .1 TDS Preferred Shares (125,000 and 30,000, respectively) 12.5 3.0 -- TDS Common Shares Issuable (42,000 and 94,000, respectively) 2.0 4.5 -- USM Common Shares (53,000, 157,000 and 130,000, respectively) 1.4 4.7 2.8 USM Common Shares Issuable in the future (140,000 and 778,000 respectively) -- 3.0 16.7 Subsidiary preferred stock (29,000) -- 2.9 -- ------------------------------------ Total Consideration $ 229.4 $ 354.0 $ 181.7 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
ANTICIPATED REQUIREMENTS for 1995 reflect the Company's construction, expansion and acquisition programs. Cellular telephone, telephone, radio paging and other property, plant and equipment additions are anticipated to aggregate approximately $350 million for 1995. The cellular capital additions budget totals $180 million for 1995 including anticipated expenditures for both enhancements to existing systems and construction of new systems. The telephone plant additions budget totals approximately $110 million in 1995, including about $37 million for new digital switches and other switching facilities and $54 million for improvements to outside plant facilities. Radio paging property and forty-six MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION equipment additions, primarily the purchase of pagers, are anticipated to total about $35 million in 1995. Other fixed asset expenditures are estimated to total $25 million in 1995. APP was the successful bidder in 1994 for five regional Personal Communications Services ("PCS") licenses, providing equivalent coverage to that of a nationwide license, at auction by the FCC. APP's bids for the licenses aggregated $53.6 million. Pursuant to the FCC auction procedures, APP made a 20% down payment of $10.7 million in 1994 and will pay the remaining 80% or $42.9 million within five business days after the FCC grants the licenses (expected to be in the first quarter of 1995). APP is currently evaluating several uses for the licenses. However, it does not expect construction of the systems to require significant additional capital expenditures in 1995. In March 1995, American Portable Telecommunications ("APT"), a wholly owned subsidiary of TDS, was the successful bidder for eight broadband PCS licenses at an auction conducted by the FCC. These 30 MHz PCS licenses will, when granted, authorize the Company to provide two-way voice and data services on new wireless, digital networks. TDS's licenses cover the Major Trading Areas of Minneapolis-St. Paul, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City, Columbus, Alaska and Guam-N. Mariana Islands, and account for 27.9 million 1994 pops. APT's successful bid commitment totalled $289.2 million for the eight licenses, or $10.35 per 1994 pop. As required by FCC auction procedures, the Company will make a 20% down payment (less its initial $20.4 million deposit) on the licenses by March 20, 1995, and complete the payment five business days after the FCC has granted the licenses. Management anticipates that construction, development and introduction of PCS networks and services in these new markets may involve expenditures of $400 million to $500 million or more over the next five years. TDS is considering a variety of financing options that appropriately balance the interests of its shareholders and debtholders. TDS's active acquisition program may require substantial external financing during 1995. The Company maintains a shelf registration of its Common Shares for use in connection with acquisitions. The following table shows outstanding Common and Series A Common Shares, Common Shares reserved for pending acquisitions, and Common Shares registered under such shelf registration.
Common and Series A Common Shares ----------------------------------------------------------------------------- (SHARES IN THOUSANDS) Shares outstanding December 31, 1994 54,824 Shares reserved for pending acquisitions under definitive agreements 2,762 ------- Total shares outstanding and committed 57,586 ----------------------------------------------------------------------------- Unissued shares previously registered for acquisitions, including shares reserved under definitive agreements 3,891 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
TDS and/or USM have entered into definitive agreements at December 31, 1994, to acquire controlling interests in seven cellular markets plus several minority interests representing an aggregate of approximately 1.2 million population equivalents for an aggregate consideration estimated to be $101.5 million. If all of these acquisitions are completed as planned, TDS and/or USM will issue approximately 1.9 million TDS Common Shares and 102,000 USM Common Shares and will pay approximately $12.7 million in cash. Any cellular interests acquired by TDS in these transactions are expected to be assigned to USM, and at the time this occurs, USM will reimburse TDS for TDS's consideration delivered and costs incurred in such acquisitions in the form of USM Common Shares, notes payable and cash. USM has also entered into agreements to exchange markets with four other cellular operators. Pursuant to the exchange agreements, USM will receive majority interests in nine new markets in exchange for majority interests in seven markets USM currently owns. Additionally, USM has commitments to issue 803,000 Common Shares in 1995 and 1996 in connection with acquisitions closed in 1992 and prior years. At December 31, 1994, the Company had agreements awaiting regulatory approvals to acquire controlling interests in four telephone companies (which also own cellular interests representing approximately 45,000 population equivalents) for an aggregate consideration of $40.7 million. Completion of these pending acquisitions will require the issuance of approximately 897,000 TDS Common Shares and the payment of $250,000 in cash. TDS and USM plan to continue to acquire additional cellular interests in markets that strengthen USM's position, while at the same time considering the disposition of interests in some markets that do not fit well with USM's long- term plans. TDS and USM are currently negotiating agreements for the acquisition of additional cellular interests. TDS and APP are also currently negotiating agreements for the acquisition of additional telephone and paging companies, respectively. TDS is a party to a legal proceeding before the FCC involving a cellular license in a Wisconsin Rural Service Area. In March 1995, a preliminary settlement forty-seven MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION was reached with a group of Wisconsin telephone companies (the "Settlement Group") involved in that proceeding, and a definitive agreement was executed with another party in the same proceeding. The proposed settlements, which follow extensive discovery by the FCC and other parties, contemplate a summary decision finding that TDS and its affiliates are fully qualified to be FCC licensees. The final settlements will be subject to the negotiation of a definitive agreement with the Settlement Group and the action of the judge presiding in the FCC proceeding. See Note 12 of Notes to Consolidated Financial Statements; Legal Proceedings (La Star and Wisconsin RSA 8 Applications), for further discussion of the proceeding involving the Wisconsin RSA. LIQUIDITY. Management believes that TDS has sufficient internal and external resources to finance the anticipated requirements of its business development, construction and acquisition programs. TDS and its subsidiaries have cash and temporary investments totalling $44.6 million and longer-term investments totalling $72.0 million at December 31, 1994. 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. The TDS Telecom telephone subsidiaries had $110.6 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 6.01%. TDS and its subsidiaries had $168.1 million of bank lines of credit for general corporate purposes at December 31, 1994, $143.1 million of which were committed. Unused amounts of such lines totalled $70.2 million, $45.2 million of which were committed. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. TDS and USM also have access to debt and equity capital markets, including shelf registration statements covering the issuance of common stock for acquisitions, and in the case of TDS, covering the issuance of Common Shares for cash. TDS's shelf registration statement for Common Shares for acquisitions had 3.9 million unissued shares at December 31, 1994, including 2.8 million shares reserved under definitive agreements. 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, 1994, $277.6 million remained unused on the universal shelf. The unused amount may be used for debt or equity security issuances including the sale of debt under TDS's $150 million Series C MTN Program. The Company plans to continue financing its telephone construction program primarily using internally generated cash supplemented by long-term financing from federal government programs. Internally generated cash financed 85% of telephone property, plant and equipment additions in 1994, 60% in 1993 and 76% in 1992. The balance was financed through federal government programs. Management believes that TDS's internal cash flows and funds available from cash and cash investments provide substantial financial flexibility. TDS also has substantial lines of credit and longer-term financing commitments to help meet its short- and longer-term financing needs. Moreover, TDS, USM and APP 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. forty-eight SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31, 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating Revenues $ 730,810 $ 557,795 $ 432,740 $ 340,160 $ 286,743 Operating Income 108,822 69,733 54,065 40,661 47,124 Net Income Before Extraordinary Item and Cumulative Effect of Accounting Changes 60,544 33,896 38,520 21,113 27,208 Extraordinary Item -- -- (769) -- -- Cumulative Effect of Accounting Changes (723) -- (6,866) (5,035) -- Net Income 59,821 33,896 30,885 16,078 27,208 Net Income Available to Common $ 58,012 $ 31,510 $ 28,648 $ 14,390 $ 26,047 Weighted Average Common Shares (000s) 54,197 47,266 39,074 33,036 30,415 Earnings per Common Share: Before Extraordinary Item and Cumulative Effect of Accounting Changes $ 1.07 $ .67 $ .91 $ .59 $ .86 Extraordinary Item -- -- (.02) -- -- Cumulative Effect of Accounting Changes (.01) -- (.17) (.15) -- Net Income $ 1.06 $ .67 $ .72 $ .44 $ .86 Pretax Profit on Revenues 13.9% 10.8% 15.8% 10.6% 15.2% Effective Income Tax Rate (Before Extraordinary Item and Cumulative Effect of Accounting Changes) 40.2% 43.9% 43.6% 41.4% 37.6% Dividends per Common and Series A Common Share $ .36 $ .34 $ .32 $ .30 $ .28 Cash and Cash Equivalents and Temporary Investments 44,566 73,385 58,145 53,346 65,824 Property, Plant and Equipment (Net) 2,153,575 1,738,298 1,275,516 997,187 624,541 Total Assets 2,790,127 2,259,182 1,696,486 1,368,145 940,289 Notes Payable 98,608 6,309 46,816 41,283 70,571 Long-term Debt (including current portion) 562,164 537,566 426,885 395,960 270,066 Redeemable Preferred Shares (including current portion) 25,001 27,367 27,967 28,779 6,965 Common Stockholders' Equity 1,473,038 1,224,285 877,419 645,290 429,666 Construction Expenditures $ 311,477 $ 208,520 $ 162,245 $ 154,574 $ 111,002 Current Ratio .5 1.1 .9 .9 .8 Common Equity per Share $ 26.85 $ 24.15 $ 21.27 $ 18.42 $ 14.17 -------------------------------------------------------------------------------------------------------------------
forty-nine CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING REVENUES Cellular telephone $332,404 $214,310 $139,929 Telephone 306,341 268,122 238,095 Radio paging 92,065 75,363 54,716 -------------------------------- 730,810 557,795 432,740 ------------------------------------------------------------------------------- OPERATING EXPENSES Cellular telephone 315,019 222,966 152,634 Telephone 214,735 189,012 165,878 Radio paging 92,234 76,084 60,163 -------------------------------- 621,988 488,062 378,675 ------------------------------------------------------------------------------- OPERATING INCOME 108,822 69,733 54,065 ------------------------------------------------------------------------------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 10,612 8,082 7,708 Minority share of income (9,079) (475) (3,703) Cellular investment income, net of license cost amortization 26,018 15,704 9,224 Gain on sale of cellular and telephone interests 7,457 4,970 31,396 Other (expense) income, net (1,322) (155) 2,207 -------------------------------- 33,686 28,126 46,832 ------------------------------------------------------------------------------- INCOME BEFORE INTEREST AND INCOME TAXES 142,508 97,859 100,897 Interest expense 41,251 37,466 32,610 ------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 101,257 60,393 68,287 Income tax expense 40,713 26,497 29,767 ------------------------------------------------------------------------------- NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 60,544 33,896 38,520 Extraordinary Item -- -- (769) Cumulative Effect of Accounting Changes (723) -- (6,866) ------------------------------------------------------------------------------- NET INCOME 59,821 33,896 30,885 Preferred Dividend Requirement (1,809) (2,386) (2,237) ------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON $ 58,012 $ 31,510 $ 28,648 ------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES (000s) 54,197 47,266 39,074 EARNINGS PER COMMON SHARE: Before Extraordinary Item and Cumulative Effect of Accounting Changes $ 1.07 $ .67 $ .91 Extraordinary Item -- -- (.02) Cumulative Effect of Accounting Changes (.01) -- (.17) -------------------------------- Net Income $ 1.06 $ .67 $ .72 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .36 $ .34 $ .32 ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. fifty CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------------------------------ (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 59,821 $ 33,896 $ 30,885 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Extraordinary item -- -- 769 Cumulative effect of accounting changes 723 -- 6,866 Depreciation and amortization 161,796 127,509 98,986 Deferred taxes 14,529 5,846 6,999 Investment income (30,083) (20,015) (13,265) Minority share of income 9,079 475 3,703 Gain on sale of cellular and telephone interests (7,457) (4,970) (31,396) Other noncash expense 5,410 5,336 10,128 Change in accounts receivable (22,401) (11,262) (10,057) Change in accounts payable 31,714 11,308 6,984 Change in accrued taxes (4,638) 4,661 1,087 Change in other assets and liabilities 6,193 7,412 3,670 ----------------------------------------- 224,686 160,196 115,359 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 36,916 122,275 59,294 Repayment of long-term debt (33,710) (37,969) (40,517) Premium on retirement of long-term debt -- -- (1,117) Change in notes payable 92,318 (40,533) 5,507 Common stock issued 11,185 69,644 72,201 Minority partner capital contributions (distributions) 12,504 (1,528) 1,690 Redemption of preferred shares (9) (220) (407) Dividends paid (20,906) (17,830) (13,902) Sale of stock by a subsidiary 45,714 37,154 407 ----------------------------------------- 144,012 130,993 83,156 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (321,435) (198,743) (148,619) Investments in and advances to cellular minority partnerships (24,444) (14,595) (16,981) Distributions from partnerships 17,375 11,943 9,676 Investments in PCS licenses (31,604) -- -- Proceeds from investment sales 6,000 6,750 7,343 Other investments (10,313) (35,054) (16,934) Acquisitions, excluding cash acquired (37,552) (51,579) (30,117) Change in temporary investments 2,342 4,945 864 ----------------------------------------- (399,631) (276,333) (194,768) ------------------------------------------------------------------------------------------------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (30,933) 14,856 3,747 CASH AND CASH EQUIVALENTS- Beginning of period 55,666 40,810 37,063 ---------------------------------------- End of period $ 24,733 $ 55,666 $ 40,810 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
fifty-one CONSOLIDATED BALANCE SHEETS-ASSETS
December 31, 1994 1993 -------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) CURRENT ASSETS Cash and cash equivalents $ 24,733 $ 55,666 Temporary investments 19,833 17,719 Construction funds 1,309 1,473 Accounts receivable Due from customers, less allowance of $2,785 and $2,093, respectively 52,897 37,802 Other, principally connecting companies 57,369 42,994 Materials and supplies, at average cost 17,106 13,870 Other 12,671 10,032 -------------------------------- 185,918 179,556 -------------------------------------------------------------------------------------------- INVESTMENTS Cellular limited partnership interests 111,733 101,210 Cellular license acquisition costs, net of amortization 94,470 92,277 Marketable equity securities 25,604 19,368 Marketable non-equity securities 71,314 64,556 Other 60,806 50,976 -------------------------------- 363,927 328,387 -------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Cellular Telephone In service and under construction 479,457 306,118 License acquisition costs 979,492 816,621 -------------------------------- 1,458,949 1,122,739 Less accumulated depreciation and amortization 169,112 108,636 -------------------------------- 1,289,837 1,014,103 -------------------------------- Telephone In service and under construction, substantially at original cost 995,601 846,491 Less accumulated depreciation 386,487 322,301 -------------------------------- 609,114 524,190 Franchise and other costs in excess of the underlying book value of subsidiaries, net of amortization 151,107 114,658 -------------------------------- 760,221 638,848 -------------------------------- Radio Paging In service 110,779 84,282 Less accumulated depreciation and amortization 39,962 31,337 -------------------------------- 70,817 52,945 -------------------------------- Other In service 66,832 57,228 Less accumulated depreciation and amortization 34,132 24,826 -------------------------------- 32,700 32,402 -------------------------------- 2,153,575 1,738,298 -------------------------------------------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES PCS licenses and deposits 74,501 -- Other 12,206 12,941 -------------------------------- 86,707 12,941 -------------------------------- $2,790,127 $2,259,182 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
fifty-two CONSOLIDATED BALANCE SHEETS-LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1994 1993 ------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) CURRENT LIABILITIES Current portion of long-term debt and preferred shares $ 37,447 $ 24,859 Notes payable 98,608 6,309 Accounts payable 112,967 82,878 Due to FCC - PCS licenses 42,897 -- Advance billings and customer deposits 20,898 17,273 Accrued interest 10,054 8,968 Accrued taxes 3,894 7,995 Other 19,419 15,249 -------------------------------- 346,184 163,531 ------------------------------------------------------------------------------------------------- DEFERRED LIABILITIES AND CREDITS Investment tax credits 5,116 6,285 Income taxes 80,274 59,842 Postretirement benefits obligation other than pensions 14,379 14,213 Other 19,307 10,639 -------------------------------- 119,076 90,979 ------------------------------------------------------------------------------------------------- LONG-TERM DEBT, excluding current portion 536,509 514,442 ------------------------------------------------------------------------------------------------- REDEEMABLE PREFERRED SHARES, excluding current portion 13,209 25,632 ------------------------------------------------------------------------------------------------- MINORITY INTEREST in subsidiaries 272,292 223,480 ------------------------------------------------------------------------------------------------- NONREDEEMABLE PREFERRED SHARES 29,819 16,833 ------------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding 47,937,570 and 43,503,584 shares, respectively 47,938 43,504 Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,886,684 and 6,881,001 shares, respectively 6,887 6,881 Common Shares issuable, 41,908 and 304,328 shares, respectively 1,995 15,189 Capital in excess of par value 1,288,453 1,069,022 Retained earnings 127,765 89,689 -------------------------------- 1,473,038 1,224,285 -------------------------------- $2,790,127 $2,259,182 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
fifty-three CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) COMMON SHARES Balance beginning of period $ 43,504 $ 34,383 $ 28,319 Add Acquisitions 4,041 7,477 3,720 Employee stock ownership plans 89 158 155 Dividend reinvestment plan 86 26 29 Sales of Common Shares 100 1,320 2,000 Conversion of Preferred Shares 116 140 160 Conversion of Series A Common Shares 2 -- -- ----------------------------------------------- Balance end of period $ 47,938 $ 43,504 $ 34,383 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ SERIES A COMMON SHARES Balance beginning of period $ 6,881 $ 6,864 $ 6,645 Add (Deduct) Acquisitions -- -- 199 Dividend reinvestment plan 8 17 20 Conversion to Common Shares (2) -- -- ----------------------------------------------- Balance end of period $ 6,887 $ 6,881 $ 6,864 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ COMMON SHARES ISSUABLE Balance beginning of period $ 15,189 $ -- $ 1,936 Add (Deduct) Acquisitions 1,995 15,189 -- Shares issued pursuant to acquisition agreements (15,189) -- (1,936) ----------------------------------------------- Balance end of period $ 1,995 $ 15,189 $ -- ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ CAPITAL IN EXCESS OF PAR VALUE Balance beginning of period $1,069,022 $ 761,706 $ 550,096 Add (Deduct) Acquisitions 182,812 299,146 132,980 Employee stock ownership plans 2,848 2,578 4,053 Dividend reinvestment plans 3,819 1,835 1,605 Sales of Common Shares 4,924 64,271 66,160 Capital stock expense (53) (333) (284) Conversion of Preferred Shares 1,324 1,972 5,309 Gain (loss) on sale of subsidiary stock 21,184 (62,153) 1,787 Net unrealized gain on noncurrent marketable equity securities 2,100 -- -- Income tax effects of capital stock transactions 473 -- -- ----------------------------------------------- Balance end of period $1,288,453 $1,069,022 $ 761,706 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance beginning of period $ 89,689 $ 74,466 $ 58,294 Add net income 59,821 33,896 30,885 ----------------------------------------------- 149,510 108,362 89,179 ----------------------------------------------- Deduct Dividends Common and Series A Common Shares 19,287 16,287 12,466 Preferred Shares 2,458 2,386 2,247 21,745 18,673 14,713 ----------------------------------------------- Balance end of period $ 127,765 $ 89,689 $ 74,466 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
fifty-four NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Telephone and Data Systems, Inc. and its subsidiaries ("TDS" or the "Company") conform to generally accepted accounting principles. The accounting records of the telephone subsidiaries are maintained in accordance with the uniform systems of accounts prescribed by the regulatory bodies under whose jurisdiction the subsidiaries operate. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of TDS, its majority-owned subsidiaries since acquisition and the cellular telephone partnerships in which TDS has a majority general partnership interest. All material intercompany items have been eliminated. 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. TDS includes as investments in cellular licenses all direct and incremental costs incurred in participating in the Federal Communications Commission ("FCC") lottery process to obtain cellular licenses. Such costs are being amortized in accordance with Company policy. CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS Cash and cash equivalents include cash and those short-term, highly-liquid investments with original maturities of three months or less. Those investments with original maturities of 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:
December 31, 1994 1993 ---------------------------------------------------------------------------- (Dollars in thousands) General funds $ 21,544 $ 30,966 Government agency securities 11,475 8,158 Certificates of deposit 11,547 8,761 Commercial paper -- 24,500 Tax-exempt municipal bonds -- 1,000 --------------------------- $ 44,566 $ 73,385 ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
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 ($97.9 million and $87.9 million at December 31, 1994 and 1993, respectively). Income and losses from these entities are reflected in the consolidated income statements on a pretax basis. The cost method of accounting is followed for those minority interests which TDS is holding for sale or exchange ($13.8 million and $13.3 million at December 31, 1994 and 1993, respectively). Cellular license acquisition costs consist of costs incurred in acquiring FCC licenses or minority interests which have been awarded FCC licenses to provide cellular service. These costs include amounts paid to license applicants and owners of 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 in 1994, $1.6 million in 1993 and $607,000 in 1992. Accumulated amortization of cellular license costs was $7.2 million and $4.4 million at December 31, 1994 and 1993, respectively. Cellular license costs with an unamortized financial reporting basis of approximately $6.0 million have no tax basis because the associated purchase transactions were structured to be tax-free. This basis difference is goodwill and no deferred taxes have been provided. The Company implemented Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities" effective January 1, 1994. SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in one of three categories: a) held-to-maturity securities, reported at amortized cost; b) trading securities, reported at fair value; and c) available-for-sale securities, reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. fifty-five NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information regarding the Company's securities is summarized below.
Aggregate Amortized December 31, 1994 Fair Value Cost Basis ------------------------------------------------------------ (Dollars in thousands) Available-for-sale Equity Securities $25,604 $22,229 Held-to-maturity-- U.S Treasury and other U.S. government corporations and agencies Current 10,981 11,061 Non-current $67,120 $71,314 ------------------------------------------------------------ ------------------------------------------------------------ Gross Gross Unrealized Unrealized Holding Holding December 31, 1994 Gains Losses ------------------------------------------------------------ (Dollars in thousands) Available-for-sale Equity Securities $ 3,379 $ 4 Held-to-maturity-- U.S Treasury and other U.S. government corporations and agencies Current -- 80 Non-current $ -- $ 4,194 ------------------------------------------------------------ ------------------------------------------------------------
The Company's debt securities classified as held-to-maturity have contractual maturities at December 31, 1994 as follows:
Aggregate Amortized Fair Value Cost Basis ---------------------------------------------------------------- (Dollars in thousands) Within one year $ 10,981 $ 11,061 Over one year through five years 63,256 67,345 Over five years through 10 years $ 3,864 $ 3,969 ----------------------------------------------------------------- -----------------------------------------------------------------
The Company's net unrealized holding gain on available-for-sale securities, $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 1994, proceeds from the sale of available-for-sale securities totalled $835,000 and gross realized losses totalled $165,000. No sales or transfers of securities classified as held-to-maturity have occurred during 1994. Other investments consist of the following:
December 31, 1994 1993 ------------------------------------------------------------- (Dollars in thousands) Minority telephone interests $30,905 $32,238 Rural Telephone Bank Stock, at cost 5,951 4,863 Long-term notes receivable 14,589 7,764 Other 9,361 6,111 ---------------------- $60,806 $50,976 -------------------------------------------------------------- --------------------------------------------------------------
The equity method of accounting is followed for minority telephone interests in which TDS holds common stock ownership of at least 20% or can influence policies of the affiliated company. Earnings from these investments are reflected in the consolidated income statements net of applicable income tax effects. At December 31, 1994, the cumulative share of income from minority cellular and telephone investments accounted for under the equity method was $91.5 million, of which $33.2 million was undistributed. Other investments are stated at cost. Amortization of excess cost relating to minority telephone interests totalled $532,000 in 1994, $545,000 in 1993 and $485,000 in 1992. 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 $22.2 million in 1994, $17.3 million in 1993 and $10.9 million in 1992. Cellular license costs with an unamortized financial reporting basis of approximately $299.6 million have no tax basis because the associated purchase transactions were structured to be tax-free. This basis difference is goodwill and no deferred taxes have been provided. 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 $1.7 million in 1994, $698,000 in 1993 and $559,000 in 1992. The composite weighted average rates were 10.4% in 1994, 9.2% in 1993 and 8.6% in 1992. 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. fifty-six NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. At December 31, 1994, costs aggregating $164.9 million relating to acquisitions since November 1, 1970, are being amortized on a straight-line basis over a 40-year period. Amortization amounted to $3.3 million in 1994, $3.0 million in 1993 and $2.4 million in 1992. Accumulated amortization of excess cost was $20.3 million and $16.9 million at December 31, 1994 and 1993, respectively. 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:
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------- Cellular Telephone 10.3% 10.5% 10.5% Telephone 7.5 7.3 7.2 Radio Paging 18.3 17.4 17.2 Other 12.8 12.9 12.8 ------------------------------------------------------------- -------------------------------------------------------------
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 31% of telephone revenues in 1994 and 1993 and 28% in 1992. 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. 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, 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. United States Cellular Corporation (AMEX symbol "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 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 Internal Revenue Service-mandated limitation on annual employee compensation under Code Section 401(a)(17). The SERP is a nonqualified deferred compensation plan and is intended to be unfunded. Total pension costs were $4.8 million in 1994, $3.3 million in 1993 and $2.4 million in 1992. OTHER POSTRETIREMENT BENEFITS The Company sponsors two defined benefit postretirement plans that cover most of the employees of TDS, its telephone subsidiaries and its service companies. One plan provides medical benefits and the other provides life insurance benefits. Both plans are contributory, with retiree contributions adjusted annually. The accounting for the medical plan anticipates future cost- sharing changes to the written plan that are consistent with the Company's intent to increase retiree contributions by the health care cost trend rate. During 1992 the Company established a Medical Benefit Fund (the "Fund") within the TDS Plan, under Internal Revenue Code Section 401(h). The Fund was established to pay for part of the cost of the medical benefits. fifty-seven NOTES TO CONSOLIDATED FINANCIAL STATEMENTS An amount equal to 25% of the total contribution to the pension 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. The following table sets forth the plans' funded status reconciled with the amount shown in the Company's consolidated balance sheet at December 31, 1994 (dollars in thousands):
Life Health Insurance Care Plan Plan ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 904 $ 2,927 Fully eligible active plan participants 414 1,828 Other active plan participants 612 5,920 -------------------- 1,930 10,675 Plan assets at fair value 643 2,568 Accumulated postretirement benefit -------------------- obligation in excess of plan assets 1,287 8,107 Unrecognized net (loss) gain from past experience different from that assumed and from changes in assumptions (240) 5,225 -------------------- Accrued postretirement benefit cost at December 31, 1994 $ 1,047 $ 13,332 ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
The Company's accumulated postretirement benefit for both plans as of January 1, 1992 totalled approximately $12.9 million. Of this amount, $1.6 million was capitalized to telephone plant by the Company's regulated operations. The remaining $11.3 million, net of related income tax benefits of $4.4 million, was recorded as the cumulative effect of a change in accounting principle for the year ended December 31, 1992. Net postretirement cost for 1994 and 1993 includes the following components:
December 31, 1994 1993 ------------------------------------------------------------- (Dollars in thousands) Service cost $ 810 $ 806 Interest cost on accumulated post-retirement benefit obligation 1,116 1,378 Actual return on plan assets -- (64) Net amortization and deferral (224) (49) ------------------ Net postretirement cost $ 1,702 $ 2,071 ------------------------------------------------------------- -------------------------------------------------------------
For measurement purposes, a 10.9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease over seven years to 6.1% and to remain at 6.1% thereafter. The assumed rates of compensation increases and return on plan assets were 5.0% and 8.0%, 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, 1994, by $2.0 million and the aggregate of the service and interest cost components of postretirement expense for the year then ended by $310,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.5%. 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 cumulative effect of implementation on years prior to 1994, $723,000 (net of income tax benefits of $390,000), has been recorded in 1994. GAIN ON SALE OF CELLULAR AND TELEPHONE INTERESTS The gains in 1994 reflect the exchange and sale of minority-owned cellular and telephone interests as follows: (a) USM transferred its minority interests in five Metropolitan Statistical Areas ("MSAs") in exchange for additional interests in several MSAs controlled by USM. The exchange of the minority interests in the five MSAs has been recorded at the fair market value of approximately $4.3 million. A gain of $3.3 million, representing the excess of the fair market value of the MSA interests traded over the book value of such interests, was included in income for 1994. (b) TDS Telecom transferred its minority interest in the common stock of a telephone company in exchange for preferred shares of the telephone company having a face value of $5.9 million and $6.0 million in cash. A gain of $4.1 million was recorded on the sale in 1994. The gains in 1993 reflect primarily the sales of two minority cellular interests. USM received $6.8 million cash consideration on the sales. The gains in 1992 reflect the sales and exchange of minority- and majority-owned cellular interests as follows: (a) USM transferred its controlling interests in two Rural Service Areas ("RSAs"), its minority interests in two MSAs and approximately $2.9 million in cash in exchange for controlling interests in two other fifty-eight NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MSAs and a minority interest in a combined MSA/RSA system. The exchange of the controlling interests in the RSAs has been recorded using book values, with no gain or loss recognized on the exchange. The exchange of the minority interests in the two MSAs has been recorded at the fair market value of approximately $15.7 million. A gain of $11.4 million, representing the excess of the fair market value of the MSA interests traded over the book value of such interests, was included in income for 1992. (b) USM sold a majority interest in an MSA in exchange for certain marketable equity securities then valued at $18.2 million. A gain of $17.1 million was recognized on the sale. (c) USM sold a minority interest in an MSA for $3.8 million in cash. A gain of $2.9 million was recognized on the sale. EXTRAORDINARY ITEM During 1992 the Company retired at a premium $20.8 million of its Senior Notes. The transaction resulted in an extraordinary loss of $769,000 ($.02 per share), net of income tax benefits of $491,000. EARNINGS PER COMMON SHARE Earnings per Common Share were computed by dividing Net Income Available to Common, less (in 1994 and 1992) an amount due to a subsidiary's issuable securities ("the minority income adjustment") by the weighted average number of Common Shares, Series A Common Shares and dilutive common equivalent shares outstanding during the year. The minority income adjustment, $411,000 in 1994 and $546,000 in 1992, reflects the additional minority share of the subsidiary's income computed as if all of the subsidiary's issuable securities were outstanding. Dilutive common stock equivalents consist of Common Shares issuable upon conversion of dilutive series of Preferred Shares and Common Share options. The calculation of Earnings per Common Share assuming full dilution had no effect. Preferred dividend requirements include all dividends paid on Preferred Shares which are not dilutive common stock equivalents. For the year ended December 31, 1994, the preferred dividend requirement on all outstanding Preferred Shares was $1.8 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 $39.9 million, $34.4 million and $32.4 million, and income taxes of $27.6 million, $17.3 million and $20.2 million, during 1994, 1993 and 1992, respectively. TDS has acquired operating telephone and paging companies, certain cellular licenses and operating companies and certain other assets since January 1, 1992. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed, and Common Shares and Preferred Shares issued:
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------ (Dollars in thousands) Property, plant and equipment $ 89,092 $ 78,252 $ 33,987 Cellular licenses 169,845 312,656 157,966 Minority interest (259) (14,115) 132 Decrease in equity method investment in cellular interests (15,586) (4,690) (8,159) Long-term debt (21,571) (23,930) (2,492) Deferred credits (6,225) (5,300) (754) Other assets and liabilities, excluding cash and cash equivalents 9,808 3,821 3,548 Common Shares issued and issuable (173,658) (281,553) (134,612) Preferred Shares issued (12,500) (3,000) -- USM stock issued and issuable (1,394) (7,653) (19,499) Subsidiary preferred stock issued -- (2,909) -- ---------------------------- Decrease in cash due to acquisitions $ 37,552 $ 51,579 $ 30,117 ------------------------------------------------------------------- -------------------------------------------------------------------
TDS issued Common Shares aggregating $1.4 million in 1994, $2.1 million in 1993 and $5.5 million in 1992 for TDS Preferred Shares and subsidiary preferred stock converted into Common Shares. TDS issued Common Shares in 1993 aggregating $40.3 million for certain cellular acquisitions completed in prior years. The consideration specified in the original acquisition agreements was USM Common Shares. The Company also added $7.1 million in other property and equipment financed with long-term obligations in 1992. NOTE 2 INCOME TAXES TDS files a consolidated federal income tax return. Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of the implementation of SFAS No. 109 on years prior to 1993 had no material effect on net income or earnings per share. Income tax expense for 1994 and 1993 reflects the new method of accounting; income tax expense for 1992 has not been restated. fifty-nine NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax provisions charged to net income before an extraordinary item and the cumulative effect of accounting changes are summarized as follows:
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------ (Dollars in thousands) Current: Federal $ 20,921 $ 15,562 $ 17,564 State 4,873 4,521 5,008 Deferred: Federal 13,440 6,696 8,344 State 2,963 1,510 851 Amortization of deferred investment tax credits (1,484) (1,792) (2,000) ------------------------------ Total income tax expense $ 40,713 $ 26,497 $ 29,767 ----------------------------------------------------------------- -----------------------------------------------------------------
Effective with the adoption of SFAS No. 109 in 1993, deferred income taxes were provided for the temporary differences between the amount of the Company's assets and liabilities for financial reporting purposes and their tax bases. The Company's current deferred tax assets totalled $3.3 million as of December 31, 1994 and $2.6 million as of December 31, 1993, which primarily represents the deferred tax effects of unearned revenues. The temporary differences that gave rise to the noncurrent deferred tax assets and liabilities as of December 31, 1994 and 1993, are as follows:
1994 1993 ------------------------------------------------------------------------ (Dollars in thousands) Deferred Tax Asset: Alternative minimum tax credit carryforwards $ 22,834 $ 19,553 State operating loss carryforwards 9,956 14,610 Postretirement benefits 4,940 5,251 Other 10,799 10,281 --------------------- 48,529 49,695 Less: valuation allowance (8,962) (8,704) ---------------------- Net Deferred Tax Asset 39,567 40,991 Deferred Tax Liability: Property, plant and equipment 76,173 65,141 Partnership investments 12,830 9,722 Marketable equity securities 8,217 6,797 Minority share of USM income 4,916 5,823 Effects of corporations not included in consolidated federal tax return 4,172 3,878 Licenses 12,329 7,313 Other 1,204 2,159 ----------------------- Total Deferred Tax Liability 119,841 100,833 ----------------------- Total Net Deferred Tax Liability $ 80,274 $ 59,842 ------------------------------------------------------------------------ ------------------------------------------------------------------------
At December 31, 1994, TDS had $22.8 million of federal alternative minimum tax credit carryforwards available to offset regular income tax payable in future years, and $10.0 million of state net operating loss carryforwards expiring between 1998 and 2009. Income tax benefits of $473,000 associated with Company employee stock purchase plans and certain stock option arrangements were recorded directly to Common Stockholders' Equity in 1994. Investment tax credits resulting from investments in telephone plant and equipment have been deferred and are being amortized over the service lives of the related property. A valuation allowance of $6.5 million was established upon the adoption of SFAS No. 109 since it is more likely than not that a portion of the state operating loss carryforwards will expire before they can be utilized. During 1994 and 1993, the valuation allowance increased $258,000 and $2.2 million, respectively. The statutory federal income tax rate is reconciled to TDS's effective income tax rate before an extraordinary item and the cumulative effect of accounting changes below.
Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 34.0% State income taxes, net of federal benefit 5.1 6.2 5.5 Amortization of license acquisition costs and costs in excess of book value 3.5 4.8 3.6 Acquisition-related tax basis adjustment (2.7) -- -- Dividend exclusion (1.8) -- -- Amortization of deferred investment tax credits (1.5) (3.0) (2.7) Effects of corporations not included in consolidated federal tax return 1.4 1.9 1.8 Deferred tax rate differential -- (.7) (.7) Other differences, net 1.2 (.3) 2.1 ------------------------------------------------------------------ Effective income tax rate 40.2% 43.9% 43.6% ------------------------------------------------------------------ ------------------------------------------------------------------
The total income tax provision for the year ended December 31, 1994 and December 31, 1992, including the extraordinary item and cumulative effect of accounting changes, was $40.3 million and $25.5 million, respectively. The effective income tax rate, including the extraordinary item and cumulative effect of accounting changes, was 40.3% in 1994 and 45.7% in 1992. Upon the adoption of SFAS No. 109, TDS's telephone subsidiaries recorded additional deferred income tax liabilities related primarily to temporary differences not deferred under rate-making policy. Deferred income tax balances were also adjusted to recognize the current federal income tax rate of 35%. Deferred income tax assets were recorded to recognize unamortized sixty NOTES TO CONSOLIDATED FINANCIAL STATEMENTS investment tax credits as a temporary difference. A corresponding regulatory asset or liability has been established to offset these deferred income tax adjustments. The unamortized regulated asset and liability balances as of December 31, 1994, are $5.3 million and $7.0 million, respectively. These amounts are being amortized over the lives of the related temporary differences. NOTE 3 BUSINESS SEGMENT INFORMATION TDS's operations are classified into three principal segments: Cellular Telephone, Telephone and Radio Paging operations. See Management's Discussion and Analysis of Results of Operations and Financial Condition, specifically "Results of Operations" for certain required financial information regarding TDS's business segments. NOTE 4 ACQUISITIONS During 1994 and 1993, TDS and its subsidiaries completed the following business combinations.
Consideration ------------------------------------ TDS and USM Cash, Common Stock, TDS Notes and Preferred Shares, Long-term and Subsidiary Debt Preferred Stock ----------------------------------------------------------------------- (Dollars in thousands) Acquisitions During 1994 Cellular interests $29,599 $110,732 Majority interests in three telephone companies 7,386 71,945 Paging interest 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 -- ----------------------------------------------------------------------- -----------------------------------------------------------------------
Assuming that these acquisitions which were accounted for as purchases had taken place on January 1, 1993, unaudited pro forma results of operations from continuing operations would have been as follows:
Year Ended December 31, 1994 1993 ----------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Operating revenues $765,248 $631,378 Net income before cumulative effect of accounting changes 60,401 24,014 Earnings per share before cumulative effect of accounting changes $ 1.04 $ .39 ----------------------------------------------------------------------- -----------------------------------------------------------------------
NOTE 5 FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of Cash and Cash Equivalents, Temporary Investments, Marketable Non-Equity Securities and Short-term Debt approximate fair value. The following assumptions were used by the Company for its fair value estimates for financial instruments: Cash and Cash Equivalents and Short-term Debt: based on face amounts. Temporary Investments and Marketable Non-Equity Securities: based on quoted market prices. The carrying value of the Company's Long-term Debt, $562.2 million, is more than its fair value, estimated to be $497.7 million. The fair value was estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying value of the Company's Redeemable Preferred Shares, $25.0 million, is less than its fair value, estimated to be $25.2 million. The fair value was estimated using discounted cash flow analyses based on the Company's current dividend yield on issues of its non-convertible preferred shares, and, for convertible series, the net present value of the common stock to be issued upon conversion (valued at the December 31, 1994 quoted market price). It was not practicable to estimate the fair value of the Company's cost method investments in other companies because of the lack of quoted market prices. The carrying amounts at December 31, 1994 represent the original cost of the investments, which management believes is not impaired. NOTE 6 NOTES PAYABLE TDS has used short-term debt to finance its investments in cellular telephone and radio paging operations, for acquisitions, and for general corporate purposes. Long-term debt and equity financing from time to time have retired such short-term debt. Proceeds from the sale of medium-term debt retired $91.4 million of short-term debt in 1993. Proceeds of TDS's sales of Common Shares retired $4.2 million of short-term debt in 1994 and $58.9 million of short-term debt in 1993. Proceeds from an American Paging, Inc. (AMEX symbol "APP") initial public offering (see Note 7) reduced $17.0 million of short-term debt in 1994. Proceeds from a USM rights offering (see Note 7) reduced $29.6 million of short-term debt in 1993. sixty-one NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TDS and its subsidiaries had $168.1 million of bank lines of credit for general corporate purposes at December 31, 1994, $143.1 million of which were committed. Unused amounts of such lines totalled $70.2 million, $45.2 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.
December 31, 1994 1993 1992 ----------------------------------------------------------------------- (Dollars in thousands) Balance at end of period $ 98,608 $ 6,309 $ 46,816 Weighted average interest rate at end of period 6.5% 3.6% 4.3% Maximum amount outstanding during the period $106,077 $ 49,851 $ 71,803 Average amount outstanding during the period (1) $ 50,499 $ 32,270 $ 31,053 Weighted average interest rate during the period (1) 5.2% 3.9% 4.5% ----------------------------------------------------------------------- ----------------------------------------------------------------------- (1) The average was computed based on month-end balances.
NOTE 7 SALE OF STOCK BY A SUBSIDIARY In 1994, APP issued 3.5 million Common Shares in an initial public offering at a price of $14 per share. The transaction reduced TDS's ownership percentage from 100% to 82.5% and resulted in a credit to TDS's paid in capital of $35.8 million. In 1993, USM sold 5.9 million Common Shares and 5.5 million Series A Common Shares at a price of $33 per share pursuant to a rights offering. Approximately 4.8 million of the Common Shares and all of the Series A Common Shares were issued to TDS in exchange for a reduction in the amount of debt USM owed TDS of approximately $341 million. USM issued Common Shares during 1994, 1993 and 1992 in connection with acquisitions and employee stock purchase plans. In addition, certain 1993 and 1992 acquisitions require USM to deliver Common Shares in the future. The USM Common Share transactions were recorded at fair market values which were substantially either less than or in excess of TDS's book value investment in USM. The (decrease) increase in TDS's book value investment (as a result of these issues and commitments to issue Common Shares) totalled ($13.0 million) in 1994, ($62.2 million) in 1993 and $1.8 million in 1992, and was (debited) credited to capital in excess of par value. NOTE 8 LONG-TERM DEBT Long-term debt as of December 31, 1994 and 1993 is as follows:
December 31, 1994 1993 ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Telephone and Data Systems, Inc. (Parent) Medium-term notes, 8% to 10%, due through 2023 $ 200,000 $ 200,000 Purchase contracts, 8% to 14%, due through 2003 3,116 4,272 Subordinated debentures, 8% to 14.5%, due through 2008 1,909 2,364 ------------------------ 205,025 206,636 Less current portion 1,261 1,604 ------------------------ Total parent debt 203,764 205,032 ----------------------------------------------------------------------- Subsidiaries RUS, RTB and FFB Mortgage Notes, due through 2031 0% to 2% 29,060 30,141 4% to 6% 168,027 162,714 6.05% to 9% 75,546 59,846 9.025% to 11% 1,153 6,994 ------------------------ 273,786 259,695 Vendor financing, approximating prime 69,265 62,931 Other long-term notes, 6.25% to 10.5%, due through 2005 14,089 8,304 ------------------------ 357,140 330,930 Less current portion 24,395 21,520 ------------------------ Total subsidiaries' debt 332,745 309,410 ------------------------ Total long-term debt $ 536,509 $ 514,442 ----------------------------------------------------------------------- -----------------------------------------------------------------------
The Company sold $92.5 million of senior unsecured debt securities in 1993 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. USM has financing arrangements with an equipment vendor for cellular system equipment and construction costs. The borrowings are collateralized by a secured interest in some or all of the assets of USM's operating subsidiaries. Borrowings have terms of seven to eight years at interest rates approximating the prime rate (8.5% at December 31, 1994). sixty-two NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The annual requirements for principal payments on long-term debt are approximately $25.7 million, $26.6 million, $25.1 million, $25.1 million and $23.4 million for the years 1995 through 1999, respectively. NOTE 9 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 redemption features as described below. Dividends on Series MM through QQ are payable in additional shares of each of those series. All other dividends are payable in cash. At December 31, 1994, Series X is convertible into TDS Common Shares as shown in the following table.
Outstanding Amount Outstanding Dividend Conversion Preferred December 31, Series Rate Ratio Shares 1994 1993 -------------------------------------------------------------------------- (Dollars in thousands, except dividend rates) H $ 7.00 -- 1,404 $ 150 $ 174 N 8.00 -- 4,708 471 550 O 9.00 -- 709 71 71 W 7.50 -- -- -- 850 X 6.00 7.88/1 194 19 170 DD 7.00 -- -- -- 1,200 HH 6.00 -- 2,627 263 263 II 6.00 -- 6,738 674 674 JJ 6.00 -- 1,310 131 674 KK 6.00 -- 6,735 674 674 LL 6.00 -- 6,735 674 674 MM 4.00 -- 5,918 592 942 NN 4.00 -- 9,426 943 905 OO 4.00 -- 58,164 5,816 5,589 PP 4.00 -- 50,553 5,055 4,858 QQ 4.00 -- 94,686 9,468 9,099 --------------------------------- 249,907 25,001 27,367 Less current portion 11,792 1,735 -------------------------- $ 13,209 $25,632 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Series H Preferred Shares are required to be redeemed at $119 per share and are stated on the balance sheets at redemption price. Series N through LL Preferred Shares are redeemable at the option of the holder at $100 per share plus accrued and unpaid dividends. Series MM through QQ Preferred Shares are redeemable at the option of the holder into (at TDS's option) a specified number of USM Common Shares, a number of TDS Common Shares having a market value equal to the specified number of USM Common Shares, or a combination of USM and TDS Common Shares. The annual requirements for redemption of Redeemable Preferred Shares are $11.8 million, $11.8 million, $1.2 million, $79,000 and $79,000 for the years 1995 through 1999, respectively. The following is a schedule of the Redeemable Preferred Shares' activity.
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------ (Dollars in thousands) Balance, beginning of period $ 27,367 $ 27,967 $ 28,779 Add: Stock dividends 839 834 802 Less: Redemption of preferred (644) (220) (407) Conversion of preferred (1,361) (14) -- Expiration of redemption feature (1,200) (1,200) (1,207) ----------------------------- Balance, end of period $ 25,001 $ 27,367 $ 27,967 ------------------------------------------------------------------- -------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES Nonredeemable Preferred Shares include outstanding series of TDS Cumulative Voting Preferred Shares which have no mandatory redemption features. Outstanding Nonredeemable Preferred Shares are redeemable at the option of TDS (except Series S, which is not redeemable) at $100 per share, plus accrued and unpaid dividends. At December 31, 1994, Series V through SS Preferred Shares are convertible into TDS Common Shares as shown in the following table.
Outstanding Amount Outstanding Dividend Conversion Preferred December 31, Series Rate Ratio Shares 1994 1993 -------------------------------------------------------------------------- (Dollars in thousands, except dividend rates) A $ 6.00 -- 1,395 $ 139 $ 139 B 7.00 -- 1,955 195 195 D 6.00 -- 646 65 65 G 7.00 -- 1,368 137 137 S 7.00 -- 1,209 121 121 U 8.50 -- 1,100 110 110 V 7.50 9/1 2,500 250 310 BB 9.00 9/1 19,000 1,900 1,900 DD 7.00 5.25/1 58,008 5,800 4,800 EE 6.00 4.5/1 13,866 1,387 1,431 GG 5.00 2.3/1 42,656 4,266 4,640 RR 7.50 2.06/1 29,490 2,949 2,985 SS 5.50 2.25/1 125,000 12,500 -- --------------------------------- 298,193 $29,819 $16,833 ---------------------------------------------------------------------- ----------------------------------------------------------------------
sixty-three NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a schedule of the Nonredeemable Preferred Shares' activity.
Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------- (Dollars in thousands) Balance, beginning of period $ 16,833 $ 14,233 $ 13,183 Add: Acquisitions 12,500 3,000 -- Reclassification from Redeemable Preferred Shares 1,200 1,200 1,207 Less: Conversion of preferred (714) (1,600) (157) ----------------------------- Balance, end of period $ 29,819 $ 16,833 $ 14,233 ------------------------------------------------------------------ ------------------------------------------------------------------
NOTE 10 RESTRICTION ON COMMON STOCK DIVIDENDS Under TDS's loan agreements at December 31, 1994, 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 $282 million underlying retained earnings of all TDS subsidiaries at December 31, 1994, $133 million was available for the payment of dividends on the subsidiaries' common stock. Of the $1.8 billion underlying net assets of the TDS subsidiaries at December 31, 1994, $1.3 billion was available for transfer to TDS. NOTE 11 COMMON STOCK COMMON SHARES ISSUABLE A cellular acquisition agreement requires TDS to deliver Common Shares in 1995. In connection with this agreement, TDS expects to deliver these Common Shares during the first quarter of 1995. 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.
Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------- Common Shares Employee stock purchase plan 34,171 31,065 44,399 Tax-deferred savings plan 30,764 29,760 31,539 Employee stock options and stock appreciation rights 25,107 96,877 78,195 Dividend reinvestment plan 85,754 26,070 29,468 ----------------------------- 175,796 183,772 183,601 ------------------------------------------------------------------ ------------------------------------------------------------------ Series A Common Shares Dividend reinvestment plan 7,783 17,182 20,525 ------------------------------------------------------------------ ------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 90,829 Common Shares for sale to the employees of TDS and its subsidiaries at $44.73 per share in connection with the 1993 Employee Stock Purchase Plan. TAX-DEFERRED SAVINGS PLAN. TDS has reserved 187,805 Common Shares for issue under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions in TDS Common Shares, USM Common Shares or four other nonaffiliated funds. Employer matching contributions, equal to 20% of employee contributions up to a certain limit, are made in TDS Common Shares. EMPLOYEE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. TDS has reserved 1,349,236 Common Shares for options granted to key employees. TDS has established certain plans that provide for the grant of stock options and stock appreciation rights to officers and employees. The options are exercisable over a specified period not in excess of ten years. The options expire from 1995 to 2004, or the date of the employee's termination of employment, if earlier. The following table summarizes the status of the plans.
Weighted Number Average Stock Options of Shares Option Prices -------------------------------------------------------------------- Outstanding January 1, 1992 (235,117 exercisable) 552,288 $13.00 Granted 1,125 $25.00 Exercised (128,439) $13.09 --------------------- Outstanding December 31, 1992 (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 ---------------------------------------------------------------- ----------------------------------------------------------------
sixty-four NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------ Outstanding beginning of period 9,100 22,076 20,725 Granted 7,796 9,410 9,828 Exercised (4,800) (22,386) (8,477) ---------------------------- Outstanding end of period 12,096 9,100 22,076 ------------------------------------------------------------------ ------------------------------------------------------------------
Compensation expense, measured on the difference between the year-end market price of the Common Shares and option prices, was $218,000 in 1994, $664,000 in 1993 and $553,000 in 1992. DIVIDEND REINVESTMENT PLANS. TDS has reserved 119,843 Common Shares for issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and 236,554 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 2,285,857 Common Shares for the possible conversion of its convertible Preferred Shares (See Note 9). TDS issued 115,542 Common Shares in 1994, 139,689 in 1993 and 160,166 in 1992 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 6,886,684 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 in 1994 and $65.6 million in 1993. TDS sold 2.0 million Common Shares at $35.50 per share in connection with a public offering in 1992. Proceeds to TDS were $34.08 per share, or $68.2 million. NOTE 12 LEGAL PROCEEDINGS The Company is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain landline or cellular telephone systems. The more significant proceedings involving the Company are described in the following paragraphs. LA STAR AND WISCONSIN RSA 8 APPLICATIONS. USM indirectly owns 49% of La Star Cellular Telephone Company ("La Star"), which was an applicant for a construction permit for a cellular system in the New Orleans MSA. In June 1992, the FCC affirmed an Administrative Law Judge's order which had granted the application of another applicant and dismissed La Star's application. The basis for the FCC's action was its finding that USM improperly controlled La Star. In a footnote to its decision, the FCC stated questions regarding the conduct of USM in that proceeding may be revisited in future proceedings. As a result of that footnote, FCC authorizations in uncontested FCC proceedings have been granted to TDS and its subsidiaries subject to any subsequent action the FCC might take concerning its findings and conclusions in the La Star decision. La Star, TDS and USM appealed the FCC's decision in the La Star proceeding. On March 29, 1994, the United States Court of Appeals for the District of Columbia Circuit vacated the FCC's decision in the La Star proceeding and remanded the matter to the FCC for further proceedings. On remand, the FCC affirmed the dismissal of the La Star application but did not address the subject matter of its footnote in the original La Star decision. As a result, the Wisconsin RSA 8 case, discussed below, now constitutes the only FCC expression calling for conditions on authorizations to TDS and its subsidiaries. On February 1, 1994, in a proceeding involving a license originally issued to TDS for Wisconsin RSA 8, the FCC instituted a hearing to determine whether in the La Star case USM had misrepresented facts to, lacked candor in its dealings with or attempted to mislead the FCC, and, if so, whether TDS possesses the requisite character qualifications to hold that Wisconsin license. sixty-five NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The FCC stated in its decision that, pending resolution of the issues in the Wisconsin proceeding, subsequent authorizations to TDS and its subsidiaries will be conditioned on the outcome of that proceeding. TDS was granted interim authority to continue to operate that Wisconsin system pending completion of the hearing. Following extensive discovery by the FCC and other parties, TDS and USM have reached preliminary and definitive settlement agreements with parties to the proceeding contemplating a summary decision finding TDS and its affiliates fully qualified to be FCC licensees. Pending the negotiation of a definitive settlement agreement with a group of Wisconsin telephone companies who are parties to the proceeding, the hearing has been postponed. Final settlement will also be subject to the action of the judge presiding in the proceeding. TOWNES TELECOMMUNICATIONS, INC. ET. AL. V. TDS, ET. AL. Plaintiffs Townes Telecommunications, Inc., Tatum Telephone Company and Tatum Cellular Telephone Company filed a suit on September 4, 1991 in the District Court of Rusk County, Texas, against both TDS and USM as defendants. Plaintiffs made a number of allegations, including usurpation, breach of fiduciary duty, civil conspiracy, breach of contract, tortious interference and other claims, and sought a variety of remedies, including unspecified damages not to exceed $33 million and as much as $200 million in punitive damages. The case went to trial on April 25, 1994. On May 5, 1994 the jury returned a verdict in favor of TDS and USM on all issues. The plaintiffs filed an appeal of the case on September 12, 1994. The parties have executed an agreement which settles all matters related to this litigation and this case has been dismissed with prejudice on February 14, 1995. The settlement agreement requires plaintiffs to purchase a minority cellular interest from the Company at a negotiated purchase price which the Company believes approximates fair market value, and does not require the payment of any money by the Company. NOTE 13 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.
December 31, 1994 1993 ---------------------------------------------------------------- (Dollars in thousands) Assets Current assets $ 217,872 $ 186,931 Due from affiliates 20,123 34,159 Property and other 631,222 570,594 -------------------------- $ 869,217 $ 791,684 ---------------------------------------------------------------- ---------------------------------------------------------------- Liabilities and Equity Current liabilities $ 194,728 $ 136,636 Due to affiliates 32,034 35,591 Deferred credits 5,468 6,777 Long-term debt 38,984 84,781 Partners' capital and stockholders' equity 598,003 527,899 -------------------------- $ 869,217 $ 791,684 ----------------------------------------------------------------- ----------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 ---------------------------------------------------------------------------- (Dollars in thousands) Results of Operations Revenues $ 892,530 $ 765,983 $599,548 Costs and expenses (652,918) (568,458) (446,149) Other income (expense) 7,952 (8,045) 3,086 Interest expense (5,650) (9,046) (8,288) Income taxes (1,824) (3,596) (4,593) Cumulative effect of accounting changes -- 432 (1,495) --------------------------------------- Net income $ 240,090 $ 177,270 $142,109 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
NOTE 14 COMMITMENTS AND CONTINGENCIES 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 $180 million during 1995. Telephone construction expenditures are estimated to be approximately $110 million during 1995. Radio paging fixed asset expenditures are estimated to be approximately $35 million during 1995. Other fixed asset expenditures are estimated to be approximately $25 million during 1995. sixty-six NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On November 8, 1994, APP was the successful bidder for five regional Personal Communications Services ("PCS") licenses, providing equivalent coverage to that of a nationwide license, at an auction by the FCC. APP's bids for the licenses aggregated $53.6 million. Pursuant to the FCC auction procedures, APP made a 20% down payment of $10.7 million in November 1994 and will pay the remaining 80% or $42.9 million within five business days after the FCC grants the licenses (expected to be in the first quarter of 1995). In March 1995, American Portable Telecomminications ("APT"), a wholly owned subsidiary of TDS, was the successful bidder for eight broadband PCS licenses at an auction conducted by the FCC. These 30 MHz PCS licenses will, when granted, authorize the Company to provide two-way voice and data services on new wireless, digital networks. TDS's licenses cover the Major Trading Areas of Minneapolis-St. Paul, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City, Columbus, Alaska and Guam-N. Mariana Islands, and account for 27.9 million 1994 pops. APT's successful bid commitment totalled $289.2 million for the eight licenses, or $10.35 per 1994 pop. As required by FCC auction procedures, the Company will make a 20% down payment (less its initial $20.4 million deposit) on the licenses by March 20, 1995, and complete the payment five business days after the FCC has granted the licenses. Management anticipates that construction, development and introduction of PCS networks and services in these new markets may involve expenditures of $400 million to $500 million or more over the next five years. TDS is considering a variety of financing options that appropriately balance the interests of its shareholders and debtholders. The Company has an ongoing acquisition program to acquire cellular telephone interests and telephone companies. For a discussion of pending acquisitions, see Management's Discussion and Analysis of Results of Operations and Financial Condition, specifically "Financial Resources and Liquidity." TDS and its subsidiaries have leases for certain cellular plant facilities, office space and data processing equipment, most of which are classified as operating leases. For the years 1994, 1993 and 1992, rent expense for term leases was $10.4 million, $7.8 million and $6.7 million, respectively, and rent expense under cancelable and short-term leases was $6.5 million, $5.4 million and $3.1 million, respectively. At December 31, 1994, the aggregate minimum rental commitments under noncancelable operating leases for the years 1995 through 1999 are approximately $10.7 million, $9.9 million, $7.8 million, $6.5 million and $5.7 million, respectively. COLLECTIBILITY OF NOTE RECEIVABLE As of December 31, 1994, USM loaned a total of $5.0 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 an RSA. Loans made under the agreement bear interest at a rate approximating the prime rate plus 1.5%. Borrowings are secured by certain of Cellular Co.'s assets, primarily those relating to the operations of the aforementioned RSA. All principal amounts and any interest amounts outstanding as of June 30, 2000 become due and payable at that time and the agreement terminates on that date. Provisions of the agreement include Cellular Co. maintaining a minimum cellular subscriber base, generating a minimum amount of cash flow and restrictions on Cellular Co. incurring additional indebtedness or paying dividends to partners. USM has no assurance that Cellular Co. will have sufficient assets at the time the principal payment is due 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, 1994. 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 $9.9 million, provides supplemental security in support of a bank loan to an entity minority-owned by the Company. The bank loan, which is secured primarily by a first mortgage on the tangible and intangible assets of a cellular operating system constructed by the minority-owned entity, was arranged to finance the construction of this cellular system, the acquisition of customers and the initial operation of the system. The cellular license for this system was originally awarded to a third party which constructed its own cellular system. The third party's license application was subsequently found to be flawed by the FCC, and the license was then awarded to the entity minority-owned by the Company. The third party has sought reconsideration of the license grant to the entity minority-owned by the Company and several appeals have been filed concerning the FCC's decision, including one by the third party. If any of these appeals are successful, the license may be removed from the entity minority-owned by the Company. If the third party resumes providing cellular service, it will not be obligated to purchase the minority-owned entity's cellular system. Such removal of the license from the minority-owned entity constitutes an event of default under its bank loan agreement, and the bank may call upon the Company's standby letter of credit to satisfy any amounts still due under this loan agreement. sixty-seven CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
Quarter Ended March 31 June 30 Sept. 30 Dec. 31 --------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 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 1993 Operating Revenues $120,400 $137,305 $149,191 $150,899 Operating Income 15,376 20,775 21,122 12,460 Net Income 6,803 8,967 11,887 6,239 Net Income Available to Common $ 6,207 $ 8,371 $ 11,293 $ 5,642 Weighted Average Common Shares (000s) 44,261 46,469 48,302 50,045 Earnings per Common Share $ .14 $ .18 $ .23 $ .11
sixty-eight 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, 1994 and 1993, 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, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in "Other Postretirement Benefits" in Note 1 of the Notes to Consolidated Financial Statements, the method of accounting for postretirement benefits other than pensions was changed effective January 1, 1992. /s/ Arthur Andersen LLP Chicago, Illinois February 7, 1995 (except with respect to the matters discussed in Note 12 and Note 14, as to which the date is March 14, 1995) sixty-nine SHAREHOLDERS' INFORMATION TDS STOCK AND DIVIDEND INFORMATION TDS's Common Shares are listed on the American Stock Exchange under the symbol "TDS" and in the newspapers as "TeleData." As of February 28, 1995, TDS Common Shares were held by 4,158 record owners and the Series A Common Shares were held by 106 record owners. TDS has paid cash dividends on Common Shares since 1974, and paid dividends of $.36 and $.34 per Common and Series A Common Share during 1994 and 1993, respectively. 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 at the indicated rates since the dates of issue (See Note 9 of Notes to Consolidated Financial Statements). The high and low sales prices of the Common Shares on the American Stock Exchange as reported by the Dow Jones News Service are as follows: 1994 1st 2nd 3rd 4th ----------------------------------------------------------- High $ 51.50 42.88 47.63 49.88 Low $ 36.75 36.00 35.50 39.50 Dividends Paid $ .09 .09 .09 .09 ----------------------------------------------------------- ----------------------------------------------------------- 1993 1st 2nd 3rd 4th High $ 40.50 45.50 53.88 57.00 Low $ 33.25 37.38 43.38 46.00 Dividends Paid $ .085 .085 .085 .085 ----------------------------------------------------------- ----------------------------------------------------------- DIVIDEND REINVESTMENT PLAN Our dividend reinvestment plan provides our common and preferred shareholders with a convenient and economical way to participate in the future growth of TDS. Common and preferred shareholders of record owning ten (10) or more shares may purchase Common Shares with their reinvested dividends at a five percent discount from market price. Shares may also be purchased, at market price, on a monthly basis through optional cash payments of up to $5,000 in any calendar quarter. There are no brokerage commissions or service charges for purchases made under the plan. seventy-two EX-21 6 EXHIBIT 21 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1994 TELEPHONE COMPANIES TDS Telecommunications Corporation Central Region - Mid-Central Division Arcadia Telephone Company Chatham Telephone Company Communications Corporation of Indiana Communication Corporation of Michigan Communications Corporation of Southern Indiana Continental Telephone Company Home Telephone Company, Inc. The Home Telephone Company of Pittsboro, Inc. Island Telephone Company Little Miami Communications Corporation Oakwood Telephone Company Shiawassee Telephone Company The Vanlue Telephone Company Wolverine Telephone Company Central Region - Mid-West Division 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 EXHIBIT 21 TELEPHONE COMPANIES (Cont.) Central Region - Western Division Arizona Telephone Company Asotin Telephone Company Cleveland County Telephone Company, Inc. Decatur Telephone Company Delta County Tele-Comm, Inc. Happy Valley Telephone Company Home Telephone Company Hornitos Telephone Company Lake Livingston Telephone Company, Inc. McDaniel Telephone Company Mid-America Telephone Company, Inc. New London Telephone Company Oklahoma Communication Systems, Inc. Orchard Farm Telephone Company Potlatch Telephone Company The Stoutland Telephone Company Strasburg Telephone Company Troy Telephone Company, Inc. Winterhaven Telephone Company Wyandotte Telephone Company Northeast Region Chichester Telephone Company, Inc. Edwards Telephone Company, Inc. Hartland & St. Albans Telephone Company The Island Telephone Company Kearsarge Telephone Company Ludlow Telephone Company Mahanoy & Mahantango Telephone Company Meriden Telephone Company, Inc. Northfield Telephone Company Oriskany Falls Telephone Corporation Perkinsville Telephone Company, Inc. Port Byron Telephone Company Somerset Telephone Company Sugar Valley Telephone Company Warren Telephone Company West Penobscot Telephone & Telegraph Company 2 EXHIBIT 21 TELEPHONE COMPANIES (Cont.) Southeast Region Amelia Telephone Corporation Barnardsville Telephone Company Blue Ridge Telephone Company Butler Telephone Company, Inc. Camden Telephone & Telegraph Company Calhoun City Telephone Company, Inc. Concord Telephone Exchange, Inc. Goshen Telephone Company Grove Hill Telephone Corporation Humphreys County Telephone Company Leslie County Telephone Company Lewisport Telephone Company McClellanville Telephone Company, Inc. New Castle Telephone Company Norway Telephone Company Oakman Telephone Company, Inc. Peoples Telephone Company Quincy Telephone Company St. Stephen Telephone Company Salem Telephone Company, Inc. Saluda Mountain Telephone Company Service Telephone Company, Inc. Southeast Mississippi Telephone Company, Inc. Tellico Telephone Company, Inc. Tennessee Telephone Company Virginia Telephone Company Williston Telephone Company Management Service Companies Tennessee Telecommunications Service Corporation Central Region - TSSD, Inc. 3 EXHIBIT 21 SERVICE COMPANIES American Communications Consultants, Inc. American Portable Telecommunications, Inc. American Radio Communications, Inc. CellVest CommVest, Inc. Integrated Communications Services, Inc. National Telephone & Telegraph Company Nortelco Finance Company, Inc. Rudevco, Inc. Suttle Press, Inc. TCC, Incorporated TDS Computing Services, Inc. TDS Oklahoma Holdings, Inc. TDS Realestate Investment Corporation Tel Radio Communications Properties, Inc. Telecommunications Technologies Fund, Inc. CABLE TV COMPANIES TDS Cable Communications Company Carolina Cable T.V. Co., Inc. Comvideo Systems, Inc. Condon TV Systems, Inc. Kearsarge Cable Communications, Inc. Lewisport Cable TV Volunteer TV Cable Company Warren Cable Company 4 EXHIBIT 21 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. Texas Paging Transmission, Inc. 5 EXHIBIT 21 CELLULAR COMPANIES United States Cellular Corporation USCOC of Arkansas RSA #1, Inc Arkansas RSA #9, Inc Block B Cellular Corporation California Rural Service Area #1, Inc. California RSA #2, Inc. California RSA #9, Inc. USCOC of Florida RSA #2, Inc. Florida RSA #8, Inc. USCOC of Florida RSA #9, Inc. Florida RSA #10, Inc. USCOC of Georgia RSA #1, Inc. Georgia RSA #11, Inc. Georgia RSA #13, 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 #2, Inc. Iowa RSA #3, Inc. Iowa RSA #9, Inc. Iowa RSA #12, Inc. Iowa 13, Inc. Kansas RSA #5, Inc. Kentucky RSA #1, Inc. Kentucky RSA #2, Inc. Kentucky RSA #3, Inc. Kentucky RSA #9-10, Inc. Maine RSA #1, Inc. Maine RSA #4, Inc. Michigan RSA #4, Inc. Mississippi RSA #9, Inc. USCOC of Missouri RSA #1, Inc. USCOC of Missouri RSA #4, Inc. USCOC of Missouri RSA #5, Inc. USCOC of Missouri RSA #13, Inc. Missouri #15 Rural Cellular, Inc. Missouri RSA #17, Inc. NH #1 Rural Cellular, Inc. USCOC of New York RSA #1, Inc. USCOC of New York RSA #6, Inc. North Carolina RSA #4, Inc. North Carolina RSA #5, Inc. North Carolina RSA No. 6, Inc. -6- EXHIBIT 21 USCOC of North Carolina RSA #7, Inc. North Carolina RSA #9, Inc. North Carolina RSA #12, Inc. USCOC of North Carolina RSA #13, Inc. USCOC of North Carolina RSA #14, Inc. North Carolina RSA #14, Inc. Ohio 1 Acquisition Corp. Ohio RSA #1, Inc. USCOC of Ohio RSA #7, Inc. Ohio RSA #9, Inc. Oklahoma Opco of RSA #8, Inc. Oklahoma #9 Rural Cellular, Inc. USCOC of Oklahoma RSA #10, Inc. Oregon RSA #2, Inc. Oregon RSA #3, Inc. USCOC of Oregon RSA #5, Inc. Oregon RSA #6, Inc. USCOC of Pennsylvania RSA #9, Inc. USCOC of South Carolina RSA #4, Inc. Tennessee RSA #3, Inc. Tennessee RSA #4 Sub 2, Inc. Tennessee RSA #6 B, Inc. Texas RSA #4, Inc. Texas RSA #5, Inc. Texas RSA #11, Inc. USCOC of Texas RSA #18, Inc. Texas #20 Rural Cellular, Inc. USCOC of Virginia RSA #4, Inc. Virginia RSA #4, Inc. Virginia RSA #7, Inc. USCOC of Washington-4, Inc. Washington RSA #5, Inc. Washington RSA #6, Inc. USCOC of West Virginia RSA #2, Inc. West Virginia RSA #4, Inc. West Virginia RSA #5, Inc. USCOC of Wisconsin RSA #6, Inc. Wisconsin RSA #8, Inc. USCIC of Colorado RSA #3, Inc. Western Colorado Cellular, Inc. Idaho Invco of RSA #1, Inc. Kentucky Invco of RSA #3, Inc. MaryPennWest Invco of RSA #1, #10 and #3, Inc. Minnesota Invco of RSA #5, Inc. Minnesota Invco of RSA #7, Inc. Minnesota Invco of RSA #8, Inc. Minnesota Invco of RSA #9, Inc. Minnesota Invco of RSA #10, Inc. Minnesota Invco of RSA #11, Inc. USCIC of North Carolina RSA #1, Inc. Oregon Invco of RSA #2 West, Inc. Pennsylvania Invco of RSA #5, Inc. Pennsylvania Invco of RSA #6, Inc. -7- EXHIBIT 21 Texas Invco of RSA #6, Inc. Texas Invco of RSA #17, Inc. TDS U2B Acquisition Corp. Virginia Invco of RSA #2, Inc. Wisconsin Invco of RSA #7, Inc. Camden Cellular Telephone Company, Inc. Community Cellular Telephone Company Farmers Cellular Telephone Company, Inc. Farmers Mutual Cellular Telephone Company, Inc. Hancock Cellular Telephone Company, Inc. Hardy Cellular Telephone Company Hill City Cellular Telephone Company Humphreys County Cellular, Inc. Jefferson Cellular Telephone Company Lake Livingston Cellular Telephone Company Laurel Highland Cellular Telephone Company McDaniel Cellular Telephone Company Minford Cellular Telephone Company Peace Valley Cellular Telephone Company Pine Island Cellular Telephone Company Randolph Cellular Telephone Company Scott County Cellular Telephone Company South Canaan Cellular Telephone Company Venus Cellular Telephone Company, Inc. Walnut Hill Cellular Telephone Company West Side Cellular Telephone Company United States Cellular Investment Company United States Cellular Investment Co. of Allentown USCIC of Amarillo, Inc. USCIC of Arecibo, Inc. United States Cellular Investment Company of Baton Rouge United States Cellular Investment Company of Binghamton, Inc. USCIC of Brownsville, Inc. United States Cellular Investment Co. of Charleston, Inc. United States Cellular Investment Company of Eau Claire, Inc. Universal Cellular for Eau Claire MSA, Inc. United States Cellular Investment Company of Fresno, Inc. United States Cellular Investment Company of Ft. Myers United States Cellular Investment Company of Ft. Smith United States Cellular Investment Company of Galveston United States Cellular Investment Company of Green Bay, Inc. United States Cellular Investment Company of Huntsville United States Cellular Investment Company of Iowa City USCIC of Jackson, Inc. United States Cellular Investment Company of Lafayette United States Cellular Investment Corporation of Los Angeles United States Cellular Investment Company of Madison, Inc. USCIC of McAllen, Inc. USCIC of Midland, Inc. United States Cellular Investment Co. of Nashville USCIC of New Orleans, Inc. USCIC of Ocala, Inc. -8- EXHIBIT 21 United States Cellular Investment Co. of Oklahoma City, Inc. United States Cellular Investment Company of Portsmouth, Inc. United States Cellular Investment Company of Raleigh-Durham USCIC of Reno, Inc. United States Cellular Investment Company of Rockford United States Cellular Investment Company of Santa Cruz, Inc. United States Cellular Investment Company of Sarasota USCIC of Seattle, Inc. United States Cellular Investment Company of South Bend, Inc. United States Cellular Investment Company of St. Cloud United States Cellular Investment Company of Wheeling United States Cellular Operating Company United States Cellular Operating Company of Atlantic City, Inc. United States Cellular Operating Company of Bangor United States Cellular Operating Company of Biloxi United States Cellular Operating Company of Cedar Rapids United States Cellular Operating Company of Columbia USCOC of Cumberland, Inc. United States Cellular Operating Company - Des Moines United States Cellular Operating Company of Dubuque United States Cellular Operating Company of Evansville, Inc. United States Cellular Operating Company of Ft. Pierce USCOC of Gainesville, Inc. USCOC of Iowa City, Inc. United States Cellular Operating Company of Joplin United States Cellular Operating Company of Knoxville United States Cellular Operating Company of LaCrosse, Inc. United States Cellular Operating Company of Lewiston-Auburn United States Cellular Operating Company of Manchester-Nashua, Inc. United States Cellular Operating Company of Medford United States Cellular Operating Company of Montgomery, Inc. United States Cellular Operating Company of Owensboro United States Cellular Operating Company of Peoria USCOC of Portland, Inc. United States Cellular Operating Company of Poughkeepsie, Inc. United States Cellular Operating Company - Quad Cities United States Cellular Operating Company of Richland United States Cellular Operating Company of Rochester USCOC of Tallahassee, Inc. USCOC of Texahoma, Inc. United States Cellular Operating Company of Tulsa, Inc. USCOC of Victoria, Inc. United States Cellular Operating Company of Vineland, Inc. United States Cellular Operating Company of Waterloo United States Cellular Operating Company of Wausau, Inc. United States Cellular Operating Company of Williamsport United States Cellular Operating Company of Yakima Canton Cellular Telephone Company Capitol Cellular, Inc. Carolina Cellular, Inc. Cellular America Telephone Company -9- EXHIBIT 21 Central Cellular Telephones, Ltd. Central Florida Cellular Telephone Company, Inc. Chibardun Cellular Telephone Corporation CSII of Baton Rouge, Inc. Davenport Cellular Telephone Company, Inc. DRGP, Inc. Dutchess County Cellular Telephone Company, Inc. Four D Ltd. Huntsville Cellular Telephone Corp., Inc. ILP, Inc. Joplin Cellular Telephone Company LaCrosse Cellular Telephone Company, Inc. Lar-Tex Cellular Telephone Company, Inc. Lavaca Cellular Telephone Company Leaf River Valley Cellular Telephone Company Mississippi Cellular Telephone Company Star Cellular Telephone Company, Inc. Star Cellular Communications, Inc. Texahoma Cellular Telephone Corporation Tri-States Cellular Communications Inc. Tulsa General Partner, Inc. USCC Real Estate Corporation Victoria Cellular Corporation Vineland Cellular Telephone Company, Inc. -10- EX-23.1 7 EXHIBIT 23.1 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 7, 1995 (except with respect to the matters discussed in Note 12 and Note 14, as to which the date is March 14, 1995), on the consolidated financial statements of Telephone and Data Systems, Inc. and Subsidiaries (the "Company") included in the Company's 1994 Annual Report to Shareholders, to the inclusion in this Form 10-K of our report dated February 7, 1995 (except with respect to the matters discussed in Note 12 and Note 14, as to which the date is March 14, 1995), on the financial statement schedules of the Company, and to the inclusion in this Form 10-K of our compilation report dated February 17, 1995, 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 and File No. 33-57257, and into the Company's previously filed S-3 Registration Statements, File No. 33-8564, File No. 33-8857, File No. 33-8858, File No. 33-28348 and File No. 33-68456, and into the Company's previously filed S-4 Registration Statements, File No. 33-45570 and File No. 33-68988. ARTHUR ANDERSEN LLP Chicago, Illinois March 22, 1995 EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion in this Form 10-K of Telephone and Data Systems, Inc., of our report, which includes explanatory paragraphs relating to contingencies, dated February 17, 1995, on our audits of the financial statements of the Los Angeles SMSA Limited Partnership as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND L.L.P Newport Beach, California March 22, 1995 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 10, 1995, February 11, 1994 and February 11, 1993, on our audits of the financial statements of the Nashville/Clarksville MSA Limited Partnership as of December 31, 1994, 1993 and 1992, and for the years ended December 31, 1994, 1993 and 1992; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND L.L.P. Atlanta, Georgia March 22, 1995 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 10, 1995, February 11, 1994 and February 11, 1993, on our audits of the financial statements of the Baton Rouge MSA Limited Partnership as of December 31, 1994, 1993 and 1992, and for the years ended December 31, 1994, 1993 and 1992; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND L.L.P. Atlanta, Georgia March 22, 1995 EX-27 9 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated financial statements of Telephone and Data Systems, Inc. as of December 31, 1994, and for the year then ended, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 24,733 25,604 82,961 2,785 17,106 185,918 2,153,575 629,693 2,790,127 346,184 536,509 54,825 13,209 29,819 1,418,213 2,790,127 0 730,810 0 621,988 (33,686) 0 41,251 101,257 40,713 60,544 0 0 (723) 59,821 1.06 1.06
EX-99 10 EXHIBIT 99 EXHIBIT 99 INCORPORATED PORTIONS OF ITEMS AS EXPECTED TO BE INCLUDED IN THE NOTICE OF 1995 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT OF TELEPHONE AND DATA SYSTEMS, INC. ("TDS" OR THE "COMPANY") ELECTION OF DIRECTORS The Company's Board of Directors is divided into three classes. Each year, one class is elected to serve for three years. At the 1995 Annual Meeting of Shareholders, four Class II directors will be elected for a term of three years or until their successors are elected and qualified. The nominees for election as Class II directors are identified in the tables below. In the event any nominee, who has expressed an intention to serve if elected, fails to stand for election, the persons named in the proxy presently intend to vote for a substitute nominee designated by the Board of Directors. NOMINEES CLASS II DIRECTORS--TERMS TO EXPIRE IN 1998 The following persons, if elected at the 1995 Annual Meeting of Shareholders, will serve as Class II directors for three years or until their successors are elected and qualified: NOMINEE FOR ELECTION BY HOLDERS OF COMMON SHARES AND HOLDERS OF PREFERRED SHARES (SERIES A, B, D, G, H AND N) POSITION WITH TDS SERVED AS DIRECTOR NAME AGE AND PRINCIPAL OCCUPATION SINCE ---- --- ------------------------ ----- James Barr III.... 55 Director of the Company and President 1990 of TDS Telecommunications Corporation NOMINEES FOR ELECTION BY HOLDERS OF SERIES A COMMON SHARES AND HOLDERS OF PREFERRED SHARES (SERIES O, S, U, V, X, BB, DD, EE, GG, HH, II, JJ, KK, LL, MM, NN, OO, PP, QQ, RR AND SS) POSITION WITH TDS SERVED AS DIRECTOR NAME AGE AND PRINCIPAL OCCUPATION SINCE ---- --- ------------------------ ----- LeRoy T. Carlson, Jr... 48 President and Director of the 1968 Company (chief executive officer) Donald C. Nebergall... 66 Director and Consultant to the 1977 Company and other companies Murray L. Swanson..... 53 Executive Vice President-Finance 1983 and Director of the Company (chief financial officer) James Barr III was appointed President and chief executive officer of TDS Telecommunications Corporation ("TDS Telecom"), a subsidiary of the Company which operates local telephone companies, in 1990. Prior 1 to that, Mr. Barr served as a Sales Vice President for American Telephone and Telegraph Company from 1985 through 1989. Mr. Barr is also a director of American Paging, Inc. (AMEX Symbol "APP"), a subsidiary of the Company which provides radio paging services. LeRoy T. Carlson, Jr., has been the President and chief executive officer for more than five years. Mr. Carlson is also Chairman and a director of TDS Telecom, APP and United States Cellular Corporation (AMEX symbol "USM"), a subsidiary of the Company which operates and invests in cellular telephone companies and properties. Mr. Carlson is the son of LeRoy T. Carlson and the brother of Walter C.D. Carlson. Donald C. Nebergall served as the Vice President of The Chapman Company, a registered investment advisory company located in Cedar Rapids, Iowa, from 1986 to 1988. Prior to that, he was the Chairman of Brenton Bank & Trust Company, Cedar Rapids, Iowa, from 1982 to 1986, and was its President from 1972 to 1982. He has been a consultant to the Company and other companies since 1988. Murray L. Swanson has been Executive Vice President-Finance and chief financial officer for more than five years. Mr. Swanson is also a director of TDS Telecom, USM and APP. All of the nominees are current Class II directors. Mr. Barr was elected by the holders of Common Shares and Preferred Shares issued before October 31, 1981. Messrs. Carlson, Nebergall and Swanson were elected by the holders of Series A Common Shares and Preferred Shares issued after October 31, 1981. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES. OTHER DIRECTORS CLASS III DIRECTORS--TERMS EXPIRE IN 1996 The following persons were elected at the Annual Meeting of Shareholders on May 14, 1993, to serve as Class III directors for three years or until their successors are elected and qualified: POSITION WITH TDS SERVED AS DIRECTOR NAME AGE AND PRINCIPAL OCCUPATION SINCE ---- --- ------------------------ ----- Lester O. Johnson... 82 Director of the Company, Architect in private practice 1968 LeRoy T. Carlson.... 78 Chairman and Director of the Company 1968 Walter C.D. Carlson. 41 Director of the Company, Partner, Sidley & Austin, Chicago, Illinois 1981 Herbert S. Wander... 60 Director of the Company, Partner, Katten, Muchin & Zavis, Chicago, Illinois 1968 All of the Class III Directors have had the principal occupations indicated for more than five years. LeRoy T. Carlson is the father of Walter C.D. Carlson and LeRoy T. Carlson, Jr. Messrs. LeRoy T. Carlson and Walter C.D. Carlson are also directors of USM. The law firm of Katten, Muchin & Zavis provided legal services to TDS in 1994. Mr. Johnson was elected by the holders of Common Shares and the holders of Preferred Shares issued before October 31, 1981. Messrs. L. Carlson, W. Carlson and Wander were elected by the holders of Series A Common Shares and holders of Preferred Shares issued after October 31, 1981. 2 CLASS I DIRECTORS--TERMS EXPIRE IN 1997 The following persons were elected at the Annual Meeting of Shareholders on May 6, 1994, to serve as Class I directors for three years or until their successors are elected and qualified: POSITION WITH TDS SERVED AS DIRECTOR NAME AGE AND PRINCIPAL OCCUPATION SINCE ---- --- ------------------------ ----- Donald R. Brown . . . 64 Director of the Company and Senior Vice 1979 President-Southeast Region of TDS Telecommunications Corporation Robert J. Collins . . 59 Director of the Company and Vice 1974 President-Northeast Region of TDS Telecommunication Corporation Rudolph E. Hornacek. . 67 Vice President-Engineering and Director 1968 of the Company Donald R. Brown was a Vice President of the Company between 1974 and 1992. In 1990, Mr Brown resigned as a Vice President of the Company and was appointed as a director and Vice President of TDS Telecom. In 1992, Mr. Brown was appointed Senior Vice President-Southeast Region. Robert J. Collins was a Vice President of the Company between 1971 and 1990, and between 1974 and 1990 was the Northeast Region Manager. In 1990, Mr. Collins resigned as Vice President of the Company and was appointed as director and Vice President of TDS Telecom. Mr. Collins has notified the Company of his intention to resign from TDS Telcom in December 1995. Rudolph E. Hornacek has been Vice President-Engineering of the Company for more than five years. He is a director of TDS Telecom. Mr. Brown was elected by the holders of Common Shares and holders of Preferred Shares issued before October 31, 1981. Messrs. Collins and Hornacek were elected by the holders of Series A Common Shares and the holders of Preferred Shares issued after October 31, 1981. COMMITTEES AND MEETINGS The Board of Directors of the Company held four meetings during 1994. Each of the directors attended at least 75% of the meetings of the Board of Directors. The Board of Directors does not have a formal nominating committee. The Audit Committee of the Board of Directors, among other things, determines audit policies, reviews external and internal audit reports and reviews recommendations made by the Company's internal auditing staff and independent public accountants. The members of the Audit Committee are: Donald C. Nebergall (Chairman), Walter C.D. Carlson, Lester O. Johnson and Herbert S. Wander. The committee met three times during 1994. Each committee member attended at least 75% of the meetings of the Audit Committee in 1994, except for Donald C. Nebergall, who attended two meetings during 1994. In 1995, the Board of Directors established a Compensation Committee, consisting of LeRoy T. Carlson, Jr., President of TDS, and a Stock Option Compensation Committee, consisting of Herbert S. Wander (chairman), Lester O. Johnson and Donald C. Nebergall. The primary function of the Compensation Committee is to approve the annual salary, bonus and other cash compensation of officers and key employees other than the President. The principal functions of the Stock Option Compensation Committee are to approve the annual salary, bonus and other cash compensation for the President, to consider and approve long-term compensation for executive officers and to consider and recommend to the Board of Directors any changes to long-term compensation plans or policies. 3 1994 LONG-TERM INCENTIVE PLAN The Board of Directors has determined that it is in the best interests of the Company and its shareholders to approve the 1994 Long-Term Incentive Plan of the Company (the "Plan"). The purposes of the Plan are (i) to align the interests of the shareholders of the Company and the key executive and management employees of the Company who receive options under the Plan by increasing the proprietary interest of such employees in the Company's growth and success, (ii) to advance the interests of the Company by attracting and retaining key executive and management employees of the Company, and (iii) to motivate such employees to act in the long-term best interests of the Company's shareholders. The Plan was adopted by an ad hoc committee of the Board of Directors composed of disinterested persons within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and was ratified by the Board of Directors on November 4, 1994. The Plan will terminate ten years thereafter unless terminated earlier by the Board. The Plan will be administered by a Committee (the "Committee") designated by the Board of Directors of the Company, consisting of two or more members of the Board, each of whom are "outside directors" within the meaning of section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee will select those eligible key executive and management employees for participation in the Plan as the Committee determines and will determine the form and timing of each grant of an option and the number of Common Shares subject to each option, the purchase price per Common Share purchasable upon exercise of the option, the time and conditions of exercise of the option and all other terms and conditions of the option, including, without limitation, the form of the award evidencing the option. Participants in the Plan may consist of such key executive and management employees of the Company as the Committee may select from time to time. The Committee may grant incentive stock options which meet the requirements of section 422 of the Code ("ISOs") or non-qualified stock options which are not ISOs ("NSOs"). In the event that the Plan is not approved by shareholders, no ISOs will be granted under the Plan. Each ISO must be granted within ten years of the effective date of the Plan. Options will be subject to the terms and conditions set forth in the Plan and will contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee deems advisable, except that the Committee may not grant an option or options to any eligible employee which, in the aggregate, give in any calendar year such employee an option to purchase more than 50,000 Common Shares (as may be adjusted pursuant to the Plan due to changes in the capital structure of the Company). The number of Common Shares subject to an option and the purchase price per Common Share purchasable upon exercise of the option will be determined by the Committee in its discretion. However, the Plan provides that the purchase price per Common Share purchasable upon exercise of either an ISO or a NSO will generally be the average fair market value of a Common Share during the 20 trading days immediately preceding the date the option is granted, but in the case of an ISO, will not be less than 100% of the fair market value of a Common Share on the date of grant of such option and that if an ISO is granted to an employee who owns capital stock possessing more than 10% of the total combined voting power of all classes of capital stock of the Company or any of its subsidiaries (a "Ten Percent Holder"), the purchase price per Common Share must be at least 110% of its fair market value. The period during which an option may be exercised will be determined by the Committee. However, the Plan provides that no ISO may be exercised later than ten years after its date of grant and that, if an ISO is granted to a Ten Percent Holder, such option must be exercised within five years of its date of grant. The Committee may establish performance measures which must be satisfied during a performance period as a condition either to a grant of an option or to the exercisability of all or a portion of an option. Notwithstanding any other provision of the Plan or any provision of any award, in the event of a change in control (as defined in the Plan) of the Company, all outstanding options will become immediately exercisable in full. The maximum number of shares available to be offered to approximately 50 eligible employees will initially be 800,000 Common Shares, subject to adjustment in the event of certain changes in the capital structure of the Company. To the extent that any such event entitles a holder of an option to purchase additional Common Shares or other securities, the securities available under the Plan will be deemed to include such additional Common Shares or other securities. 4 The Board may amend the Plan as it deems advisable, subject to any requirement of shareholder approval under applicable law, including Rule 16b-3 under the Exchange Act and section 162(m) of the Code, except that, subject to adjustment for certain changes in the capital structure of the Company, no amendment may be made without shareholder approval if such amendment (a) would increase the maximum number of Common Shares available for issuance under the Plan or (b) would reduce the minimum purchase price in the case of an option, and no amendment may extend the term of the Plan or effect any change inconsistent with section 422 of the Code with respect to any ISO granted under the Plan. There are no tax consequences to the Company or a participant upon the grant of an option pursuant to the Plan. A participant who is granted an NSO will generally recognize income at the time such option is exercised in an amount equal to the difference between the exercise price of the Common Shares with respect to which the option is exercised and the market value of the shares on the date of exercise. The Company will be entitled to a tax deduction for the amount of income recognized by a participant. A participant who is granted an ISO will not recognize any taxable income at the time of its exercise. If the holder of an ISO does not dispose of the Common Shares acquired upon the exercise of the option before the later of two years from the date of grant of the option and one year from the date of exercise, any gain or loss realized on a subsequent disposition of the shares will be treated as a long-term capital gain or loss, and the Company will not be entitled to any deduction for federal income tax purposes. If the holder sells or disposes of the Common Shares acquired upon the exercise of an Incentive Stock Option within two years from the date of the grant or one year from the date of exercise (a "disqualifying disposition") and the amount realized upon such disposition is greater than the exercise price, then the holder will recognize ordinary income at the time of the disqualifying disposition in an amount equal to the excess of the lesser of (i) the amount realized upon the disposition and (ii) the fair market value of the shares disposed of, determined on the date such shares were transferred to the holder pursuant to the exercise of the option, over the exercise price. The Company generally will be entitled to a deduction corresponding to the amount of recognized ordinary income. On November 4, 1994, the aforementioned ad hoc committee of the Board of Directors of the Company approved, and the full Board of Directors ratified, the grant of options (the "Automatic Options") to purchase an aggregate of 220,150 Common Shares of the Company to 32 eligible employees, including Automatic Options for an aggregate of 165,050 Common Shares to ten executive officers of the Company, pursuant to the Plan. The purchase price per Common Share subject to the Automatic Options is $47.59, representing the average of the closing prices of the Common Shares on the American Stock Exchange for the twenty trading days ended on November 3, 1994. Each Automatic Option becomes exercisable in annual increments of 20% each on December 15, 1994, and on the first through the fourth anniversaries of such date, but no Automatic Option is exercisable for a period of more than ten years after the grant date. In addition, on each of December 15, 1995 and on the first through fourth anniversaries of such date (collectively, the "Anniversary Dates"), each optionee may also become eligible to exercise options (the "Performance Options") to purchase an additional number of Common Shares equal to a percentage (not in excess of 200%) of the number of Common Shares subject to Automatic Options which shall have become exercisable with respect to such person in the year immediately preceding the year of such Anniversary Date. Such percentage will be based on the achievement of certain levels of corporate and individual performance as contemplated by the Plan. The purchase price per Common Share subject to the Performance Options will be the average of the closing prices of the Common Shares on the American Stock Exchange for the twenty trading days ended on the trading day immediately preceding April 30 of the year in which the Performance Options become exercisable. The Performance Options will become exercisable in full on the Anniversary Date on which they are granted and will remain exercisable for a period of ten years. The following table specifies the number of Common Shares which are subject to options granted under the Plan to the named executive or group: 5 New Plan Benefits 1994 Long-Term Incentive Plan(1) Number of Name(2) Common Shares ------- ------------- LeRoy T. Carlson . . . . . . . . . . . . . . . . . . . . . . . 36,050 LeRoy T. Carlson, Jr. . . . . . . . . . . . . . . . . . . . . 47,100 Murray L. Swanson . . . . . . . . . . . . . . . . . . . . . . 18,500 Other Executives . . . . . . . . . . . . . . . . . . . . . . . 63,400 ------- Executive Group . . . . . . . . . . . . . . . . . . . . . . . 165,050 Non-Executive Director Group . . . . . . . . . . . . . . . . . -0- Non-Executive Employee Group . . . . . . . . . . . . . . . . . 55,100 ------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . 220,150 ------- ------- ------------- (1) Since the option exercise price of $47.59 is equal to the fair market value of the Common Shares as of the date of grant, no dollar value was assigned to the options for purposes of the above table. (2) Neither James Barr III nor H. Donald Nelson is eligible to participate in the 1994 Long-Term Incentive Plan. EXECUTIVE OFFICERS In addition to the executive officers identified in the tables regarding the election of directors, set forth below is a table identifying current officers of the Company and its subsidiaries who may be deemed to be executive officers of the Company for disclosure purposes under the rules of the Securities and Exchange Commission. NAME AGE POSITION ---- --- -------- H. Donald Nelson . . . . 61 President of United States Cellular Corporation John R. Schaaf . . . . . 49 President of American Paging, Inc. Michael K. Chesney . . . 39 Vice President-Corporate Development George L. Dienes . . . . 64 Vice President-Corporate Development C. Theodore Herbert . . 59 Vice President-Human Resources Ronald D. Webster . . . 45 Vice President and Treasurer Byron A. Wertz . . . . . 48 Vice President-Corporate Development Gregory J. Wilkinson . . 44 Vice President and Controller Michael G. Hron . . . . 50 Secretary H. Donald Nelson is a director of and has served as the President and chief executive officer of USM for more than five years. John R. Schaaf is a director of and was appointed President of APP in 1991. Prior to that, Mr. Schaaf was Vice President-Operations of APP for more than five years. Michael K. Chesney was appointed Vice President-Corporate Development in 1994. Prior to that he was Director - Corporate Development of the Company for more than five years. George L. Dienes has been Vice President-Corporate Development of the Company for more than five years. 6 C. Theodore Herbert has been Vice President-Human Resources of the Company for more than five years. Ronald D. Webster was appointed a Vice President of the Company in 1993. He has been the Treasurer of the Company for more than five years. Byron A. Wertz was appointed a Vice President-Corporate Development in 1994. Prior to that he was Director - Telecommunications Development of the Company for more than five years. Gregory J. Wilkinson was appointed a Vice President of the Company in 1993. He has been the Controller of the Company for more than five years. Michael G. Hron has been the Secretary of the Company for more than five years. He has been a partner at the law firm of Sidley & Austin for more than five years. All of TDS's executive officers devote substantially all of their time to the Company or its subsidiaries, except for Michael G. Hron who is a practicing attorney. EXECUTIVE COMPENSATION SUMMARY OF COMPENSATION The following table summarizes the compensation paid by TDS during 1994 to the chief executive officer of TDS and the four most highly compensated executive officers of the Company and its subsidiaries other than the chief executive officer for services rendered during the year ended December 31, 1994. 7 SUMMARY COMPENSATION TABLE(1)
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ---------------------- ------------- SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS/SARs(4) COMPENSATION(5) --------------------------- ---- --------- -------- -------------- --------------- LeRoy T. Carlson 1994 $ 290,000 $ 45,000 36,050 $ 32,848 Chairman 1993 $ 265,000 $ 80,000 -- $ 23,875 1992 $ 245,000 $ 60,000 -- $ 28,218 Leroy T. Carlson, Jr. 1994 $ 350,000 $ 95,000 47,100 $ 10,485 President 1993 $ 316,000 $ 95,000 -- $ 15,461 (chief executive officer) 1992 $ 290,000 $ 75,000 -- $ 12,072 Murray L. Swanson 1994 $ 241,000 $ 42,750 18,500 $ 16,351 Executive Vice President- 1993 $ 224,000 $ 74,000 -- $ 28,553 Finance (chief financial 1992 $ 207,000 $ 57,000 -- $ 21,967 officer) James Barr III 1994 $ 242,500 $ 54,563 -- $ 15,541 President of TDS 1993 $ 227,500 $ 66,500 -- $ 24,704 Telecommunications 1992 $ 202,500 $ 55,200 -- $ 17,804 Corporation H. Donald Nelson (6) 1994 $ 245,726 $ 49,500 28,414 $ 3,703 President of United States 1993 $ 206,375 $ 66,500 600 $ 4,714 Cellular Corporation 1992 $ 191,375 $ 62,500 600 $ 3,072 -------------------- (1) Does not include the discount amount under any dividend reinvestment plan or any employee stock purchase plan since such plans are generally available to all eligible shareholders or salaried employees, respectively. Does not include the value of any perquisites and other personal benefits, securities or property, since the aggregate amount of such compensation is the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the named executive officers above. (2) Represents the dollar value of base salary (cash and non-cash) earned by the named executive officer during the fiscal year identified. (3) Represents the dollar value of bonus (cash and non-cash) earned by the named executive officer for 1993 and 1992. Except for LeRoy T. Carlson, Jr., the final bonuses for 1994 have not yet been determined, but the amounts listed above for 1994 were approved for payment as a partial advance of the 1994 bonus. See "Executive Officer Compensation Report." (4) Represents the number of TDS Common Shares subject to stock options ("Options") and/or stock appreciation rights ("SARs") awarded during the fiscal year identified, except for H. Donald Nelson, in which case the amount represents the number of USM shares subject to Options and/or SARs awarded during the fiscal year identified. Unless otherwise indicated by footnote, the awards represent Options without tandem SARs. (5) Includes contributions by the Company for the benefit of the named executive officer under the Employees' Pension Trust ("EPT"), including earnings accrued under a related supplemental benefit agreement, the TDS Tax-Deferred Savings Plan ("TDSP") and the taxable dollar value of any insurance premiums paid during the covered fiscal year with respect to term life insurance for the benefit of the named executive ("Life Insurance"), as indicated below:
LEROY T. CARLSON LEROY T. CARLSON, JR. MURRAY L. SWANSON JAMES BARR III H. DONALD NELSON ---------------- --------------------- ----------------- -------------- ---------------- EPT $17,192 $ 7,539 $11,984 $11,599 $ -- TDSP 1,800 1,800 1,800 1,800 1,232 Life Insurance 13,856 1,146 2,567 2,142 2,471 ------- ------- ------- ------- ------- $32,848 $10,485 $16,351 $15,541 $3,703 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (6) All of Mr. Nelson's compensation is paid by USM and is approved by the Chairman of the Board of Directors of USM.
GENERAL INFORMATION REGARDING OPTIONS AND SARS The following tables show, as to the executive officers who are named in the Summary Compensation Table, information regarding Options and/or SARs. The number of shares subject to the Options and/or SARs and the exercise prices have been adjusted for stock splits in 1988. 8 INDIVIDUAL OPTION/SAR GRANTS IN 1994
Number of Potential Realizable Value at Securities % of Total Assumed Annual Rates of Underlying Options/SARs Stock Price Appreciation Options/SARs Granted to Exercise Market Expiration for Option Terms(4) ----------------------------- Name Granted(1) Employees(2) Price Price(3) Date 0% 5% 10% ---- ------------- ------------ ------- -------- --------- -- -- --- LeRoy T. Carlson 36,050 16% $47.59 $47.59 11/04/04 $ -0- $1,078,944 $2,734,256 LeRoy T. Carlson, Jr. 47,100 21% $47.59 $47.59 11/04/04 $ -0- $1,409,660 $3,572,356 Murray L. Swanson 18,500 8% $47.59 $47.59 11/04/04 $ -0- $ 553,688 $1,403,155 H. Donald Nelson(5) 1994 Options 28,200 15% $32.25 $32.25 11/09/04 $ -0- $ 571,948 $1,449,429 1991 Options 214 15% $15.67 $28.25 11/01/97 $2,692 $ 3,906 $ 5,289 ------ --- ------ ---------- ---------- TOTAL 28,414 15% $2,692 $ 575,854 $1,454,718 ------------------ (1) For the terms of the Options granted in 1994 by TDS, see "1994 Long-Term Incentive Plan" above. (2) Represents the percent of total TDS shares underlying Options/SARS awarded to all TDS employees during the fiscal year, except for H. Donald Nelson, in which case the percentage represents the percent of total USM shares underlying options/SARs awarded to all USM employees during the fiscal year. (3) Represents the fair market value of shares as of the award date. (4) Represents the potential realizable value of each grant of Options, assuming that the market price of the shares underlying the Options appreciates in value from the award date to the end of the Option term at the indicated annualized rates. (5) On November 9, 1994, Mr. Nelson was granted an Option to purchase 28,200 USM Common Shares which becomes exercisable in annual increments of 20% on December 15, 1994 and on the first through fourth anniversaries of such date. On February 1, 1991, H. Donald Nelson received an award of Options for USM shares which could vary, based on performance, between 80% and 120% of the targeted amount of 9,000 shares. Therefore, options for 7,200 shares or 80% of the targeted amount were deemed to be awarded on the grant date. The minimum amount scheduled to become exercisable is 1,200 USM shares in each year on February 1, 1992 through February 1, 1997. Each year during such period an additional number of USM shares, up to an additional 600 shares, may be awarded based on performance for the prior year. The amount over 1,200 shares per year which is awarded based on performance is shown above as a grant in that year. Since 1,414 shares were awarded in 1994 to become exercisable in 1995, 214 shares are shown as a grant in 1994. The exercise price of the Options is equal to the average market price of USM Common Shares for the 20 consecutive trading days ending on the original grant date of February 1, 1991.
9 AGGREGATED OPTION/SAR EXERCISES IN 1994, AND DECEMBER 31, 1994 OPTION/SAR VALUE
1994 As of December 31, 1994 ---- ----------------------- Number of Securities Underlying Value of Unexercised In- Shares Unexercised Options/SARs(3) the-Money Options/SARs(4) Acquired on Value --------------------------- ------------------------- Name Exercise(1) Realized(2) Exercisable Unexercisable Exercisable Unexercisable ---- ---------- ----------- ----------- ------------- ----------- ------------ LeRoy T. Carlson 1994 Options -- -- 7,210 28,840 $ -0- $ -0- ----- ------ ----------- ------------ ----- ------ ----------- ------------ LeRoy T. Carlson, Jr. 1994 Options -- -- 9,420 37,680 $ -0- $ -0- 1988 Options -- -- 38,350 51,000 1,205,449 1,607,265 ------ ------ --------- --------- Total -- -- 47,770 88,680 $ 1,205,449 $ 1,607,265 ------ ------ --------- --------- ------ ------ --------- --------- Murray L. Swanson 1994 Options -0- -0- 3,700 14,800 $ -0- $ -0- 1987 Options 3,375(5) $102,102 -0- 10,125 -0- 382,877 ------ -------- ----- ----- --------- -------- Total 3,375 $102,102 3,700 24,925 $ -0- $382,877 ------ -------- ----- ------ --------- -------- ------ -------- ----- ------ --------- -------- James Barr III 1994 Options -- -- 8,000 12,000 $ 49,000 $ 73,500 ----- ------ --------- -------- ----- ------ --------- -------- H. Donald Nelson 1994 Options -- -- 5,640 22,560 $ 2,820 $ 11,280 1991 Options -- -- 5,224 3,814 89,226 65,143 SARs -- -- 14,400 21,600 255,600 383,400 ------ ------ ---------- ---------- Total -- -- 25,264 47,974 $ 347,646 $ 459,823 ------ ------ ---------- ---------- ------ ------ ---------- ---------- ------------------------ (1) Represents the number of TDS Common Shares received upon exercise or, if no shares were received, the number of TDS Common Shares with respect to which the Options or SARs were exercised, except for H. Donald Nelson, in which case the information is presented with respect to USM shares. (2) Represents the aggregate dollar value realized upon exercise, based on the difference between the exercise price and the average of the high and low price of the shares on the date of exercise as reported in the American Stock Exchange ("AMEX") Composite Transactions by THE WALL STREET JOURNAL. (3) Represents number of TDS Common Shares subject to Options and/or SARs, except for H. Donald Nelson, in which case the information is presented with respect to USM shares. (4) Represents the aggregate dollar value of in-the-money, unexercised Options and SARs held at the end of the fiscal year, based on the difference between the exercise price and $46.125, the closing price of TDS Common Shares or, with respect to H. Donald Nelson, $32.75, the closing price of USM Common Shares, on December 30, 1994, as reported in the AMEX Composite Transactions by THE WALL STREET JOURNAL. (5) Options for a total of 3,375 Common Shares were exercised. A total of 700 Common Shares received upon exercise were used to pay the exercise price and 940 Common Shares were used to pay withholding taxes.
SUPPLEMENTAL BENEFIT AGREEMENTS The Telephone and Data Systems, Inc. Employees' Pension Trust (the "Pension Plan") is a defined contribution plan designed to provide retirement benefits for eligible employees of the Company and certain of its affiliates which adopt the Pension Plan. Annual employer contributions based upon actuarial assumptions are made under a formula designed to fund a target pension benefit for each participant commencing generally upon the participant's attainment of retirement age. The amounts of the annual contributions are included above in the Summary Compensation Table under "All Other Compensation." In 1980, TDS entered into a nonqualified supplemental benefit agreement with LeRoy T. Carlson which, as amended, requires TDS to pay a supplemental retirement benefit to Mr. Carlson, in the amount of $47,567 plus interest at a rate equal to 1/4% under the prime rate for the period from May 15, 1981 (the date of Mr. Carlson's 65th birthday) to May 31, 1991, in five annual installments beginning June 1, 2001, plus interest at 9 1/2% compounded semi-annually from June 1, 1991. The agreement was entered into because certain amendments made to the Pension Plan in 1974 had the effect of reducing the amount of retirement benefits which Mr. Carlson would receive under the Pension Plan. The payments to be made under the agreement, together with the retirement benefits under the Pension Plan, were designed to permit Mr. Carlson to receive approximately the same retirement benefits he would have received if the Pension Plan had not been amended. All of the interest 10 accrued under this agreement is included above in the Summary Compensation Table under "All Other Compensation" and identified in footnote 5 thereto as contributions under the Employees' Pension Trust (EPT). In 1988, USM entered into a nonqualified supplemental benefit agreement with H. Donald Nelson which requires USM to pay a supplemental retirement benefit to Mr. Nelson. The agreement was entered into because Mr. Nelson's employment with TDS was terminated upon the completion of the initial public offering of USM Common Shares in May 1988 and, as a result, he was no longer eligible to participate in the Pension Plan. Under the supplemental benefit agreement, USM is obligated to pay Mr. Nelson an amount equal to the difference between the retirement benefit he will receive from the Pension Plan and that which he would have received had he continued to work for TDS. USM will pay any such benefit at the same time as Mr. Nelson receives payments from the Pension Plan. At the time of Mr. Nelson's withdrawal from the TDS Pension Plan, he had 5 years of credited service. If he had continued as an active participant, he would have received credit for 16 years of service upon retirement at age 65. If Mr. Nelson had continued to be employed by TDS, and had remained employed through age 65, he would have been eligible to receive an estimated annual benefit upon retirement of approximately $50,000 under the TDS Pension Plan. Currently, Mr. Nelson's annual benefit under the TDS Pension Plan is expected to be approximately $15,000. Accordingly, Mr. Nelson is expected to receive an estimated annual benefit of approximately $35,000 under the supplemental benefit agreement. Such estimates are based on Mr. Nelson's base salary, which is included in the cash compensation table above, and calculations of certain projections to age 65. The actual benefits payable to Mr. Nelson upon retirement will be based upon the facts that exist at the time and will be determined actuarially pursuant to the TDS Pension Plan. Since the nature of this agreement is a defined benefit arrangement, no amounts related thereto are included above in the Summary Compensation Table. SALARY CONTINUATION AGREEMENT The Company has entered into an agreement with LeRoy T. Carlson whereby it will employ Mr. Carlson until he elects to retire. Mr. Carlson is to be paid at least $60,000 per annum until his retirement. The agreement also provides that upon his retirement, Mr. Carlson will be retained by the Company as a part-time consultant (for not more than 60 hours in any month) until his death or disability. Upon his retirement, Mr. Carlson will receive $75,000 per annum as a consultant, plus increments beginning in 1985 equal to the greater of three percent of his consulting fee or two-thirds of the percentage increase in the consumer price index for the Chicago metropolitan area. If Mr. Carlson becomes disabled before retiring, the Company can elect to discontinue his employment and retain him in accordance with the consulting arrangement described above. Upon Mr. Carlson's death (unless his death follows his voluntary termination of his employment or the consulting arrangement), his widow will receive until her death an amount equal to that which Mr. Carlson would have received as a consultant. The Company may terminate payments under the agreement if Mr. Carlson becomes the owner of more than 21% of the stock, or becomes an officer, director, employee or paid agent of any competitor of the Company within the continental United States. No amounts were accrued or payable under this agreement in 1994, 1993 or 1992, and no amounts related thereto are included above in the Summary Compensation Table. 11 COMPENSATION OF DIRECTORS Directors of the Company who are not officers or employees of TDS or any subsidiary of TDS receive an annual fee of $12,000 plus $1,000 for attendance at each meeting of the Board of Directors and $500 for attendance at each audit committee meeting. Pursuant to such policy, in 1994, each of Walter C.D. Carlson, Lester O. Johnson, Donald C. Nebergall and Herbert S. Wander earned $16,000 in director's fees, each of Walter C.D. Carlson, Lester O. Johnson and Herbert S. Wander earned $1,500 for services on the audit committee, and Donald C. Nebergall earned $1,000 for services on the audit committee. Donald C. Nebergall also received $9,250 as a bonus for services in 1993 and $112,000 for consulting services provided to the Company in 1994. In addition, the Company paid directors' life insurance premiums in 1994 on behalf of each of the following directors in the indicated amounts: James Barr III ($525); Donald R. Brown ($1,888); LeRoy T. Carlson ($4,155); LeRoy T. Carlson, Jr. ($220); Walter C.D. Carlson ($159); Robert J. Collins ($483); Rudolph E. Hornacek ($2,198); Donald C. Nebergall ($869); Murray L. Swanson ($1,589); and Herbert S. Wander ($873). Except for such life insurance premiums, directors who are also employees of the Company do not receive any compensation for services rendered as directors. EXECUTIVE OFFICER COMPENSATION REPORT This report is submitted by LeRoy T. Carlson, Jr., President, who serves as the Compensation Committee of the Board of Directors for all officers other than the President, and by the Stock Option Compensation Committee of the Board of Directors, which approves all compensation for the President and approves long-term compensation to executive officers of the Company. The Company's compensation policies for executive officers are intended to provide incentives for the achievement of corporate and individual performance goals and to provide compensation consistent with the financial performance of the Company. The Company's policies are based on the belief that the incentive compensation performance goals for executive officers should be based on factors over which such officers have control and which are important to the Company's long-term success. It is also believed that compensation paid should be appropriate in relation to the financial performance of the Company and should be sufficient to enable the Company to attract and retain individuals possessing the talents required for the Company's long-term successful performance. Executive compensation consists of both annual and long-term compensation. Annual compensation consists of a base salary and an annual bonus. The Company evaluates the annual compensation of each executive officer on an aggregate basis by combining the base salary and bonus, and also evaluates the level of the base salary and the bonus separately. Annual compensation decisions are based partly on individual and corporate short-term performance and partly on the individual and corporate cumulative long-term performance during the executive's tenure in his position, particularly with regard to the President (chief executive officer). Long-term compensation is intended to compensate executives primarily for their contributions to long-term increases in shareholder value. Long-term compensation is generally provided through the grant of stock options. The process of determining base salary begins with establishing an appropriate salary range for each officer. Each officer's range is based upon the particular duties and responsibilities of the officer, as well as salaries for comparable positions with other companies. These other companies include the companies included in the peer group index described below under "Stock Performance Chart," as well as other companies in the telecommunications industry and other industries with similar characteristics, to the extent considered appropriate in the judgment of the President, based on similar size, function, geography or otherwise. No written or formal list of specific companies is prepared. Instead, as discussed below, the President is provided with various sources of information about executive compensation at other companies, such as compensation reported in proxy statements of comparable companies and salary surveys published by various organizations. The President uses these sources and makes a personal determination of appropriate sources, companies and ranges for each executive officer. The base salary of each officer is set within a range considered appropriate in the judgment of the President based on an assessment of the particular responsibilities and performance of such officer, taking into account the performance of the Company (as discussed below), other comparable companies, the industry and the economy in general during the immediately preceding year. The President makes a personal determination of the appropriate range based on the total mix of information available to him. The range considered to be 12 relevant by the President is based on his informed judgment, using the information provided to him by the Vice President of Human Resources, as discussed below. The range is not based on any formal analysis nor is there any documentation of the range which the President considers relevant in making his compensation decisions. The salary of the executive officers is believed to be at or slightly above the median of the range considered to be relevant in the judgment of the President. Annually, the nature and extent of each executive officer's major accomplishments and contributions for the year are determined through written information prepared by the executive and by others familiar with his performance, including the executive's direct supervisor. With regard to all executive officers other than the President, the President evaluates the information in terms of the personal objectives given by the President or other direct supervisor to such executive officer for the performance appraisal period. The President also makes an assessment of how well the Company did as a whole during the year and the extent to which the President believes the executive officer contributed to the results. With respect to executive officers having primary responsibility over a certain business unit or division of the Company, the President considers the performance of the business unit or division and makes an assessment of the contribution of the executive officer thereto. The primary focus of the Company is increasing shareholder value through growth, measured in terms such as: revenues; cellular telephones, landline telephone access lines, and pagers in service; operating cash flow; and income. In general, the Company believes it has met or exceeded its objectives of growth while managing to balance the effects of the costs of such growth. In 1994, revenues increased 31.0%, consolidated cellular telephone customer units increased 61.3%, telephone access lines increased 10.2%, pagers in service increased 41.6%, operating cash flow increased 38.7% and operating income increased 56.1%. However, no specific measures of performance are considered determinative in the compensation of executive officers. Instead, all of the facts and circumstances are taken into consideration by the President in his executive compensation decisions. Ultimately, it is the informed judgment of the President that determines an executive's salary and bonus, this being based on the total mix of information rather than on any specific measures of performance. Other than for the President, the President serves as the Compensation Committee. The Vice President-Human Resources accumulates and prepares various materials, including relevant base pay and bonus information, for the annual compensation reviews of executive officers. These materials are reviewed by the President along with various performance evaluation information. The President will determine the bonus for 1994 and base salary for 1995 for all executives other than himself. The Company has no written or formal corporate bonus plan. The bonuses for corporate executive officers are determined by the President based on his evaluation of each executive's contribution to the Company, the achievement of individual objectives, the Company's performance and all other facts and circumstances considered relevant in his judgment. The President has not yet taken action to approve the 1994 bonus or the 1995 base salary for these executives. Due to the fact that the 1994 bonus had not been determined as of the end of 1994, the President approved advance bonus payments for 1994 to all executive officers of TDS, excluding the President. The amounts approved for the named executives are listed above in the Summary Compensation Table. The compensation of the President (chief executive officer) of the Company, is proposed by the President to the Stock Option Compensation Committee of the Board of Directors, and approved or adjusted by the Stock Option Compensation Committee. In addition to the factors described above for all executive officers in general, the Vice President-Human Resources prepares an analysis of compensation paid to chief executive officers of other comparable companies. These other companies include the companies included in the peer group index described below under "Stock Performance Chart," as well as other companies in the telecommunications industry and other industries with similar characteristics, to the extent considered appropriate in the judgment of the President, based on similar size, function, geography or otherwise. This information is presented to the President who recommends a base salary and bonus level for himself. The Stock Option Compensation Committee approves the final base salary and bonus of the President based on the recommendation of the President. The Stock Option Compensation Committee approved an increase in the base salary of the President from $316,000 in 1993 to $350,000 for 1994, representing an increase of approximately 10.8%. The Stock Option Compensation Committee also approved the President's bonus of $95,000 for 1993 and $95,000 for 1994. As with the other executive officers, the compensation of the President is based on all facts and circumstances and the total mix of information rather than related to any specific measures of performance. The Stock Option Compensation Committee has access to numerous performance measures and financial statistics prepared by the Company's financial personnel. This financial information includes the audited financial 13 statements of the Company, as well as internal financial statements such as budgets and their results, operating statistics and various analyses. The Stock Option Compensation Committee is not limited in its analysis to the information presented to it by the President or available from financial personnel, and may consider other factual or subjective factors as the members of such committee deem appropriate in their compensation decisions. No specific measures of performance are considered determinative in the compensation of the President. Instead, all of the facts and circumstances are taken into consideration by the Stock Option Compensation Committee in its executive compensation decisions. Ultimately, it is the informed judgment of the Stock Option Compensation Committee, based on the recommendation of the President, that determines the salary and bonus for the President, this being based on the total mix of information rather than on any specific measures of performance. The Stock Option Compensation Committee believes that the annual total base salary and bonus compensation of the President has been set at a level less than an average level for equally responsible executives at companies which it considers comparable. The members of the Stock Option Compensation Committee base this belief on their personal assessment and judgment of the President's responsibilities in comparison to the chief executive officers and chief operating officers of the companies included in the peer group index described below under "Stock Performance Chart," as well as other companies in the telecommunications industry and other industries with similar characteristics, based on the information prepared by the Vice President of Human Resources, as discussed above. The President has a substantial beneficial interest in the Company, as described below under "Security Ownership of Management," and will benefit together with other shareholders based on the performance of the Company. The Stock Option Compensation Committee considers this an important fact in connection with its review and approval or adjustment of the salary and bonus recommended by the President for himself. At such time as the President approves the 1994 bonuses and 1995 salaries for executive officers and recommends a 1995 salary for himself, he may also recommend to the Stock Option Compensation Committee long-term compensation in the form of additional stock option grants, stock appreciation rights or otherwise for executive officers and himself. The long-term compensation decisions for executive officers will be made by the Stock Option Compensation Committee in a manner similar to that described for annual base salary and bonus decisions, except that the stock options will generally vest over several years in a manner which will reflect the goal of relating the long-term compensation of the executive officers, including the President, to increases in shareholder value over the same period. In 1994, prior to the establishment of the Stock Option Compensation Committee, an ad-hoc committee of outside directors approved the 1994 Long-Term Incentive Plan and granted options thereunder, as indicated in the above tables and as discussed above under "1994 Long-Term Incentive Plan." TAX LAW CHANGES. For tax years beginning on and after January 1, 1994, the federal income tax laws were amended to limit to $1 million the deduction a publicly held corporation may take for certain compensation paid to each of its chief executive officer and four most highly compensated executive officers (other than the chief executive officer). Generally, "performance-based" compensation, including stock options and stock appreciation rights, are not subject to the $1 million deduction limitation if certain requirements are satisfied. Under transition rules provided in proposed Treasury regulations, stock option plans that meet certain requirements are deemed to meet the performance-based compensation exception until the 1996 annual shareholders' meeting. The 1994 Incentive Plan has been prepared to comply with the performance-based compensation exception to the $1 million deduction limitation, as set forth in the proposed Treasury regulations. Due to these and other reasons, the Company does not believe the $1 million deduction limitation should have any effect on the Company in the near future. The Company will continue to consider ways to maximize the deductibility of executive compensation, while retaining the discretion the Company deems necessary to compensate executive officers in a manner commensurate with performance and the competitive environment for executive talent. By LeRoy T. Carlson, Jr., President; and By the Stock Option Compensation Committee: Herbert S. Wander (Chairman); Lester O. Johnson; and Donald C. Nebergall 14 STOCK PERFORMANCE CHART The following chart graphs the performance of the cumulative total return to shareholders (stock price appreciation plus dividends) during the previous five years in comparison to returns of the Standard & Poor's 500 Composite Stock Price Index and a peer group index. The peer group index was constructed specifically for the Company and includes the following non-Bell telephone companies: ALLTEL Corp., C-TEC Corp., Century Telephone Enterprises, Inc., Cincinnati Bell, Inc., Citizens Utilities Co., Frontier Corp. (formerly Rochester Telephone Corp.), Lincoln Telecommunications, Inc., Southern New England Telecommunications Corp. and TDS. In calculating the peer group index, the returns of each company in the group have been weighted according to such company's market capitalization at the beginning of the period. COMPARATIVE FIVE-YEAR TOTAL RETURNS* TDS, S&P 500, PEER GROUP (PERFORMANCE RESULTS THROUGH 12/31/94) [LINE GRAPH OF DATA POINTS]
1989 1990 1991 1992 1993 1994 TDS $100.00 $74.50 $ 77.93 $ 89.99 $116.36 $103.84 S&P 500 $100.00 $96.90 $126.42 $136.05 $149.76 $151.48 Peer Group $100.00 $79.04 $ 86.06 $102.85 $124.01 $117.82
Assumes $100 invested at the close of trading on the last trading day preceding the first day of the fifth preceding fiscal year in TDS common stock, S&P 500, and Peer Group. *Cumulative total return assumes reinvestment of dividends. The peer group index was revised from the prior year to add Citizens Utilities Co. because it acquired substantial telephone properties from GTE Corp. in 1994. For comparison to the above-reported peer group results, if the Company had not changed the peer group index from the peer group reported in its 1994 Notice of Annual Meeting and Proxy Statement, the peer group results would have been as follows: 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- Peer Group $100.00 $82.14 $85.91 $101.74 $121.88 $120.78 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION LeRoy T. Carlson, Jr., President (chief executive officer) of TDS, makes annual compensation decisions for TDS executives other than for himself. LeRoy T. Carlson, Jr., is a member of the Board of Directors of TDS, USM, TDS Telecom and APP. LeRoy T. Carlson, Jr., is also the Chairman of TDS Telecom, USM and APP and, as such, approves the executive officer compensation decisions for TDS Telecom, USM and APP. The Stock Option Compensation Committee of the Board of Directors of TDS makes annual compensation decisions for the President of TDS and makes long-term compensation decisions for all executive officers. The members of the Stock Option Compensation Committee are Herbert S. Wander (Chairman), Lester O. Johnson and Donald C. Nebergall, all of whom are directors of TDS. ISSUANCE OF TDS SHARES IN CONNECTION WITH CERTAIN ACQUISITIONS The Company issues TDS securities in connection with the acquisition of cellular interests on behalf of USM. At the time such acquisitions are closed, the acquired cellular interests are generally transferred to USM, which reimburses TDS by issuing USM securities to TDS or by increasing the balance due to TDS under a revolving credit agreement between TDS and USM (the "Revolving Credit Agreement"). The fair market value of the USM securities issued to TDS in connection with these transactions is calculated in the same manner and over the same time period as the fair market value of the TDS securities issued to the sellers in such acquisitions. During 1994, USM issued 4.2 million USM Common Shares to TDS and became indebted to TDS for an 15 additional $309,000 under the Revolving Credit Agreement, to reimburse TDS for 2.2 million TDS Common Shares issued for such cellular interests. In addition to the shares described in the preceding paragraph, additional securities of TDS and USM were authorized for issuance in connection with acquisitions of cellular interests that were pending at December 31, 1994. In connection with these acquisitions, TDS expects to issue in 1995 or later years approximately 1.9 million TDS Common Shares, for which USM will reimburse TDS by issuing approximately 2.7 million USM Common Shares and increasing the amount of debt under the Revolving Credit Agreement in an amount estimated to be approximately $11.2 million. OTHER RELATIONSHIPS AND RELATED TRANSACTIONS. Walter C.D. Carlson, a director of the Company, Michael G. Hron, Secretary of the Company, TDS Telecom and APP, William S. DeCarlo, the Assistant Secretary of TDS, Stephen P. Fitzell, the Secretary of USM and Sherry S. Treston, the Assistant Secretary of USM, are partners of Sidley & Austin, the principal law firm of the Company and its subsidiaries. Walter C.D. Carlson is a trustee and beneficiary of a voting trust which controls TDS and is the husband of Debora M. de Hoyos, a director of APP. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, at February 28, 1995, the number of Common Shares and Series A Common Shares beneficially owned, and the percentage of the outstanding shares of each such class so owned by each director and nominee for director of the Company, by each of the executive officers named in the Summary Compensation Table and by all directors and executive officers as a group.
Name of Percent Individual or Number of Amount and Nature of Percent of Voting Persons in Group Title of Class Beneficial Ownership(1) of Class Power ----------------------- -------------- ----------------------- -------- --------- LeRoy T. Carlson, Jr., Walter C.D. Carlson, Letitia G. Carlson, Donald C. Nebergall and Melanie J. Heald(2) Series A Common Shares 6,252,336 90.9% 52.4% LeRoy T. Carlson, Jr., C. Theodore Herbert, Ronald D. Webster and Michael G. Hron(3) Common Shares 1,008 * * Series A Common Shares 146,576 2.1% 1.2% LeRoy T. Carlson, Jr., C. Theodore Herbert, Ronald D. Webster and Michael G. Hron(4 ) Common Shares 19,148 * * LeRoy T. Carlson(5) Common Shares 19,793 * * Series A Common Shares 72,174 1.0% * LeRoy T. Carlson, Jr.(6)(12) Common Shares 64,912 * * Murray L. Swanson(7)(12) Common Shares 28,426 * * Series A Common Shares 2,445 * * James Barr III(12) Common Shares 12,229 * * H. Donald Nelson(7) Common Shares 3,576 * * Series A Common Shares 5,147 * * Rudolph E. Hornacek(8) Common Shares 16,666 * * Series A Common Shares 2,350 * * Lester O. Johnson(9) Common Shares 2,041 * * 16 Series A Common Shares 70,262 1.0% * Donald C. Nebergall(10) Common Shares 1,098 * * Walter C.D. Carlson(11) Common Shares 67 * * Donald R. Brown(12) Common Shares 16,749 * * Series A Common Shares 4,592 * * Robert J. Collins(12) Common Shares 3,998 * * Series A Common Shares 498 * * Other executive officers Common Shares 117,244 * * (8 persons)(12)(13) Series A Common Shares 710 * * All directors and executive officers Common Shares 306,955 * * as a group (20 persons)(12) Series A Common Shares 6,557,090 95.4% 54.9% ----------------------- * Less than 1% (1) The nature of beneficial ownership for shares in this column is sole voting and investment power, except as otherwise set forth in these footnotes. (2) The shares listed are held by the persons named as trustees under a voting trust which expires June 30, 2009, created to facilitate long-standing relationships among the trustees' certificate holders. Under the terms of the voting trust, the trustees hold and vote the Series A Common Shares held in the trust. If the voting trust were terminated, the following persons would each be deemed to own beneficially more than 5% of the outstanding Series A Common Shares: Margaret D. Carlson (wife of LeRoy T. Carlson), LeRoy T. Carlson, Jr., Walter C.D. Carlson, Prudence E. Carlson, Letitia G. Carlson (children of LeRoy T. Carlson and Margaret D. Carlson) and Donald C. Nebergall, as trustee under certain trusts for the benefit of the heirs of LeRoy T. and Margaret D. Carlson and an educational institution. In addition, Margaret D. Carlson owns 50,512 Series A Common Shares directly and Prudence E. Carlson owns 194,148 Series A Common Shares directly. (3) Voting and investment control is shared by the persons named as trustees of the Telephone and Data Systems, Inc. Employees' Pension Trust I. (4) Voting and investment control is shared by the persons named as trustees of the Telephone and Data Systems, Inc. Tax-Deferred Savings Trust. Does not include 185,870 shares as to which the voting and investment power is passed through to plan participants or 1,278 shares voted by such trustees which are reported as being beneficially owned by the other persons in this table. (5) Does not include 267,648 Series A Common Shares (3.9% of class) held for the benefit of LeRoy T. Carlson in the voting trust described in footnote (2). Beneficial ownership is disclaimed as to 637,261 Series A Common Shares held for the benefit of his wife in such voting trust and as to 50,512 Series A Common Shares included in the table which are held directly by his wife (an aggregate of 10.0% of class). (6) Does not include 1,067,970 Series A Common Shares (15.5% of class) held in the voting trust described in footnote (2), of which 1,038,734 shares are held for the benefit of LeRoy T. Carlson, Jr. Beneficial ownership is disclaimed with respect to an aggregate of 29,236 Series A Common Shares held for the benefit of his wife, his children and others in such voting trust. (7) Includes shares held by and/or in joint tenancy with spouse or children. (8) Includes 681 Series A Common Shares held as custodian for his children. (9) Does not include 244,622 Series A Common Shares (3.6% of class) held for the benefit of Lester O. Johnson and his wife in the voting trust described in footnote (2).
17 (10) Does not include 1,007,828 Series A Common Shares (14.6% of class) held as trustee under trusts for the benefit of the heirs of LeRoy T. and Margaret D. Carlson and an educational institution, or 30 Series A Common Shares held for the benefit of Donald C. Nebergall, which are included in the voting trust described in footnote (2). (11) Does not include 1,069,341 Series A Common Shares (15.5% of class) held in the voting trust described in footnote (2), of which 1,042,878 shares are held for the benefit of Walter C.D. Carlson. Beneficial ownership is disclaimed with respect to an aggregate of 26,463 Series A Common Shares held for the benefit of his wife and children in such voting trust. (12) Includes the following number of Common Shares that may be purchased pursuant to stock options and/or stock appreciation rights which are currently exercisable or exercisable within 60 days: Mr. LeRoy T. Carlson, 7,210 shares; Mr. LeRoy T. Carlson, Jr., 60,420 shares; Mr. Swanson, 7,075 shares; Mr. Barr, 10,000 shares; Mr. Hornacek, 11,890 shares; Mr. Brown, 1,430 shares; Mr. Collins, -0- shares; and all other executive officers, 80,975 shares. (13) Does not include 58,569 Series A Common Shares held in the voting trust described in footnote (2). PRINCIPAL SHAREHOLDERS In addition to persons listed in the preceding table and the footnotes thereto, the following table sets forth, as of February 28, 1995, information regarding each person who beneficially owns more than 5% of any class of voting securities of TDS. The nature of beneficial ownership in this table is sole voting and investment power except as otherwise set forth in footnotes thereto.
Shares of Percent Percent Shareholder's TDS Class of TDS of Voting Name and Address Title of Class Owned Class Power ---------------- -------------- --------- ------- -------- Putnam Investments, Inc., et al.(1) Common Shares 3,578,933 7.1% 3.0% One Post Office Square Boston, Massachusetts 02109 Eagle Asset Management Inc.(2) Common Shares 3,513,634 7.0% 2.9% 880 Carillon Parkway St. Petersburg, Florida 33733 The Equitable Companies Inc.(3) Common Shares 2,810,190 5.6% 2.4% 787 Seventh Avenue New York, New York 10019 William and Betty McDaniel Preferred Shares 62,500 13.8% * 160 Stowell Road Salkum, Washington 98582 Van and Janet McDaniel Preferred Shares 62,500 13.8% * 160 Stowell Road Salkum, Washington 98582 Goldman Sachs & Co. Preferred Shares 51,290 11.3% * 85 Broad Street New York, New York 10004 Roland G. and Bette B. Nehring Preferred Shares 23,030 5.1% * 5253 North Dromedary Road Phoenix, Arizona 85018 ____________________ * Less than 1% (1) Based on a Schedule 13G filed with the Securities and Exchange Commission ("SEC"). The Schedule 13G reports that Putnam Investments, Inc. and The Putnam Advisory Company, Inc. share voting power with respect to 342,331 Common Shares, 18 that Putnam Investments, Inc. and Putnam Investment Management, Inc. share dispositive power with respect to 3,096,605 Common Shares, and that Putnam Investments, Inc. and The Putnam Advisory Company, Inc. share dispositive power with respect to 482,328 Common Shares. The Schedule 13G reports that Marsh & McLennan Companies, Inc. is the direct or indirect parent corporation of each of such entities. (2) Based on the most recent Schedule 13G (Amendment No. 4) filed with the SEC. In such Schedule 13G filing, Eagle Asset Management, Inc. has reported sole investment power and sole voting power with respect to all such shares. (3) Based on the most recent Schedule 13G (Amendment No. 6) filed with the SEC. Includes shares held by the following affiliates: The Equitable Life Assurance Society of the United States - 1,507,900 shares; Alliance Capital Management, L.P. - 1,290,090 shares; and Wood, Struthers & Winthrop Management Corp. - 12,200 shares. Equitable reports sole voting power with respect to 2,653,350 shares, shared voting power with respect to 53,500 shares and sole dispositive power with respect to 2,810,190 shares. Alpha Assurance I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle and AXA, corporations organized under the laws of France, are affiliates of The Equitable Companies Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Executive Compensation - Compensation Committee Interlocks and Insider Participation." 19