-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dpLl8Ai/IrOwQ0hitIAABOIh984n5wHpFdllY43WFxNrx+h+QxbgeyWz5O0FMBjH mI3FdbKS53AokHwEUJt6OQ== 0000912057-94-001091.txt : 19940330 0000912057-94-001091.hdr.sgml : 19940330 ACCESSION NUMBER: 0000912057-94-001091 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC CENTRAL INDEX KEY: 0000096966 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 362669023 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-08251 FILM NUMBER: 94518429 BUSINESS ADDRESS: STREET 1: 30 N LASALLE ST STE 4000 CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3126301900 MAIL ADDRESS: STREET 1: 301 S. WESTFIELD RD STREET 2: PO BOX 5158 CITY: MADISON STATE: WI ZIP: 53705-0158 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC STOCK OPTION PLANS DATE OF NAME CHANGE: 19741118 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC DATE OF NAME CHANGE: 19740509 10-K 1 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, 1993 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 March 7, 1994, the aggregate market values of the registrant's Common Shares, Series A Common Shares and Preferred Shares held by nonaffiliates were approximately $2.026 billion, $16.5 million and $62.2 million, respectively. The closing price of the Common Shares on March 7, 1994, was $44.625, as reported by the American Stock Exchange. Because no market exists for the Series A Common Shares and Preferred Shares, the registrant has assumed for purposes hereof that (i) each Series A Common Share has a market value equal to one Common Share because the Series A Common Shares were initially issued by the registrant in exchange for Common Shares on a one-for-one basis and are convertible on a share-for-share basis into Common Shares, (ii) each nonconvertible Preferred Share has a market value of $100 because each of such shares had a stated value of $100 when issued, and (iii) each convertible Preferred Share has a value of $44.625 times the number of Common Shares into which it was convertible on March 7, 1994. The number of shares outstanding of each of the registrant's classes of common stock, as of March 7, 1994, is 45,669,568 Common Shares, $1 par value, and 6,881,001 Series A Common Shares, $1 par value. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1993 Annual Report to Shareholders described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Part II of this report. - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS - --------------------------------------------------------------------------------
PAGE NUMBER OR REFERENCE(1) --------------- Item 1. Business............................................. 3 Item 2. Properties........................................... 29 Item 3. Legal Proceedings.................................... 29 Item 4. Submission of Matters to a Vote of Security Holders............................................ 30 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 31 (2) Item 6. Selected Financial Data.............................. 31 (3) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 31 (4) Item 8. Financial Statements and Supplementary Data.......... 31 (5) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 31 Item 10. Directors and Executive Officers of the Registrant... 32 Item 11. Executive Compensation............................... 32 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 32 Item 13. Certain Relationships and Related Transactions....... 32 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 33 - --------- (1) Parenthetical references are to information incorporated by reference from the registrant's Exhibit 13, which includes portions of its Annual Report to Shareholders for the year ended December 31, 1993 ("Annual Report"). (2) Annual Report sections entitled "TDS Stock and Dividend Information" and "Market Price per Common Share by Quarter." (3) Annual Report section entitled "Selected Consolidated Financial Data." (4) Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Annual Report sections entitled "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)" and "Report of Independent Public Accountants."
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 local telephone, cellular telephone and radio paging operations. At December 31, 1993, the Company operated 94 telephone subsidiaries serving 356,200 access lines in rural and suburban areas; owned or had the right to acquire cellular interests representing approximately 23.7 million population equivalents and offered cellular telephone service through 116 majority-owned markets with 261,000 cellular telephones in service; and offered radio paging and related services with 460,900 pagers in service. The Company's business development strategy is to expand its existing operations through internal growth and acquisitions and to explore and develop other telecommunications businesses that management believes will utilize the Company's expertise in customer-based telecommunications services. For the year ended December 31, 1993, telephone operations provided 45.4% of the Company's consolidated revenues and all of its earnings; cellular operations provided 41.9% of the Company's consolidated revenues; and paging operations provided 12.7% of the Company's consolidated revenues. The Company conducts substantially all of its telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). TDS Telecom is expanding through the selective acquisition of local exchange telephone companies serving rural and suburban areas and by offering additional lines of telecommunications products and services to existing customers. TDS Telecom has acquired 29 telephone companies since the beginning of 1989. These acquisitions added 59,600 access lines during this five-year period, while internal growth added 57,000 lines. The Company conducts substantially all of its cellular operations through its majority-owned subsidiary, United States Cellular Corporation (AMEX symbol "USM"), which is engaged through subsidiaries and joint ventures primarily in the development and operation of and the acquisition of interests in cellular markets. The Company has had voting control of USM since USM's incorporation. TDS owned an aggregate of 59,548,450 shares of common stock of USM at December 31, 1993, representing over 85% of the combined total of USM's outstanding Common and Series A Common Shares and over 97% of their combined voting power. Assuming USM's Common Shares are issued in all instances in which USM has the choice to issue its Common Shares or other consideration and assuming all other issuances of USM's common stock to TDS and third parties for completed and pending acquisitions and redemptions of USM Preferred Stock and TDS Preferred Shares had been completed at December 31, 1993, TDS would have owned approximately 79.5% of the total outstanding common stock of USM and controlled over 95% of the combined voting power of both classes of its common stock. In the event TDS's ownership of USM falls below 80% of the total value of all of the outstanding shares of USM's stock, TDS and USM would be deconsolidated for federal income tax purposes. TDS and USM have the ability to defer or prevent deconsolidation, if deferring or preventing deconsolidation would be advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's Common Shares in connection with certain acquisitions. USM owns, operates, invests in and has 3 the right to acquire interests in cellular telephone systems representing approximately 23.7 million population equivalents in 205 markets in 37 states. USM owns a controlling interest in and manages cellular systems serving 116 markets ("consolidated markets") and has the right to acquire a controlling interest in and manage cellular systems serving 16 additional markets. All but two of these markets are operational. USM owns or has the right to acquire minority interests (without the right to acquire a controlling interest) and manage cellular systems in 12 operational markets and owns non-controlling interests in and does not manage 61 other operational markets. Since the beginning of 1989, the number of cellular customers in USM's consolidated markets has increased from 13,600 to 261,000. The Company conducts substantially all of its radio paging operations through its 82.5%-owned subsidiary, American Paging, Inc. (AMEX symbol "APP"). APP offers radio paging and related services through its subsidiaries. Since the beginning of 1989, the number of pagers in service increased from 127,600 to 460,900 at December 31, 1993, primarily from internal growth. The Company was incorporated in Iowa in 1968. The Company's executive offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its telephone number is 312-630-1900. Unless the context indicates otherwise: (i) references to "TDS" or the "Company" refer to Telephone and Data Systems, Inc., and its subsidiaries; (ii) references to "USM" refer to United States Cellular Corporation and its subsidiaries; (iii) references to "APP" refer to American Paging, Inc. and its subsidiaries; (iv) references to "MSA" or to a particular city refer to the Metropolitan Statistical Area, as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission ("FCC") in designating metropolitan cellular market areas; (v) references to "RSA" refer to the Rural Service Area, as used by the FCC in designating non-MSA cellular market areas; (vi) references to cellular "markets" or "systems" refer to MSAs, RSAs or both; and (vii) references to "population equivalents" mean the population of a market, based on 1993 Donnelley Marketing Service Estimates, multiplied by the percentage interests that the Company owns or has the right to acquire in an entity licensed, designated to receive a license or expected to receive a construction permit ("licensee") by the FCC to construct or operate a cellular system in such market. REGULATORY DEVELOPMENTS Each of the diversified telecommunications operations of TDS conducted by its local telephone, cellular telephone and radio paging subsidiaries is subject to FCC and state regulation. The licenses held by these subsidiaries which are granted by the FCC for the use of radio frequencies are an important component of the overall value of the assets of TDS. As discussed here, recent Congressional legislation and related FCC regulatory proceedings may have significant impact on some or all of its diversified telecommunications operations by altering FCC and state regulatory responsibilities for mobile service, the procedures for the award by the FCC of licenses to conduct existing and new mobile services, the terms and conditions of business relationships between mobile service providers and Local Exchange Carriers ("LECs") and the scope of the competitive opportunities available to mobile service providers. The Omnibus Reconciliation Act of 1993 (the "Budget Act"), which became effective in August 1993, amended the Communications Act of 1934 (the "Communications Act") by eliminating legislatively enacted distinctions affecting FCC and state regulation of common carrier and private carrier mobile operations and directed the FCC to classify all mobile services, including cellular, paging, Specialized Mobile Radio ("SMR") and other services under two categories: Commercial Mobile Radio Services ("CMRS"), subject to common carrier regulation; or Private Mobile Radio Services ("PMRS"), not subject to common carrier regulation. At its February 3, 1994 public meeting, the FCC adopted a decision classifying mobile service offerings as CMRS operations if they include a service offering to the public for a fee which is interconnected to the public switched network. Cellular, SMR and paging, among other services, will be classified as CMRS if they fit this definition. In addition, the FCC decision establishes a regulatory precedent for hybrid CMRS/PMRS regulation of mobile operations which offer both CMRS and PMRS service. The Company anticipates that a substantial portion of its service offerings will be classified as CMRS. The FCC decision also states that it would forebear from requiring that CMRS providers comply with a number of statutory provisions, otherwise applicable to common carriers, such as the filing of tariffs. It requires LECs to provide reasonable and fair interconnection to all 4 CMRS providers, subject to mutual compensation, reasonable charges for interstate interconnection and reasonable forms of interconnection. Because the text of the FCC's decision has only recently been released and addresses many complex and interrelated aspects of regulatory policy, the impact of these aspects of the FCC proceedings on the Company cannot be predicted with certainty. The Budget Act also amended the Communications Act to authorize the FCC to use a system of competitive bidding to issue initial licenses for the use of radio frequencies for which there are mutually exclusive applications and where the principal use of the license will be to offer service in return for compensation from customers. At its March 8, 1994 public meeting, the FCC adopted a decision, the text of which has not yet been released, that establishes generic rules for competitive bidding, defines eligibility criteria for small businesses, minority-and female-owned businesses and rural telephone companies which qualify for preferential bidding treatment, as required under the Budget Act, and describes the bidding mechanisms to be used by businesses qualifying for preferential treatment in future spectrum auctions. The FCC deferred adoption of the competitive bidding rules for specific licensing situations. The Company believes that competitive bidding for licenses in any market could increase the cost of entry into that market to the extent of prevailing market prices for such licenses. The Company also believes that it has the financial resources to be a strong competitor for licensing in those markets in which it elects to compete, that the competitive bidding process should not materially increase the Company's aggregate cost of entering new markets and should result in more efficient granting of licenses than at present thereby permitting the winning bidder to commence service to customers promptly pursuant to such licenses. Under other amendments to the Communications Act included in the Budget Act, states will generally be prohibited from regulating the entry of, or the rates charged by, any CMRS provider. The new law does not, however, prohibit a state from regulating other terms and conditions of CMRS offerings and permits states to petition the FCC for authority to continue rate regulation. These new statutory provisions will take effect in August 1994. On September 23, 1993, the FCC decided to allocate seven Personal Communications Services ("PCS") frequency blocks for licensing, in the aggregate 120 Megahertz ("MHz") of spectrum for licensed operations, and an additional 40 MHz for unlicensed operations, including uses such as telephone PBX and wireless local area network operations. Two 30 MHz frequency blocks will be awarded for each of the 51 Rand McNally Major Trading Areas, while one 20 MHz and four 10 MHz frequency blocks will be awarded for each of the 492 Rand McNally Basic Trading Areas. Cellular operators will be permitted to participate in the award of these new PCS licenses, which will be made via a yet-to-be-defined auction process, except for licenses reserved for rural, small, minority-and female- owned businesses and licenses for markets in which such cellular operator owns a 20% or greater interest in a cellular licensee which holds a license covering 10% or more of the population of the respective PCS licensed area. In the latter case, the cellular licensee is limited to one 10 MHz PCS channel block. Numerous requests for reconsideration of the FCC's decision have been filed and remain pending before the FCC. In its March 8, 1994 decision referenced above, the FCC presumptively classified PCS as CMRS. The FCC has not adopted specific competitive bidding rules for the initial licensing of PCS spectrum or established a schedule for the commencement of PCS auctions. PCS technology is currently under development and is expected to be similar in some respects to cellular technology. When offered commercially, this technology is expected to offer increased capacity for wireless two-way and one-way voice, data and multimedia communications services and is expected to result in increased competition in each area of the Company's diversified telecommunications operations. The ability of these future PCS licensees to complement or compete with existing cellular licensees is uncertain, and may be affected by future FCC rule-making. It is expected that the new wireless services will be both complementary services and competitive alternatives to current cellular and landline telephone services. These and other future technological developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the services currently offered by the Company and its subsidiaries. There can be no assurance that the Company will not be adversely affected by such technological developments. 5 TELEPHONE OPERATIONS The Company's telephone operations are conducted through TDS Telecom and its 94 telephone subsidiaries. These telephone companies, ranging in size from less than 500 to more than 40,000 access lines, serve 356,200 access lines in 29 states. The Company provides modern, high-quality local and long-distance telephone service. Local service is provided by the Company's operating telephone subsidiaries. Long-distance or toll service is provided through connections with long-distance carriers, primarily AT&T Communications, Inc. ("AT&T"), and the Regional Bell Operating Companies ("RBOCs"). The Company anticipates that it will need to make arrangements with AT&T, the RBOCs and other large companies in order to offer certain software-intensive services such as information gateway services. There is no assurance that the Company will be able to obtain such arrangements or that such arrangements, if obtained, will be on terms favorable to the Company. Future growth in telephone operations is expected to be derived from the acquisition of additional telephone companies, from providing service to new or presently unserved establishments, from business expansion in the areas served by the Company, from upgrading existing customers to higher grades of service, from increased usage of the network through both local and long-distance calling and from providing additional services made possible by advances in technology. The following table summarizes certain information regarding the Company's telephone operations.
YEAR ENDED OR AT DECEMBER 31, -------------------------------------------------------------------- 1993 1992 1991 1990 1989 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) TELEPHONE OPERATIONS Access lines*.......................................... 356,200 321,700 304,000 278,700 263,900 % Residential........................................ 82.0 83.1 83.8 84.3 84.9 % Business (nonresidential).......................... 18.0 16.9 16.2 15.7 15.1 % Single-party....................................... 99.5 99.1 98.8 98.3 98.0 Total revenues......................................... $ 268,122 $ 238,095 $ 211,231 $ 194,100 $ 168,046 % Local service...................................... 26.9 27.4 29.0 28.9 29.4 % Network access and long-distance................... 59.3 57.9 57.0 57.2 57.2 Depreciation and amortization expense.................. $ 59,562 $ 51,946 $ 43,425 $ 38,281 $ 34,620 Operating income....................................... 79,110 72,218 65,242 62,707 49,971 Construction expenditures.............................. 82,233 67,357 67,856 70,308 57,614 Total identifiable assets.............................. $ 829,489 $ 723,855 $ 674,712 $ 567,498 $ 512,067 - --------- *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, 1989, TDS has acquired 29 telephone companies serving a total of 59,600 access lines for an aggregate consideration totalling $160.2 million. The consideration consisted of $61.9 million in cash and notes, 116,000 Preferred Shares and 2.5 million Common Shares of the Company. At December 31, 1993, the Company had agreements, awaiting regulatory or other approvals, to acquire two telephone companies which serve 17,600 access lines and which own minority cellular interests representing approximately 90,000 population equivalents. These acquisitions are expected to be completed for an aggregate consideration of approximately $53.2 million, consisting of approximately 1.1 million Common Shares of the Company. The Company continually evaluates acquisition opportunities. Telephone holding companies and others actively compete for the acquisition of telephone companies and such acquisitions are subject to the consent or approval of regulatory agencies in most states and, in some cases, to federal waivers that may affect the form of regulation or amount of interstate cost recovery of acquired telephone exchanges. 6 While management believes that it will be successful in making additional acquisitions, there can be no assurance that the Company will be able to negotiate additional acquisitions on terms acceptable to it or that regulatory approvals, where required, will be received. The Company maintains shelf registration of its Common Shares and Preferred Shares under the Securities Act of 1933 for issuance specifically in connection with acquisitions. It is the Company's policy to preserve, insofar as possible, the local management of each telephone company it acquires. The Company provides the telephone subsidiaries with centralized purchasing and general management and other services, at cost plus a reasonable rate of return on invested capital. These services afford the subsidiaries expertise in the following areas: finance, accounting and treasury services; marketing; customer service; traffic; engineering and construction; accounting and customer billing; rate administration; credit and collection; and the development of administrative and procedural practices. CONSTRUCTION AND DEVELOPMENT PROGRAM The Company's policy is to upgrade plant and equipment in presently owned and newly acquired telephone subsidiaries pursuant to an ongoing construction and development program. The Company makes major plant additions to upgrade service and replace existing facilities, and provides for routine plant additions. The program also allows the Company to enhance service and revenues and reduce costs by taking advantage of technological developments in the telecommunications industry. During 1993 the Company began replacing older switches with state-of-the-art 5ESS switches manufactured by AT&T. In 1994 the Company will continue to bring the advanced calling services of the AT&T 5ESS and Siemens Stromberg-Carlson EWSD to more of its customers by adding 14 additional host units. The Company's overall plan is to bring advanced calling services to all customers by the year 2000. The Company has converted facilities serving 96% of its access lines to digital switching technology and is installing high-capacity fiber optic cable facilities where appropriate and cost-effective. At December 31, 1993, the Company had approximately 1,900 route miles of fiber optic cable in service. Gross additions to plant and equipment were $82.2 million in 1993, $67.4 million in 1992, $67.9 million in 1991, $70.3 million in 1990 and $57.6 million in 1989. The Company estimates that gross additions for major construction projects and routine plant additions will total approximately $110 million in 1994, exclusive of pending acquisitions. The Company plans to continue financing its telephone construction program using internally generated cash supplemented by long-term financing from federal government programs. FEDERAL FINANCING AND HIGH COST SUPPORT PROGRAMS The Company's primary sources of long-term financing for additions to telephone plant and equipment have been the Rural Electrification Administration ("REA"), the Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of the United States of America. The REA has made primarily 35-year loans to telephone companies since 1949, at interest rates of 2% and 5%, for the purpose of improving telephone service in rural areas. The REA is authorized to make hardship loans at a 5% interest rate and cost of money loans at a rate not greater than 7%. The RTB, established in 1971, makes loans at interest rates based on its average cost of money (6.05% and 6.35% for its fiscal year ended September 30, 1993), and in some cases makes loans concurrently with REA loans. In addition, the REA guarantees loans made to telephone companies by the FFB at the federal cost of money (6.414% for a 35-year note at December 31, 1993). Substantially all of the Company's telephone plant is pledged or is subject to mortgages to secure obligations of the operating telephone companies to the REA, RTB and FFB. The amount of dividends on common stock that may be paid by the operating telephone companies is limited by certain financial requirements set forth in the mortgages. Of the $306.2 million of underlying retained earnings of the telephone subsidiaries at December 31, 1993, $79.1 million was available for the payment of dividends on the subsidiaries' common stock. At December 31, 1993, the Company's operating telephone companies had unadvanced loan commitments under the REA, RTB and FFB loan programs aggregating approximately $93.9 million, at a weighted average annual interest rate of 6.1%, to finance specific construction activities in 1994 and future years. These loan commitments are generally issued for five-year periods and may be extended 7 under certain circumstances. The Company's operating telephone companies have made applications for additional loans from the REA, RTB and FFB, and intend to make further applications as their needs arise. There is no assurance that these applications will be accepted or what the terms or interest rates of any future loan commitments will be. If funds were unavailable through the REA, RTB and FFB programs in the future and the subsidiaries were to borrow from conventional lenders at market rates, their cost of new loans might increase significantly. In that event, the Company would expect to seek higher local service rates to cover higher interest expense in order to maintain a reasonable balance between service to customers and local service rates. A number of the telephone subsidiaries recover a proportion of their costs via interstate support mechanisms. Reevaluation and probable modification of those mechanisms is expected. The interstate Universal Service Fund has been capped and indexed as an interim measure pending regulatory proceedings. Bills in Congress propose to widen the base of providers contributing to support for universal service but could involve development of new mechanisms and eligibility criteria. There is no assurance that cost recovery through direct and indirect interstate mechanisms will remain at current levels. Some telephone subsidiaries are in states where support and rate structures are under reevaluation or have been changed. There is no assurance that the states will continue to provide for cost recovery from current sources. The Company would expect to seek higher local service rates to recover costs for which current interstate or intrastate recovery may become unavailable. REGULATION Operating telephone companies are regulated by state regulatory agencies with respect to local rates, intrastate intra-LATA (Local Access Transport Area) toll rates, intrastate access charges billed to intrastate interexchange carriers, service areas, service standards, accounting and related matters. In a number of states, construction plans and borrowings and certain other financial transactions are also subject to regulatory approval. The switch replacement program discussed above will require some regulatory approval. The Company has sought and will continue to seek appropriate increases in local and other service rates and changes in rate structures to achieve reasonable rates and earnings. The FCC regulates interstate toll rates, interstate access charges paid by interexchange carriers to local exchange carriers and other matters relating to interstate telephone service. The FCC also regulates the use of radio frequencies in telephone operations. The Company's telephone subsidiaries participate in the National Exchange Carrier Association ("NECA") common line and traffic sensitive tariffs and participate in the access revenue pools administered by NECA for interstate services. Where applicable, the Company's subsidiaries also participate in intrastate access tariffs and toll-pooling arrangements approved by state regulatory authorities for intrastate intra-and inter-LATA services. Such interstate and intrastate arrangements are intended to compensate LECs, such as the Company's operating telephone companies, for the costs, including a fair rate of return, of facilities furnished in originating and terminating interstate and intrastate long-distance services. Various aspects of federal and state telephone regulation have, in recent years, been subject to re-examination and ongoing modification. In several states, toll revenue pooling arrangements that are the source of substantial revenues to local exchange companies are being replaced with access-charge-based arrangements. Access charges are typically priced to result in revenue flows similar to those realized in the toll-pooling process. To the extent they are not, the Company may seek adjustments in other rates. On September 19, 1990, the FCC approved a mandatory price cap plan on interstate access rates for the seven RBOCs and GTE, leaving the plan optional for all other local telephone operating companies. This follows a March 16, 1989 FCC decision allowing price cap regulation for AT&T's interstate services. The price cap approach differs from traditional rate-of-return regulation by focusing primarily on the prices of communications services. The intention of price cap regulation is to focus on productivity and the approved plan for telephone operating companies allows for the sharing with its customers of profits achieved by increasing productivity. Alternatives to rate-of-return regulation have also been adopted or proposed primarily for the RBOCs in some of the states in which the Company's operating subsidiaries do business. 8 On May 13, 1993, the FCC approved an alternative regulation plan for small and mid-sized telephone operating companies not electing price caps. This plan intends to reduce regulatory filing burdens under a form of modified rate-of-return. The Company's telephone subsidiaries have not elected the new FCC plan for 1994 and will remain in the NECA pools for this period. Since approximately one-third of the Company's telephone subsidiaries serve high-cost areas, important cost support mechanisms associated with the NECA pooling process would be lost if the Company elected either of the alternatives to rate-of-return regulation. On November 5, 1993, NECA filed with the FCC a Petition for Rulemaking proposing rule revisions to allow incentive settlement options within the NECA pools. The settlement options are designed to provide companies wishing to remain in the NECA pools with incentives similar to those previously adopted by the FCC but only available to non-NECA participants. Management has been involved in providing comments on this plan and continues to evaluate opportunities under all forms of regulation. COMPETITION As a result of a series of FCC, court and state regulatory agencies' decisions, competition has been introduced in certain sectors of the telephone industry, including interstate and intrastate toll, special access services and customer premises equipment. Landline facilities-based competition in intrastate intra-LATA markets is currently prohibited in some of the various states where the Company provides service. On September 17, 1992, the FCC took a step toward introducing competition in the local exchange access business by ordering that competitive access providers, interexchange carriers and others have the right to directly interconnect facilities in the central offices of tier one telephone companies for the provision of interstate special access services. A related proceeding adjusted the interstate transport rate structure to reflect the policy of promoting interstate access competition. The intent of these orders and other related FCC decisions is to allow interstate special access competition with telephone companies and provide telephone companies with increased pricing flexibility, allowing them to compete on fair terms with the new entrants. On August 3, 1993, the FCC adopted a framework parallel to their special access interconnection rules for interstate switched access transport services. Less than one percent of the Company's consolidated revenues are derived from special access transport services and less than seven percent are derived from switched access transport services. Further, the rules do not apply to the Company's telephone subsidiaries, but could lead to changes in other FCC rules and policies that affect the way certain services are priced. Bills are pending in both Houses of Congress that propose to open local exchange and other telecommunications services to competition and apply expanded interconnection requirements to some or all local exchange telephone companies. Technological developments in cellular telephone, digital microwave, coaxial cable, fiber optics and other wireless and wired technologies may further permit the development of alternatives to traditional landline service. The Company and many other members of the local exchange carrier industry are seeking to maintain a strong universally affordable public telecommunications network through regulatory policies and programs that are sensitive to the needs of small communities and rural areas serviced by many of the Company's telephone subsidiaries. Certain providers and users of toll service may seek to bypass the LEC's switching services and local distribution facilities, particularly if services are not strategically priced. There are three primary ways which users of toll service may bypass the Company's switching services. First, users may construct and operate or lease facilities to transmit their traffic to an interexchange carrier. Second, certain interexchange carriers provide services which allow users to divert their traffic from the LEC's usage-sensitive services to their flat-rate services. Third, users may choose to use cellular telephone service to bypass the LEC's switching services. The Company's telephone subsidiaries have experienced only a small loss of traffic to such bypass. The Company and the exchange carrier industry are seeking to address bypass by advocating flexible pricing, including reduced pricing of access and toll services, where appropriate. The FCC released other significant orders and proposed rulemakings during 1992 and 1993 which are intended to further promote competition in video and voice communications and which may provide the Company with increased communications opportunities. On August 14, 1992, the FCC issued a "video dialtone" order permitting telephone companies greater participation in the video marketplace. Video dialtone enables telephone companies to provide 9 network distribution platforms, various ancillary services such as billing and collections, and enhanced gateway services on behalf of video programmers. The FCC also tentatively concluded that the CATV rural exemption should be increased from its current population ceiling for communities in the service areas of 2,500 to 10,000. The rural exemption sets a population benchmark defining areas where a telephone company can directly provide cable TV service to its telephone customers. In addition, the FCC has authorized cellular telephone and other technologies as discussed above under "Regulatory Developments" which may be competitive with traditional telephone operations as well as provide new business opportunities. The Company actively monitors these proceedings seeking to protect its interests, and continues to evaluate new business opportunities that arise out of these regulatory decisions. The Clinton Administration has made its intentions known, through Vice President Gore, to develop a national communications policy, backed by legislation. The policy will be directed toward creation of a broadband interactive National Information Infrastructure. The administration has advocated legislation based on five principles: to encourage private investment, to provide and protect competition, to provide open access to the network, to take action to avoid creating a society of information "haves" and "have nots" and to encourage flexible and responsive governmental action. Because of the legislation proposed by leadership in each house of Congress and the Administration's initiatives, the Company expects that there eventually may be open entry in nearly every aspect of communications. On the other hand, Vice President Gore and certain House and Senate bills suggest that all participants should contribute to universal service and intend, to varying degrees, that geographic location should not determine who has access to an advanced infrastructure. The Company believes high-cost funds and similar cost-averaging methods should continue to be employed to ensure that advanced services reach rural areas. It plans to compete by providing high-quality advanced voice, video, data and image services. CELLULAR TELEPHONE OPERATIONS THE CELLULAR TELEPHONE INDUSTRY THE CELLULAR TELEPHONE INDUSTRY. The cellular telephone industry has been in existence for approximately eleven years in the United States. Although the industry is still relatively new, it has grown significantly during this period. According to the Cellular Telecommunications Industry Association, at December 31, 1993, there were estimated to be over 16 million cellular customer units in service in the United States, generating nearly $11 billion of revenue per year. Cellular service is now available throughout the United States. The commercial feasibility of cellular systems in the United States has not, however, been proven over a long period of time. Cellular telephone technology provides high-quality, high-capacity communications services to in-vehicle cellular telephones and hand-held portable cellular telephones. Cellular technology is a major improvement over earlier mobile telephone technologies. Cellular telephone systems are designed to allow for maximum mobility of the customer. In addition to mobility, cellular telephone systems provide access through system interconnections to local, regional, national and world-wide telecommunications networks. Cellular telephone systems also offer a full range of ancillary services such as conference calling, call-waiting, call-forwarding, voice mail, facsimile and data transmission. Cellular telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers operating on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSO is connected to the conventional ("landline") telephone network. Each conversation on a cellular phone involves a transmission over a specific range of radio frequencies from the cellular phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSO and from there may be forwarded to the landline telephone network to complete the call. As the cellular telephone moves from one cell to another, the MTSO determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call. 10 USM provides cellular telephone service under licenses granted by the FCC. The FCC grants only two licenses to provide cellular telephone service in each market. However, competition for customers includes competing communications technologies such as conventional landline and mobile telephone, SMR systems and radio paging. In addition, emerging technologies such as Enhanced Specialized Mobile Radio ("ESMR"), mobile satellite communication systems, second generation cordless telephones ("CT-2") and PCS may prove to be competitive with cellular service in the future in some or all of the markets where USM has operations. The services available to cellular customers and the sources of revenue available to cellular system operators are similar to those provided by conventional landline telephone companies. Customers are charged a separate fee for system access, airtime, long-distance calls, and ancillary services. Technical standards require that analog cellular telephones be compatible with all cellular systems in all market areas in the United States. Because of this compatibility feature, cellular system operators often provide service to customers of other operators' cellular systems while the customers are temporarily located within the operators' service areas. Customers using service away from their home system are called "roamers." The system that provides the service to these roamers will generate usage revenue. Many operators, including USM, charge premium rates for this roaming service. There are a number of recent technical developments in the cellular industry. Currently, while most of the MTSOs process information digitally, most of the radio transmission is done on an analog basis. Digital radio technology offers advantages, including less transmission noise, greater system capacity, and potentially lower incremental costs for additional customers. The conversion from analog to digital radio technology is expected to be an industry-wide process that will take a number of years. During 1992, a new transmission technique was approved for implementation by the cellular industry. Time Division Multiple Access ("TDMA") technology was selected as one industry standard by the cellular industry and has been deployed in several markets, including USM's operations in Tulsa, Oklahoma. However, another digital technology, Code Division Multiple Access ("CDMA"), is expected to be in a commercial trial by the end of 1994. USM expects to deploy some digital radio channels in other markets in the near future. The cellular telephone industry is characterized by high initial fixed costs. Accordingly, if and when revenues less variable costs exceed fixed costs, incremental revenues should yield an operating profit. The amount of profit, if any, under such circumstances is dependent on, among other things, prices and variable marketing costs which in turn are affected by the amount and extent of competition. Until technological limitations on total capacity are approached, additional cellular system capacity can normally be added in increments that closely match demand and at less than the proportionate cost of the initial capacity. CERTAIN CONSIDERATIONS REGARDING CELLULAR TELEPHONE OPERATIONS A significant portion of the aggregate market value of TDS's Common Shares is represented by the market value of TDS's interest in USM. Since its inception in 1983, USM has principally been in a start-up phase in which its activities have been concentrated significantly on the acquisition of interests in entities licensed or designated to receive a license ("licensees") from the FCC to provide cellular service and on the construction and initial operation of cellular systems. The development of a cellular system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. USM has experienced operating losses and net losses in all but a few quarters since its inception. USM may incur operating losses for the next few quarters, and there is no assurance that future operations, individually or in the aggregate, will be profitable. The licensing (including renewal of licenses), construction, operation, sale, interconnection arrangements and acquisition of cellular systems are regulated by the FCC and various state public utility commissions. Changes in the regulation of cellular operators or their activities and of other mobile service providers (such as the decision by the FCC to permit PCS licensees) could have a material adverse effect on USM's operations. See "Legal Proceedings - -- La Star Application" for a discussion of certain FCC proceedings which have suspended the Company's and USM's licensing authority in a Wisconsin market pending the outcome of an FCC hearing. 11 The number of population equivalents represented by USM's cellular interests bears no direct relationship to the number of potential cellular customers or the revenues that may be realized from the operation of the related cellular systems. The fair market value of USM's cellular interests will ultimately depend on the success of its operations. There is no assurance that the value of cellular interests will not be significantly lower in the future than at present. While there are numerous cellular systems operating in the United States and other countries, the industry has only a limited operating history. As a result, there is uncertainty regarding its future, including, among other factors: (i) the growth in customers; (ii) the usage and pricing of cellular services; (iii) the percentage of customers who terminate service each month (the "churn rate"); (iv) the cost of providing cellular services, including the cost of attracting new customers; and (v) continuing technological advances which may provide competitive alternatives. Media reports have suggested that certain radiofrequency ("RF") emissions from portable cellular telephones might be linked to cancer. USM has reviewed relevant scientific information and, based on such information, is not aware of any credible evidence linking the usage of portable cellular telephones with cancer. The FCC currently has a rulemaking proceeding pending to update the guidelines and methods it uses for evaluating RF emissions in radio equipment, including cellular telephones. While the proposal would impose more restrictive standards on RF emissions from low-power devices such as portable cellular telephones, it is anticipated that all cellular telephones currently marketed and in use will comply with those standards. CELLULAR OPERATIONS USM is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage cellular telephone systems. Its cellular interests include market clusters in Northern Florida, Eastern Tennessee/Western North Carolina, Eastern North Carolina/ Virginia, Maine/New Hampshire/Vermont, West Virginia/Pennsylvania/Maryland, Indiana/Kentucky, Iowa, Wisconsin/Illinois/Minnesota, Oklahoma, Missouri, Southwestern Texas, Texas/Oklahoma, Oregon/California and Washington/Idaho areas. See "The Company's Cellular Interests." USM has acquired its cellular interests through the wireline application process (22%), including settlements and exchanges with other applicants, and through acquisitions (78%), including acquisitions from TDS and third parties. USM's management plans to retain minority interests in certain cellular markets which it believes will earn a favorable return on investment. Other minority interests may be traded for interests in markets which enhance USM's market clusters or may be sold for cash or other consideration. CELLULAR SYSTEMS DEVELOPMENT ACQUISITIONS. During the last three years, USM has aggressively expanded its size, particularly in markets which share adjacency, through an ongoing acquisition program aimed at strengthening USM's position in the cellular industry. This growth has resulted primarily from acquisitions of interests in RSAs and has been based on obtaining interests with rights to manage the underlying market. The Company has nearly tripled its population equivalents from approximately 8.4 million at December 31, 1988, to approximately 23.7 million at December 31, 1993. Similarly, markets managed or to be managed by USM have increased from 33 markets at December 31, 1988, to 144 markets at December 31, 1993. As of December 31, 1993, almost 86% of the Company's population equivalents represented interests in markets USM manages or expects to manage, compared to 62% at December 31, 1988. USM seeks and is currently negotiating for the acquisition of additional cellular interests and plans to acquire significant additional cellular interests in markets that complement its developing market clusters and in other attractive markets. USM also seeks to acquire minority interests in markets where it already owns (or has the right to acquire) the majority interest. At the same time USM continues to evaluate the disposition of interests which are not essential to its corporate development strategy. 12 USM, or TDS for the benefit of USM, will ordinarily make acquisitions using securities or cash or by exchanging cellular interests it already owns. There is no assurance that USM will be able to purchase any additional interests, or that any such additional interests, if purchased, will be purchased on terms that are favorable to USM. USM, or TDS for the benefit of USM, has negotiated acquisitions of cellular interests from third parties primarily in consideration for USM's Common Shares or TDS's Common or Preferred Shares. Cellular interests acquired by TDS are generally assigned to USM. At that time, USM reimburses TDS for the value of TDS securities issued in such transactions, generally by issuing Common Shares and Preferred Stock (redeemable by the delivery of Common Shares) to TDS or by increases to the balance due TDS under USM's Revolving Credit Agreement in amounts equal to the value of TDS capital stock at the time the acquisitions are closed. The fair market value of the Common Shares and Preferred Stock issued to TDS in connection with these transactions is equal to the fair market value of the TDS securities issued in the transactions and is determined at the time the transactions are closed. In cases where USM's Common Shares are used as consideration in connection with acquisitions, most of the agreements call for such shares to be delivered in 1994 and later years. In a limited number of transactions, USM has agreed to pay some portion of the purchase price in cash. COMPLETED ACQUISITIONS. During 1993, the Company completed the acquisition of controlling interests in 25 markets and several minority interests representing approximately 3.8 million population equivalents for an aggregate consideration of $281.9 million. The consideration consisted of 6.1 million TDS Common Shares, 157,000 USM Common Shares, $19.5 million in cash, 29,000 shares of subsidiary preferred stock which are exchangeable into 73,000 TDS Common Shares, and the obligation to deliver approximately 140,000 USM Common Shares to third parties in 1994. USM reimbursed TDS for TDS securities issued and cash paid in the acquisitions through an increase in the debt to TDS under the Revolving Credit Agreement of $101.5 million and the issuance to TDS of 5.5 million USM Common Shares. PENDING ACQUISITIONS. At December 31, 1993, TDS and/or USM had entered into agreements to acquire controlling interests in nine markets and a minority interest representing approximately 1.2 million population equivalents for an aggregate consideration estimated to be approximately $128.4 million. If all of the pending acquisitions are completed as planned, TDS and/or USM will issue approximately 2.4 million TDS Common Shares, all of which are expected to be issued in 1994, and 49,000 USM Common Shares, and will pay approximately $6.2 million in cash. Any interests acquired by TDS in these transactions are expected to be assigned to USM and at that time, USM will reimburse TDS for TDS's consideration delivered and costs incurred in such acquisitions in the form of USM Common Shares or increases in the balance under the Revolving Credit Agreement. In addition to the agreements discussed above, the Company has agreements to acquire interests representing 302,000 population equivalents in three markets. The consideration for these acquisitions will be determined based on future appraisals of the fair market values of the interests to be acquired. All population equivalents pursuant to these agreements are included in the table on pages 15 to 18. TDS and USM maintain shelf registration of their respective Common Shares and Preferred Shares under the Securities Act of 1933 for issuance specifically in connection with acquisitions. CELLULAR INTERESTS AND CLUSTERS USM operates clusters of adjacent cellular systems, enabling its customers to benefit from a larger service area than otherwise possible. USM's strategy was initially implemented by filing for licenses to operate cellular systems in MSAs. Following the MSA lotteries and settlements, USM acquired interests in certain additional MSAs through purchases. USM has acquired substantial additional population equivalents through the purchase of interests in RSAs. USM plans to continue to acquire controlling interests in cellular licenses to provide service in systems that complement its developing market clusters and in other attractive systems. USM anticipates that clustering markets will expand its cellular service areas and provide certain economies in its capital and operating costs. In areas where USM has clusters of contiguous markets it may offer wide-area coverage. This would allow uninterrupted service within the area and allow the customer to make outgoing and receive incoming calls without special roamer arrangements. Clustering 13 also makes possible greater sharing of facilities, personnel and other costs and may thereby reduce the costs of serving each customer. The extent to which these revenue enhancements and economies of operation will be realized through clustering is dependent upon market conditions, population sizes of the clusters and engineering considerations. USM's market clusters have grown rapidly. At December 31, 1993, approximately 87%, or 17.7 million, of USM's managed population equivalents were in contiguous markets within market clusters. Additionally, 92% of USM's managed markets were adjacent to another USM-managed market at that time. USM anticipates continuing to pursue strategic acquisitions and trades in order to complement its developing market clusters. USM has also acquired minority interests in markets where it already owns, or has the right to acquire, a majority interest. From time to time, USM may consider trading or selling some of its cellular interests which do not fit well with its long-term strategies. USM owned or had the right to acquire interests in cellular telephone systems in 205 markets at December 31, 1993. At December 31, 1993, approximately 86%, or 20.4 million, of USM's population equivalents were in markets that USM manages or expects to manage. At that date, approximately 95% of USM's managed population equivalents were in markets where cellular service has been initiated and where USM is currently operating the system. The following table summarizes the growth in USM's population equivalents in recent years and the development status of these population equivalents.
DECEMBER 31, ----------------------------------------------------- 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- (THOUSANDS OF POPULATION EQUIVALENTS)(1) Operational Markets: Majority-Owned and Managed........................................... 18,212 14,268 10,427 5,110 4,060 Minority-Owned and Managed(2)........................................ 1,139 2,007 1,755 1,291 994 Markets Under Construction and to be Managed:(3) Majority-Owned....................................................... 996 1,811 2,973 4,372 2,458 Minority-Owned(2).................................................... 6 5 122 444 757 --------- --------- --------- --------- --------- Total Markets Managed and to be Managed.............................. 20,353 18,091 15,277 11,217 8,269 Minority Interests in Markets Managed by Others........................ 3,378 3,474 3,229 3,428 3,482 --------- --------- --------- --------- --------- Total................................................................ 23,731 21,565 18,506 14,645 11,751 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- - --------- (1) Based on 1993 Donnelley Marketing Services estimates for all years. (2) Includes markets where USM has the right to acquire an interest but does not currently own an interest. (3) Includes markets which are operational but which are currently managed by third parties.
The following section details USM's cellular interests, including those it owned or had the right to acquire as of December 31, 1993. The table presented therein lists clusters of markets, including both MSAs and RSAs, that USM operates or anticipates operating. USM's market clusters show the areas in which USM is currently focusing its development efforts. These clusters have been devised with a long-term goal of allowing delivery of cellular service to areas of economic interest and along corridors of economic activity. 14 THE COMPANY'S CELLULAR INTERESTS The table below sets forth certain information with respect to the interests in cellular markets which USM and TDS owned or had the right to acquire pursuant to definitive agreements as of December 31, 1993.
PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1993 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ---------- ----------- -------------- -------- ----------------- MARKETS MANAGED BY THE COMPANY: EASTERN NORTH CAROLINA/VIRGINIA: Northampton (NC 8)...................... 282,000 100.00% 100.00% 282,000 Rockingham (NC 7)....................... 276,000 100.00 100.00 276,000 Harnett (NC 10)......................... 266,000 100.00 100.00 266,000 Greene (NC 13).......................... 235,000 100.00 100.00 235,000 Greenville (NC 14)...................... 232,000 100.00 100.00 232,000 Hoke (NC 11)............................ 212,000 100.00 100.00 212,000 Chesterfield (SC 4)..................... 209,000 100.00 100.00 209,000 Bedford (VA 4).......................... 171,000 100.00 100.00 171,000 Sampson (NC 12)......................... 120,000 100.00 100.00 120,000 Chatham (NC 6).......................... 146,000 81.16 81.16 119,000 Camden (NC 9)........................... 117,000 100.00 100.00 117,000 Buckingham (VA 7)....................... 88,000 100.00 100.00 88,000 Bath (VA 5)............................. 62,000 100.00 100.00 62,000 ---------- ----------------- 2,416,000 2,389,000 ---------- ----------------- WISCONSIN/ILLINOIS/MINNESOTA: Peoria, IL.............................. 346,000 100.00 100.00 346,000 Jo Daviess (IL 1)....................... 313,000 100.00 100.00 313,000 Vernon (WI 8)(2)*....................... 227,000 100.00 100.00 227,000 Adams (IL 4)(3)*........................ 216,000 100.00 100.00 216,000 Mercer (IL 3)........................... 204,000 100.00 100.00 204,000 Rochester, MN*.......................... 113,000 69.80 30.20% 100.00 113,000 Pierce (WI 5)........................... 92,000 100.00 100.00 92,000 Wausau, WI*............................. 119,000 71.76 71.76 85,000 Trempealeau (WI 6)(3)................... 81,000 100.00 100.00 81,000 LaCrosse, WI............................ 99,000 52.08 52.08 52,000 ---------- ----------------- 1,810,000 1,729,000 ---------- ----------------- EASTERN TENNESSEE/WESTERN NORTH CAROLINA: Knoxville, TN*.......................... 531,000 96.03 96.03 510,000 Henderson (NC 4)(3)*.................... 271,000 100.00 100.00 271,000 Whitfield (GA 1)........................ 206,000 100.00 100.00 206,000 Asheville, NC*.......................... 200,000 100.00 100.00 200,000 Bledsoe (TN 7)(3)*...................... 139,000 96.03 96.03 133,000 Giles (TN 6)*........................... 153,000 80.00 80.00 122,000 Hamblen (TN 4)(3)*...................... 121,000 100.00 100.00 121,000 Lake (TN 1)*............................ 75,000 16.33 83.67 100.00 75,000 Macon (TN 3)*........................... 323,000 16.67 16.67 54,000 Yancey (NC 2)(3)*....................... 30,000 100.00 100.00 30,000 ---------- ----------------- 2,049,000 1,722,000 ---------- ----------------- IOWA: Des Moines, IA.......................... 410,000 100.00 100.00 410,000 Davenport, IA-IL........................ 360,000 97.37 97.37 350,000 Humboldt (IA 10)........................ 182,000 100.00 100.00 182,000 Cedar Rapids, IA........................ 173,000 83.16 83.16 143,000 Waterloo-Cedar Falls, IA................ 149,000 73.27 73.27 109,000 Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000 Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000 Mills (IA 1)............................ 62,000 100.00 100.00 62,000 Dubuque, IA............................. 88,000 70.01 70.01 61,000 Audubon (IA 7).......................... 55,000 100.00 100.00 55,000 Union (IA 2)............................ 50,000 100.00 100.00 50,000 Monroe (IA 3)*.......................... 90,000 49.00 49.00 44,000 Winneshiek (IA 12)*..................... 115,000 24.50 24.50 28,000 Ida (IA 9)*............................. 63,000 16.67 16.67 11,000 ---------- ----------------- 1,972,000 1,680,000 ---------- ----------------- MAINE/NEW HAMPSHIRE/VERMONT: Manchester-Nashua, NH................... 336,000 86.43 86.43 291,000 Kennebec (ME 3)......................... 221,000 100.00 100.00 221,000 Coos (NH 1)*............................ 221,000 100.00 100.00 221,000 Somerset (ME 2)......................... 158,000 100.00 100.00 158,000 Bangor, ME.............................. 148,000 73.33 73.33 108,000
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PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1993 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ---------- ----------- -------------- -------- ----------------- MARKETS MANAGED BY THE COMPANY: (CONTINUED) MAINE/NEW HAMPSHIRE/VERMONT: (CONTINUED) Addison (VT 2)(3)*...................... 105,000 100.00% 100.00% 105,000 Washington (ME 4)*...................... 85,000 100.00 100.00 85,000 Oxford (ME 1)........................... 82,000 100.00 100.00 82,000 Lewiston-Auburn, ME..................... 103,000 75.06 75.06 78,000 ---------- ----------------- 1,459,000 1,349,000 ---------- ----------------- WEST VIRGINIA/PENNSYLVANIA/MARYLAND: Monongalia (WV 3)*...................... 266,000 100.00 100.00 266,000 Greene (PA 9)........................... 187,000 20.00 80.00% 100.00 187,000 Grant (WV 4)*........................... 164,000 100.00 100.00 164,000 Tucker (WV 5)*.......................... 129,000 100.00 100.00 129,000 Hagerstown, MD* #....................... 125,000 100.00 100.00 125,000 Cumberland, MD*......................... 102,000 100.00 100.00 102,000 Wetzel (WV 2)........................... 79,000 100.00 100.00 79,000 Bedford (PA 10)(3)*..................... 50,000 100.00 100.00 50,000 Garrett (MD 1)*......................... 30,000 100.00 100.00 30,000 ---------- ----------------- 1,132,000 1,132,000 ---------- ----------------- MISSOURI: Joplin, MO*............................. 138,000 49.67 50.33 100.00 138,000 Columbia, MO*........................... 119,000 100.00 100.00 119,000 Brown (KS 5)............................ 119,000 100.00 100.00 119,000 Stone (MO 15)........................... 103,000 100.00 100.00 103,000 Laclede (MO 16)......................... 92,000 100.00 100.00 92,000 Washington (MO 13)...................... 88,000 100.00 100.00 88,000 Callaway (MO 6)*........................ 84,000 100.00 100.00 84,000 Madison (AR 1).......................... 70,000 51.00 49.00 100.00 70,000 Linn (MO 5)............................. 68,000 100.00 100.00 68,000 DeKalb (MO 4)........................... 68,000 100.00 100.00 68,000 Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000 Shannon (MO 17)*........................ 54,000 100.00 100.00 54,000 Atchison (MO 1)......................... 43,000 100.00 100.00 43,000 ---------- ----------------- 1,102,000 1,102,000 ---------- ----------------- NORTHERN FLORIDA: Worth (GA 14)........................... 237,000 100.00 100.00 237,000 Gainesville, FL......................... 216,000 100.00 100.00 216,000 Toombs (GA 11).......................... 147,000 100.00 100.00 147,000 Early (GA 13)*.......................... 144,000 100.00 100.00 144,000 Walton (FL 10) #........................ 107,000 100.00 100.00 107,000 Putnam (FL 5)........................... 103,000 100.00 100.00 103,000 Jefferson (FL 8)........................ 52,000 100.00 100.00 52,000 Dixie (FL 6)............................ 50,000 100.00 100.00 50,000 Calhoun (FL 9)#......................... 39,000 100.00 100.00 39,000 ---------- ----------------- 1,095,000 1,095,000 ---------- ----------------- WASHINGTON/IDAHO: Clark (ID 6)............................ 281,000 100.00 100.00 281,000 Richland-Kennewick-Pasco, WA*........... 164,000 100.00 100.00 164,000 Butte (ID 5)............................ 149,000 100.00 100.00 149,000 Yakima, WA*............................. 202,000 54.55 54.55 110,000 Okanogan (WA 4)......................... 110,000 100.00 100.00 110,000 Umatilla (OR 3)*........................ 145,000 60.42 60.42 88,000 Pacific (WA 6)*......................... 174,000 49.00 49.00 85,000 Kittitas (WA 5)(3)*..................... 66,000 83.50 83.50 55,000 Hood River (OR 2)*...................... 68,000 27.98 (5.98) 22.00 15,000 Skamania (WA 7)* #...................... 26,000 22.00 22.00 6,000 ---------- ----------------- 1,385,000 1,063,000 ---------- ----------------- INDIANA/KENTUCKY: Meade (KY 3)............................ 300,000 100.00 100.00 300,000 Evansville, IN.......................... 316,000 78.13 78.13 247,000 Owen (IN 7)............................. 219,000 100.00 100.00 219,000 Union (KY 2)............................ 126,000 100.00 100.00 126,000 Owensboro, KY........................... 89,000 78.69 78.69 70,000 Warren (IN 5)*.......................... 119,000 33.33 33.33 40,000 Miami (IN 4)*........................... 182,000 14.29 14.29 26,000 ---------- ----------------- 1,351,000 1,028,000 ---------- -----------------
16
PERCENTAGE ACQUIRABLE TOTAL CURRENT AND CURRENT UNDER ACQUIRABLE 1993 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ---------- ----------- -------------- -------- ----------------- MARKETS MANAGED BY THE COMPANY: (CONTINUED) TEXAS/OKLAHOMA: Cherokee (TX 11)(4)..................... 275,000 100.00% 100.00% 275,000 Garvin (OK 9)........................... 197,000 100.00 100.00 197,000 Tyler, TX (4)........................... 158,000 100.00 100.00 158,000 Haskell (OK 10)......................... 82,000 100.00% 100.00 82,000 Wichita Falls, TX*...................... 130,000 49.66 1.99 51.65 67,000 Lawton, OK*............................. 112,000 100.00 (48.35) 51.65 58,000 Jackson (OK 8)*......................... 96,000 34.00 17.65 51.65 50,000 Hardeman (TX 5)(3)*..................... 37,000 16.33 35.32 51.65 19,000 Briscoe (TX 4)(3)*...................... 11,000 49.00 2.65 51.65 6,000 Beckham (OK 7)(3)*...................... 10,000 34.00 17.65 51.65 5,000 ---------- ----------------- 1,108,000 917,000 ---------- ----------------- OREGON/CALIFORNIA: Coos (OR 5)............................. 247,000 100.00 100.00 247,000 Del Norte (CA 1)........................ 209,000 100.00 100.00 209,000 Medford, OR*............................ 158,000 100.00 100.00 158,000 Mendocino (CA 9)........................ 139,000 100.00 100.00 139,000 Modoc (CA 2)............................ 59,000 100.00 100.00 59,000 Crook (OR 6)*........................... 177,000 33.33 33.33 59,000 ---------- ----------------- 989,000 871,000 ---------- ----------------- SOUTHWESTERN TEXAS: Atascosa (TX 19)........................ 213,000 100.00 100.00 213,000 Edwards (TX 18)......................... 202,000 100.00 100.00 202,000 Laredo, TX.............................. 149,000 91.78 91.78 137,000 Wilson (TX 20).......................... 134,000 100.00 100.00 134,000 Victoria, TX............................ 78,000 96.22 96.22 75,000 ---------- ----------------- 776,000 761,000 ---------- ----------------- OKLAHOMA: Tulsa, OK*.............................. 780,000 55.06 55.06 429,000 Seminole (OK 6)......................... 214,000 100.00 100.00 214,000 ---------- ----------------- 994,000 643,000 ---------- ----------------- OTHER OPERATIONS: Union (PA 8)*........................... 407,000 100.00 100.00 407,000 Jefferson (NY 1)........................ 256,000 54.00 46.00 100.00 256,000 Tuscarawas (OH 7)....................... 253,000 100.00 100.00 253,000 Poughkeepsie, NY........................ 262,000 81.05 81.05 213,000 Newton (IN 1)+.......................... 210,000 100.00 100.00 210,000 Glades (FL 2)+.......................... 206,000 100.00 100.00 206,000 Atlantic City, NJ#...................... 327,000 8.74 50.01 58.75 192,000 Kosciusko (IN 2)........................ 163,000 100.00 100.00 163,000 Hawaii (HI 3)........................... 136,000 100.00 100.00 136,000 Fort Pierce, FL (5)*.................... 271,000 49.00 49.00 133,000 Cheboygan (MI 4)*....................... 128,000 100.00 100.00 128,000 Williamsport, PA*....................... 121,000 100.00 100.00 121,000 Ross (OH 9)*............................ 243,000 49.00 49.00 119,000 Copiah (MS 9)#.......................... 117,000 100.00 100.00 117,000 Williams (OH 1)*........................ 126,000 75.00 75.00 95,000 Vineland-Millville-Bridgeton, NJ........ 139,000 67.23 67.23 94,000 St. Cloud, MN*.......................... 202,000 14.29 14.29 29,000 ---------- ----------------- 3,567,000 2,872,000 ---------- ----------------- Total Population Equivalents of Managed Markets...................... 23,205,000 20,353,000 ---------- ----------------- MARKETS MANAGED BY OTHERS: Los Angeles, Oxnard, CA*................ 15,281,000 5.50 5.50 840,000 Nashville/Clarksville-Hopkinsville, TN-KY*................................. 1,200,000 49.00 49.00 588,000 Baton Rouge, LA (6)*.................... 553,000 52.00 52.00 288,000 Seattle-Everett/Tacoma/Bremerton, WA*... 2,931,000 6.25 6.25 184,000 Biloxi/Pascagoula, MS*.................. 334,000 49.00 49.00 164,000 Oklahoma City, OK*...................... 963,000 14.60 14.60 141,000 McAllen, TX............................. 419,000 26.20 26.20 110,000 Portsmouth-Dover-Rochester, NH-ME*...... 269,000 40.00 40.00 107,000 Others (Fewer than 100,000 population equivalents each)...................... 956,000 ----------------- Total Population Equivalents of Markets Managed by Others........................................ 3,378,000 ----------------- Total Population Equivalents..................................................................... 23,731,000 ----------------- ----------------- - --------- * Designates wireline system.
17 + Designates non-operational system. # Designates operational system managed by third parties until USM acquires a controlling interest. (1) Interests under these agreements are expected to be acquired at the various times specified therein following the satisfaction of customary closing conditions. (2) USM's interest in the license for this market has been set aside by the FCC. USM is currently operating the market under interim operating authority granted by the FCC. See Item 3, "Legal Proceedings -- La Star Application." (3) This market has been or will be partitioned into more than one licensed area. The 1993 population, percentage ownership and number of population equivalents shown is for the licensed area within the market in which USM owns or has the right to acquire an interest. (4) USM's interests in these markets are the subject of litigation. See Item 3., "Legal Proceedings -- Townes Telecommunications, Inc., et. al. v. TDS, et. al." (5) USM owns 80% of the entity which owns and operates this market but has only a 49% interest in the earnings and profits. (6) Represents a noncontrolling limited partnership interest.
SYSTEM DESIGN AND CONSTRUCTION. USM designs and constructs its systems in a manner it believes will permit it to provide high-quality service to mobile, transportable and portable cellular telephones, generally based on market and engineering studies which relate to specific markets. Engineering studies are performed by USM personnel or independent engineering firms. USM's switching equipment is digital, which reduces noise and crosstalk and is capable of interconnecting in a manner which reduces costs of operation. While digital microwave interconnections are typically made between the MTSO and cell sites, primarily analog radio transmission is used between cell sites and the cellular telephones themselves. In accordance with its strategy of building and strengthening market clusters, USM has selected high capacity with service-upgraded digital cellular switching systems that are capable of serving multiple markets via a single MTSO. USM's cellular systems are designed to facilitate the installation of equipment which will permit microwave interconnection between the MTSO and each cell site. USM has implemented such microwave interconnection in most of the cellular systems it manages. In other systems in which USM owns or has an option to purchase a majority interest and where it is believed to be cost-efficient, such microwave technology will also be implemented. Otherwise, such systems will rely upon landline telephone connections or microwave links owned by others to link cell sites with the MTSO. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company, while generally improving system reliability. In addition, microwave facilities can be used to connect separate cellular systems to allow shared switching, which reduces the aggregate cost of the equipment necessary to operate both systems. USM has continued to expand its internal, nationwide seamless network in 1993 to encompass over 100 markets in the United States. This network provides automatic call delivery for USM's customers and handoff between adjacent markets. The seamless network has also been extended, using IS-41 technology, via links with certain systems operated by several other carriers, incuding GTE, US West, Ameritech, BellSouth, Centennial Cellular Corp., Southwestern Bell, McCaw Cellular Communications, Inc., Vanguard Cellular Systems, Inc. and others. Additionally, USM has conducted Signaling System 7 field trials with AT&T and with Independent Telephone Network to determine the most viable approach to establish a backbone network that will enable USM to interface with other national networks. During 1994, USM expects to significantly extend the seamless network for its customers into additional areas in Texas, Arkansas, Indiana, Idaho, Utah, California, Louisiana, Massachusetts, Washington, Florida and several other states. Not only will this expanded network increase the area in which customers can automatically receive incoming calls, but it will also reduce the incidence of fraud due to the pre-call validation feature of the IS-41 technology. USM believes that currently available technologies will allow sufficient capacity on USM's networks to meet anticipated demand over the next few years. 18 COSTS OF SYSTEM CONSTRUCTION AND FINANCING Construction of cellular systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, MTSOs, cell site equipment, microwave equipment, customer equipment, engineering and installation. USM, consistent with FCC control requirements, uses primarily its own personnel to engineer and oversee construction of each cellular system where it owns or has the right to acquire a controlling interest. In so doing, USM expects to improve the overall quality of its systems and to reduce the expense and time required to make them operational. The costs (exclusive of license costs) of the operational systems in which USM owns or has the right to acquire an interest are generally financed through capital contributions or intercompany loans to the partnerships or subsidiaries owning the systems, and through certain vendor financing. MARKETING AND CUSTOMER SERVICE USM's marketing plan is designed to capitalize on its clustering strategy and to increase revenue by growing USM's customer base, increasing customers' usage of cellular service and reducing churn or customer disconnects. The marketing plan stresses service quality and incorporates programs aimed at developing and expanding new and existing distribution channels, stimulating customer usage by offering new and enhanced services and by increasing the public's awareness and understanding of the cellular services offered by USM. Most of USM's operations market cellular service under the "United States Cellular"-TM- name and service mark. USM's marketing strategy is to develop a local, customer-oriented operation, the primary goal of which is to provide quality cellular service to its customers. USM's marketing program focuses on obtaining customers who need cellular service, such as business people who, while out of their offices, need to be in contact with others. USM plans to follow the same marketing program in the other systems it expects to manage. USM manages each cellular cluster, and in some cases individual markets, with a local staff, including a manager and customer service representatives. Sales consultants are typically maintained in each market within the clusters. Customers are able to report cellular service problems or concerns 24 hours a day. It is USM's goal to respond to customers' concerns and to correct reported service deficiencies within 24 hours of notification. USM has established local service centers in order to repair and maintain most major brands of user equipment. USM has relied primarily on its own direct and retail sales channels to obtain customers for the cellular markets it manages. USM maintains an ongoing training program to improve the effectiveness of the sales consultants and retail associates in obtaining customers as well as maximizing the sale of high- user packages. These packages commit customers to pay for a minimum amount of usage at discounted rates per minute, even if usage falls below the monthly minimum amount. USM also uses agents, dealers and retailers to obtain customers. Agents and dealers are independent business people who sell to customers on a commission basis for USM. USM's agents are in the business of selling cellular telephones, cellular service packages and other related products to customers. USM's dealers include car stereo companies and other companies whose customers are also potential cellular customers. USM's retailers include car dealers, major appliance dealers, office supply dealers and mass merchants. USM began to specifically address the fast-growing consumer market by opening its own retail stores in late 1993. These small facilities are located in high-traffic areas and are designed to cater to walk-in customers. USM plans to open more locations in 1994 to further its presence in the local markets. USM also actively pursues national retail accounts which may potentially yield new customer additions in multiple markets. The national account effort is expected to enable USM to reach segments of the market other than those accessed by the local sales force. Agreements have been entered into with such national distributors as Chrysler Corporation, Ford Motor Company, General Motors, Honda, AT&T, Radio Shack, Best Buy, and Sears, Roebuck & Co. for certain of USM's markets. Upon the sale of a cellular telephone by one of these national distributors, USM receives, often exclusively within the territories served, the resulting cellular customer. In recognition of the needs of these national accounts, 19 USM initiated a centralized customer support program. This program allows for customer activation during peak retail business hours (weekends and evenings) when USM's local office might otherwise be closed. USM uses a variety of direct mail, billboard, radio, television and newspaper advertising to stimulate interest by prospective customers in cellular service and to establish familiarity with USM's name. Advertising is directed at gaining customers, increasing usage by existing customers and increasing the public awareness and understanding of the cellular services offered by USM. USM attempts to select the advertising and promotion media that are most appealing to the targeted groups of potential customers in each local market. USM utilizes local advertising media and public relations activities and establishes programs to enhance public awareness of USM, such as providing telephones and service for public events and emergency uses. CUSTOMERS AND SYSTEM USAGE USM data for 1993 indicate that 52% of USM's customers use their cellular telephones primarily for business. Cellular customers come from a wide range of occupations. They typically include a large proportion of individuals who work outside of their offices such as people in the construction, real estate, wholesale and retail distribution businesses, and professionals. Most of USM's customers use in-vehicle cellular telephones. However, more customers (71% of new customers in 1993 compared to 21% in 1988) are selecting portable and other transportable cellular telephones as these units become more compact and fully featured as well as more attractively priced. USM's cellular systems are used most extensively during normal business hours between 7:00 am and 6:00 pm. On average, the local retail customers in USM's majority-owned and managed systems used their cellular systems approximately 103 minutes per unit each month and generated retail revenue of approximately $49 per month during 1993, compared to 121 minutes and $52 per month in 1992. Revenue generated by roamers, together with local, toll and other revenues, brought USM's total average monthly service revenue per customer unit in majority-owned and managed markets to $99 during 1993. Average monthly service revenue per customer unit decreased approximately 6% during 1993, reflecting primarily the decline in average local minutes per customer unit. USM anticipates that average monthly service revenue per customer unit may continue to decline as retail distribution channels provide additional consumer customers who generate fewer local minutes of use and as roamer revenues grow more slowly. Roaming is a service offered by USM which allows a customer to place or receive a call in a cellular service area away from the customer's home market area. USM has entered into "roaming agreements" with operators of other cellular systems covering virtually all systems in the United States and Canada. These agreements offer customers the opportunity to roam in these systems. These reciprocal agreements automatically pre-register the customers of USM's systems in the other carriers' systems. Also, a customer of a participating system roaming (i.e. travelling) in a USM market where this arrangement is in effect is able to automatically make and receive calls on USM's system. The charge for this service is typically at premium rates and is billed by USM to the customer's home system, which then bills the customer. USM has entered into agreements with other cellular carriers to transfer roaming usage at agreed-upon rates. In some instances, based on competitive factors, USM may charge a lower amount to its customers than the amount actually charged to USM by another cellular carrier for roaming; however, these services include call delivery and call handoff. 20 The following table summarizes certain information about customers and market penetration in USM's managed operations.
YEAR ENDED OR AT DECEMBER 31, ----------------------------------------------------------------------- 1993 1992 1991 1990 1989 --------------- ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Majority-owned and managed markets: Cellular markets in operation (1)................. 116 92 67 32 25 Total population of markets in service (000s)..... 19,383 15,014 11,481 6,314 5,228 Customer Units: at beginning of period (2)...................... 150,800 97,000 57,300 36,100 13,600 additions during period (2)..................... 165,300 88,600 59,800 31,800 28,000 disconnects during period (2)................... 55,100 34,800 20,100 10,600 5,500 at end of period (2)............................ 261,000 150,800 97,000 57,300 36,100 Market penetration at end of period (3)(4)........ 1.35% 1.00% 0.84% 0.91% 0.69% Consolidated revenues............................... $ 247,259 $ 164,085 $ 99,477 $ 62,452 $ 39,935 Depreciation expense................................ 25,665 16,606 8,814 4,363 3,199 Amortization expense................................ 19,362 13,033 10,455 7,287 4,684 Operating (loss).................................... (8,656) (12,705) (16,831) (9,141) (15,636) Construction expenditures........................... 94,088 58,832 66,037 21,189 10,032 Identifiable assets................................. $ 1,275,569 $ 858,795 $ 612,981 $ 293,368 $ 189,544 - --------- (1) Represents the number of markets in which USM owned at least a 50% interest and which it managed, including its reseller operation in 1989-1992. The revenues and expenses of these cellular markets are included in USM's consolidated revenues and expenses. (2) Represents the approximate number of revenue-generating cellular telephones served by the cellular markets referred to in footnote (1). The revenue generated by such cellular telephones is included in consolidated revenues. (3) Computed by dividing the number of customer units at the end of the period by the total population of markets in service as estimated by Donnelley Marketing Service for the respective years. (4) The decrease from 1990 to 1991 is due to the addition of 32 majority-owned and managed RSAs in 1991. Market penetration for majority-owned and managed MSAs was 1.48% in 1991 and 1.07% in 1990.
21 The following table summarizes, by cluster, the total population, USM's customer units and penetration for USM's majority-owned and managed markets that were operational as of December 31, 1993.
POPULATION CUSTOMERS PENETRATION --------------- ----------- ------------- Eastern North Carolina/Virginia....................................................... 2,416,000 20,500 0.85% Wisconsin/Illinois/Minnesota.......................................................... 1,810,000 23,400 1.29% Eastern Tennessee/Western North Carolina.............................................. 1,651,000 27,800 1.68% Iowa.................................................................................. 1,704,000 31,500 1.85% Maine/New Hampshire/Vermont........................................................... 1,459,000 19,700 1.35% West Virginia/Pennsylvania/Maryland................................................... 820,000 5,100 0.62% Missouri.............................................................................. 964,000 6,700 0.70% Northern Florida...................................................................... 951,000 10,400 1.09% Washington/Idaho...................................................................... 972,000 8,100 0.83% Indiana/Kentucky...................................................................... 1,050,000 15,600 1.49% Texas/Oklahoma........................................................................ 742,000 12,400 1.67% Oregon/California..................................................................... 812,000 8,100 1.00% Southwestern Texas.................................................................... 776,000 7,100 0.91% Oklahoma.............................................................................. 994,000 34,900 3.51% Other Operations...................................................................... 2,262,000 29,700 1.31% --------------- ----------- --- 19,383,000 261,000 1.35% --------------- ----------- --- --------------- ----------- ---
CELLULAR TELEPHONES AND INSTALLATION There are a number of different types of cellular telephones, all of which are currently compatible with cellular systems nationwide. USM offers a full range of vehicle-mounted, transportable, and hand-held portable cellular telephones. Features offered in some of the cellular telephones include hands-free calling, repeat dialing, horn alert and others. USM has established service and/or installation facilities in many of its local markets to ensure quality installation and service of the cellular telephones it sells. These facilities allow USM to improve its service by promptly assisting customers who experience equipment problems. USM negotiates volume discounts from its cellular telephone suppliers. USM discounts cellular telephones in most markets to meet competition or to stimulate sales by reducing the cost of becoming a cellular customer. In these instances, where permitted by law, customers are generally required to sign an extended service contract with USM. USM also cooperates with cellular equipment manufacturers in local advertising and promotion of cellular equipment. PRODUCTS AND SERVICES USM's customers are able to choose from a variety of packaged pricing plans which are designed to fit different calling patterns. USM's customer bills typically show separate charges for custom-calling features, airtime in excess of the packaged amount, and toll calls. Custom-calling features provided by USM include wide-area call delivery, call forwarding, call waiting, three-way calling and no-answer transfer. USM also offers a voice message service in many of its markets. This service, which functions like a sophisticated answering machine, allows customers to receive messages from callers when they are not available to take calls. REGULATION The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act. The FCC has promulgated regulations governing construction and operation of cellular systems, and licensing and technical standards for the provision of cellular telephone service. For licensing purposes, the FCC divided the United States into separate geographic markets (MSAs and RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the application process, the FCC reserved one block of frequencies for nonwireline applicants and another block for wireline applicants. Subject to FCC approval, a cellular system may be sold to either a wireline or nonwireline entity, but no entity which controls a cellular system may own an interest in another cellular system in the same MSA or RSA. 22 The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the Company's application for approval of the proposed transfer. When the first cell of a cellular system has been constructed, the licensee is required to notify the FCC that construction has been completed. Immediately upon this notification, but not before, FCC rules authorize the licensee to offer commercial service to the public. The licensee is then said to have "operating authority." Initial operating licenses are granted for ten-year periods. The FCC must be notified each time an additional cell is constructed. The FCC's rules also generally require persons or entities holding cellular construction permits or licenses to coordinate their proposed frequency usage with other cellular users and licensees in order to avoid electrical interference between adjacent systems. The height and power of base stations in the cellular system are regulated by FCC rules, as are the types of signals emitted by these stations. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration regulations respecting the siting and construction of cellular transmitter towers and antennas. On January 9, 1992, the FCC adopted a Report and Order ("R&O") which establishes standards for conducting comparative renewal proceedings between a cellular licensee seeking renewal of its license and challengers filing competing applications. In the R&O, the FCC: (i) established criteria for comparing the renewal applicant to challengers, including the standards under which a "renewal expectancy" will be granted to the applicant seeking license renewal; (ii) established basic qualifications standards for challengers; and (iii) provided procedures for preventing possible abuses in the comparative renewal process. The FCC has concluded that it will award a renewal expectancy if the licensee has (i) substantially used its spectrum for its intended purposes; (ii) complied with FCC rules, policies and the Communications Act, as amended; and (iii) not engaged in substantial relevant misconduct. If a renewal expectancy is awarded to an existing licensee, that expectancy will be more significant in the renewal proceeding than any other criterion used to compare the licensee to challengers. Licenses of USM's affiliates in Knoxville and Tulsa will be its first to come up for renewal in 1994. See "Legal Proceedings -- La Star Application" for a discussion of certain FCC proceedings which have suspended the Company's and USM's licensing authority in a Wisconsin market pending the outcome of an FCC hearing. USM conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and would anticipate being able to qualify for a renewal expectancy. Accordingly, USM believes that the regulations will have no significant effect on its operations and financial condition. The FCC has also provided that five years after the initial licenses are granted, unserved areas within markets previously granted to licensees may be applied for by both wireline and nonwireline entities and by third parties. The FCC established 1993 filing dates for filing "unserved area" applications in MSAs in which the five-year period had expired and many unserved area applications were filed in certain MSAs. USM's strategy with respect to system construction in its markets has been and will be to build cells covering every area within such markets that USM considers economically feasible to serve or might conceivably wish to serve and to do so within the five-year period following issuance of the license. USM is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. However, certain states require cellular system operators to go through a state certification process to serve communities within their borders. All such certificates can be revoked for cause. In addition, certain state authorities regulate several aspects of a cellular operator's business, including the rates it charges its customers and cellular resellers, the resale of long-distance service to its customers, the technical arrangements and charges for interconnection with the landline network and the transfer of interests in cellular systems. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters may also be subject to state or local zoning, land use and other local regulations. Public utility or public service commissions (or certain of the commissioners) in several states have expressed an interest in examining whether the cellular industry should be more closely regulated by such states. 23 COMPETITION USM's only facilities-based competitor for cellular telephone service in each market is the licensee of the second cellular system in that market. Competition for customers between the two systems in each market is principally on the basis of quality of service, price, size of area covered, services offered, and responsiveness of customer service. The competing entities in many of the markets in which USM has an interest have financial resources which are substantially greater than those of USM and its partners in such markets. The FCC's rules require all operational cellular systems to provide, on a nondiscriminatory basis, cellular service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public. In addition to competition from the other cellular licensee in each market, there is also competition from, among other technologies, conventional mobile telephone and SMR systems, both of which are able to connect with the landline telephone network. USM believes that conventional mobile telephone systems and conventional SMR systems are competitively disadvantaged because of technological limitations on the capacity of such systems. The FCC has recently given approval, via waivers of its rules, to ESMR, an enhanced SMR system. ESMR systems may have cells and frequency reuse like cellular, thereby potentially eliminating any current technological limitation. The first ESMR systems were implemented in 1993 in Los Angeles. Although less directly a substitute for cellular service, wireless data services and one-way paging service (and in the future, two-way paging services) may be adequate for those who do not need full two-way voice service. Continuing technological advances in the communications field make it impossible to predict the extent of additional future competition for cellular systems. For example, the FCC has allocated radio channels to a mobile satellite system in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites, and a consortium to provide such service has been formed. Such a system is designed primarily to serve the communications needs of remote locations and a mobile satellite system could provide viable competition for land-based cellular systems in such areas. It is also possible that the FCC may in the future assign additional frequencies to cellular telephone service to provide for more than two cellular telephone systems per market. CT-2, second generation cordless telephones, and PCS, personal communications network services, may prove to be competitive with cellular service in the future. CT-2 will allow a customer to make a call from a personal phone as long as the person is within range of a telepoint base station which connects the call to the public switched telephone network. PCS will be digital, wireless communications systems which currently are primarily targeted for use in very densely populated areas. Various CT-2 and PCS trials are in process throughout the United States. CT-2 and PCS are not anticipated to be significant sources of competition in USM's markets in the near future. Similar technological advances or regulatory changes in the future may make available other alternatives to cellular service, thereby creating additional sources of competition. RADIO PAGING OPERATIONS WIRELESS MESSAGING INDUSTRY Paging is a wireless messaging technology which uses an assigned radio frequency to contact a paging customer within a geographic service area. Pagers are small, lightweight, easy-to-use, battery-operated devices which receive messages by the broadcast of a radio signal. To contact a customer, a message is initiated by placing a telephone call to the customer's pager number. The telephone call is received by a computerized paging switch which generates a signal sent to microprocessor-controlled radio transmitters within the service area. The transmitters broadcast a digital or analog signal that is received by the pager and delivered as a tone, voice, numeric or alphanumeric text message. The paging industry started in 1949 when the FCC set aside certain radio frequencies for exclusive use in providing one-way mobile communications services. Until the 1980s, the industry was highly fragmented with a large number of small, local firms. During that decade, acquisitions of many firms by regional telephone companies greatly consolidated the industry. While it is estimated that by late 1993 24 more than 500 licensed paging companies remained in the United States, most providing local service in a single market, the ten largest companies served more than 47% of all pager units, with no single provider serving more than 16% of the United States marketplace. The FCC has recently allocated certain radio spectrum channels designated for Advanced Messaging Services ("AMS"), which are also known as Narrowband PCS. These frequency channels, which are anticipated to be auctioned by the FCC in 1994, will accommodate a wide array of emerging wireless technologies and ancillary communications services to both individuals and businesses. As a potential AMS provider, APP is exploring the potential to offer acknowledgment paging, two-way data services, wireless E-mail, location services and the transmission of voice messages and high-resolution graphics. Additional innovations in technology combined with further reduced costs of equipment are expected to continue to broaden the potential market size for paging services and support the industry's rapid growth rate. Management also believes that future developments in the wireless communications industry will produce additional consolidations of smaller operators with larger, multi-market paging companies. APP provides one-way wireless messaging services in the United States with operations concentrated in Florida and in the Mid-Atlantic and Midwest regions. APP has experienced strong growth in the number of pagers in service, increasing from 161,600 at the end of 1989 to 460,900 at year-end 1993, a compound annual growth rate of 30.0% The following table summarizes certain information about APP's operations.
YEAR ENDED OR AT DECEMBER 31, --------------------------------------------------------------- 1993 1992 1991 1990 1989 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Pagers in service.............................................. 460,900 322,200 236,800 201,200 161,600 Total revenues................................................. $ 75,363 $ 54,716 $ 43,973 $ 38,022 $ 31,822 Depreciation and amortization expense.......................... 13,392 10,412 9,047 8,304 6,494 Operating (loss)............................................... (721) (5,448) (7,750) (6,442) (7,429) Additions to property and equipment............................ 24,813 15,501 13,322 14,347 10,433 Identifiable assets............................................ $ 74,923 $ 57,080 $ 41,726 $ 38,067 $ 32,403
COMPANY STRATEGY APP has authorizations for more than 500 transmitter sites on Private Carrier Paging ("PCP") channel 929.3375 MHz in 47 states. Under recently adopted changes in FCC rules, APP has requested exclusive use of this channel throughout the United States. Other companies also hold authorizations for PCP channels and are expected to request exclusive use of PCP channels for systems serving nationwide, regional or local service areas. APP believes this license will enable APP to offer competitive regional and nationwide messaging services and is building certain systems required to utilize and retain its exclusive license. In addition, APP has applied for SMR licenses in several markets, including certain markets it presently serves. These licenses would allow APP to offer a broad range of innovative mobile data services, including one-and two-way messaging, high-resolution graphics, wireless E-mail, and facsimile. Since the FCC classifies APP as a wireline carrier as a result of its relationship with TDS, APP must receive a waiver from the FCC to obtain such licenses. APP is unable to predict whether it will receive such a waiver from the FCC. In the event APP is unable to obtain the SMR licenses, APP believes that it would be able to provide such mobile data services in the pertinent markets though the use of other frequencies for which FCC licenses must be obtained but where no such waiver would be required. APP has recently entered into a joint venture with NEXUS Telecommunications Systems of Israel Ltd. ("NEXUS") to develop proprietary wireless technologies. As part of this arrangement, APP has the exclusive right to market two-way lower-speed data messaging, vehicle location, and inventory management services using patented spread spectrum technology in the western hemisphere. Management believes its alliance with NEXUS has the potential to result in advanced two-way messaging services for current and future customers. APP also expects to have access to two-way messaging service technology offered by other manufacturers. 25 Both wireless and wireline carriers will compete to offer services on America's "information highway" -- the electronic marketplace which will provide consumers and businesses with access to a wide array of data and other services. Paging traditionally provides high-quality service at the lowest price and cost of any wireless service. TDS believes that the wireless messaging industry, including APP's wireless network, will be an important part of the information highway and will permit APP to compete successfully as a provider of information services. One of the many potentials of this network is the ability, through alliances with other firms, to provide customers with a shopping list of specialized information services. For example, APP's customers could receive E-mail messages, news or sports headlines, stock quotes, or morning wake-up calls that also provide the weather forecast. APP's substantial base of loyal customers, modern wireless network infrastructure and well-trained sales force position APP to continue transitioning customers to higher-value, more profitable products and services. Many of the services discussed above can be provided with little or no significant additional capital investment. APP anticipates that marketing expenses will be minimized by selling such services through existing distribution channels and incorporating these services into existing advertising and promotional campaigns. Incremental operational expenses are expected to be minimized by using existing support functions such as APP's customer service and technical staffs to service these new customers. Services which may require additional capacity, such as E-mail, will require higher-speed networks to support the customer base. This, in turn, may require more transmitter sites, more complex communication switches, and other enhancements to APP's infrastructure. Also, additional capital spending may be required to secure the necessary radio spectrum in the auctions the FCC will hold in the future which will allow APP to offer two-way communication, and to expand its one-way capacity. Many of the services such as information services are currently offered in several of APP's operations. The time-frame for new two-way services is projected to be mid-1995, but there can be no assurance at this early stage of development of such services that APP will be willing or able to invest in some or all of such services or that, if implemented, such services will be commercially successful. PAGING OPERATIONS APP provides local, wide-area, regional, and nationwide paging services to customers through its operations centers. It offers local and regional paging coverage throughout Florida, in the Midwest (Illinois, Indiana, Kentucky, Minnesota, Missouri and Wisconsin) and the Mid-Atlantic (Maryland, Pennsylvania, Virginia, and Washington, D.C.) regions, and in the states of Oklahoma, Texas, Arizona and Utah. Nationwide paging is offered through APP's alliance with a nonaffiliated service provider. APP currently provides four types of pagers in all of its markets: digital display, alphanumeric text display, voice and tone. A digital display pager permits a caller to transmit to the customer a numeric message that may consist of a telephone number, an account number or coded information. It has the memory to store several numeric messages that can be recalled by the customer when desired. Alphanumeric text display service allows customers to receive, store, and display full text messages of between 80 and 160 characters, which are sent from either a data entry device or an operator. In the case of voice service, the notification is followed by a brief voice message. A tone pager notifies the customer that a message has been received by emitting an audible beep, displaying a flashing light or vibrating. Since 1986, APP has made a limited number of selective acquisitions of paging companies which had been providing service in the same areas as APP, or in areas adjacent to APP's service areas. In 1991, APP exchanged approximately 22,000 customers in its California, Connecticut, and Rhode Island subsidiaries for 27,000 customers in Florida, where APP already had existing paging operations. In total, APP has added 30,700 net customers through acquisitions since 1986. As the industry continues to consolidate, APP expects to evaluate and may purchase attractive acquisition opportunities on an ongoing basis. MARKETING STRATEGY APP generates its revenues from (i) service usage billed primarily on a flat-rate basis, (ii) pager rentals, (iii) pager warranties, maintenance contracts and repair, (iv) loss protection, (v) voice mail usage on a flat rate or measured service basis, (vi) activation fees, (vii) the sale of new and used pagers, 26 (viii) the sale of pager accessories and (ix) service usage of value-added services such as text dispatching, second telephone numbers or group calls. Service to end users is provided directly by APP in most cases. APP markets its services directly, through its sales force complemented by customer service representatives, and indirectly, through third-party resellers, agents and retailers. APP's sales force and customer service representatives have the responsibility to ensure that all customers and prospects as well as resellers, agents and retailers understand APP's significant competitive advantages: reliable wireless network, wide-area coverage, value-priced selection of pagers and services, and responsive sales and customer service staff. APP offers its services to third-party resellers and retailers under marketing agreements. APP offers resellers paging airtime in bulk quantities at wholesale rates. Resellers then sell APP's airtime to end users at a markup. Agents, on the other hand, refer customers directly to APP. Retail outlets sell the pagers to the customers and the customers then purchase the services from APP. Resellers and retailers may also sell services of other wireless communications companies which may compete with APP. APP seeks to develop long-term and cooperative relationships with its resellers, agents and retailers. APP's cost of obtaining customer units through resellers is substantially less than the cost of obtaining customer units through direct sales or retail distribution channels. Resellers incur the cost to acquire customers as well as to service pagers and to bill and collect revenues from the customer. They also assume the cost of the paging unit for those who rent rather than purchase. COMPETITION APP faces significant competition in all of its markets. Many of APP's competitors, which include local, regional and national paging companies and certain regional telephone companies, possess greater financial, technical and other resources than APP. Moreover, certain competitors in the paging business offer wider coverage in certain geographic areas than does APP and certain competitors follow a low-price discounting strategy to expand market share. If any of such companies were to devote additional resources to the paging business or increase competitive pressure in APP's markets, APP's results of operations could be adversely affected. A number of technologies, including cellular, broadband and narrowband PCS, SMR and others, are competitive forms of technology used in, or projected to be used for, wireless one-way and two-way communications. Cellular telephone technology provides an alternative communications system for customers who are frequently away from fixed-wire communications systems (i.e., ordinary telephones). APP believes that paging will remain one of the lowest-cost forms of wireless messaging due to the low-cost infrastructure associated with paging systems, as well as advances in technology that will provide for reduced paging costs. Future technological developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the paging services currently offered by APP. There can be no assurance that APP would not be adversely affected by such technology changes. GOVERNMENT REGULATION APP's message paging operations are subject to regulation by the FCC under the Communications Act. Currently, paging services are offered primarily over radio frequencies that the FCC has allocated for either common carriage (licensees are known as radio common carriers ("RCC")) or private carriage (licensees are known as private carrier paging operators ("PCP")). An RCC license is an exclusive license to a specific radio frequency in a particular locality or region and the licensee is regulated as a common carrier. A PCP license may be designated by the FCC as exclusive or non-exclusive, and may be subject to frequency sharing and coordination procedures. These procedures are designed to avoid interference with the operation of communications by other carriers using the same frequency. PCP licensees are private carriers, not subject to common carrier regulation. The FCC has granted APP licenses to use the radio frequencies required to conduct its paging operations and these licenses define the technical parameters under which APP is authorized to use 27 those frequencies. APP primarily provides paging services directly to customers over its own transmission facilities, and is currently regulated as an RCC for some of its current services. APP also holds PCP licenses. The FCC licenses granted to APP are issued for up to ten years in the case of RCC licenses and five years in the case of PCP licenses, at the end of which time renewal applications must be approved by the FCC. Most of APP's current licenses expire between 1997 and 2001. FCC renewals are generally granted as long as APP is in compliance with FCC regulations. Although APP is unaware of any circumstances which would prevent the approval of any pending or future renewal applications, no assurance can be given that APP's licenses will be renewed by the FCC in the future. Moreover, although revocation and involuntary modification of licenses are extraordinary regulatory measures, the FCC has the authority to restrict the operation of licensed facilities or revoke or modify licenses. No license of APP has ever been revoked or modified involuntarily. See "Legal Proceedings--La Star Application" for a discussion of certain FCC proceedings which have suspended the Company's and USM's licensing authority in a Wisconsin market pending the outcome of an FCC hearing. The Communications Act requires licensees such as APP to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license, or any rights thereunder. The Communications Act also requires prior approval by the FCC of acquisitions of other paging companies by APP. The FCC has approved all transfers of control for which APP has sought approval. APP also routinely applies for FCC authority to use frequencies, modify the technical parameters of existing licenses, expand its service territory and provide new services. Although there can be no assurance that any future requests for approval or applications filed by APP will be approved or acted upon in a timely manner by the FCC, or that the FCC will grant the relief requested, subject to the forthcoming rules for competitive bidding, APP has no reason to believe that any such requests, applications or relief will not be approved or granted. 28 OTHER SUBSIDIARIES Subsidiaries of the Company provide engineering and technical management consulting services (American Communications Consultants, Inc.); data processing and related services (TDS Computing Services, Inc.); graphic communications services (Suttle Press, Inc.); and telemessaging services (Integrated Communications Services, Inc.). EMPLOYEES The Company enjoys satisfactory employee relations. As of December 31, 1993, 4,343 persons were employed by the Company, 91 of whom are represented by unions. - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES The property of TDS consists principally of telephone lines, central office equipment, telephone instruments and related equipment, and land and buildings related to telephone operations; switching and cell site equipment related to cellular telephone operations; and radio pagers and transmitting equipment related to radio paging operations. As of December 31, 1993, TDS's gross property, plant and equipment of approximately $1.3 billion consisted of the following: Telephone Telephone lines.................................. 33.4% Central office equipment......................... 17.8 Telephone instruments and related equipment...... 1.5 Land and buildings............................... 3.4 Miscellaneous.................................... 6.6 Plant under construction......................... 2.7 ----- Total Telephone.............................. 65.4 Cellular telephone................................. 23.7 Radio paging....................................... 6.5 Other.............................................. 4.4 ----- 100.0% ----- -----
"Telephone lines" consists primarily of buried cable and also includes aerial cable, poles, and wire. "Central office equipment" consists of switching equipment, carrier equipment, and related facilities. "Telephone instruments and related equipment" consists of equipment located on the subscribers' premises and includes private branch exchanges. "Land and buildings" consists of land owned in fee simple and improvements thereto. "Miscellaneous" consists of tools, furnishings, fixtures, motor vehicles, work equipment, and plant held for future use. "Plant under construction" includes property of the foregoing categories which had not been placed in service because it was still under construction. The plant and equipment of TDS is maintained in good operating condition and is suitable and adequate for the Company's business operations. The properties of the operating telephone subsidiaries and most of the tangible assets of the cellular subsidiaries are subject to the lien of the mortgages securing the funded debt of such companies. The Company owns substantially all of its central office buildings, local administrative buildings, warehouses, and storage facilities used in its telephone operations and leases most of its offices and transmitter sites used in its cellular and paging businesses. All of the Company's telephone lines and cell and transmitter sites are located either on private or public property. Locations on private land are by virtue of easements or other arrangements. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS The Company is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain landline or cellular telephone markets. The more significant proceedings involving the Company are described in the following paragraphs. 29 LA STAR APPLICATION. Star Cellular Telephone Company, Inc. ("Star Cellular"), an indirect, wholly owned subsidiary of USM, is a 49% owner of La Star Cellular Telephone Company ("La Star"), an applicant for a construction permit for a cellular system in St. Tammany Parish in the New Orleans MSA. In June 1992, the FCC affirmed an Administrative Law Judge's order which had granted the mutually exclusive application of New Orleans CGSA, Inc. ("NOCGSA") and dismissed La Star's application. The ground for the FCC's action was its finding that Star Cellular, and not the 51% owner, SJI Cellular, Inc. ("SJI"), in fact controlled La Star. La Star, TDS and USM have appealed that order to the United States Court of Appeals of the District of Columbia Circuit and those appeals are pending. In a footnote to its decision, the FCC stated, in part, that "Questions regarding the conduct of SJI and [USM] in this case may be revisited in light of the relevant findings and conclusions here in future proceedings where the other interests of these parties have decisional significance." Certain adverse parties have attempted to use the footnote in the LA STAR decision in a number of unrelated, contested proceedings which TDS and USM have pending before the FCC. In addition, since the LA STAR proceeding, FCC authorizations in uncontested FCC proceedings have been granted subject to any subsequent action the FCC may take concerning the LA STAR footnote. On February 1, 1994, in a proceeding involving a license originally issued to TDS for a rural service area in Wisconsin, the FCC instituted a hearing to determine whether in the La Star case USM had misrepresented facts to, lacked candor in its dealings with or attempted to mislead the FCC and, if so, whether TDS possesses the requisite character qualifications to hold that Wisconsin license. The FCC stated that, pending resolution of the issues in the Wisconsin proceeding, further grants to TDS and its subsidiaries will be conditioned on the outcome of that proceeding. TDS was granted interim authority to continue to operate the Wisconsin system pending completion of the hearing. An adverse finding in the Wisconsin hearing could result in a variety of possible sanctions, ranging from a fine to loss of the Wisconsin license, and could, as stated in the FCC order, be raised and considered in other proceedings involving TDS and its subsidiaries. TDS and USM believe they acted properly in connection with the La Star application and that the findings and record in the La Star proceeding are not relevant in any other proceeding involving their FCC license qualifications. TOWNES TELECOMMUNICATIONS, INC., ET. AL. V. TDS, ET. AL. Plaintiffs Townes Telecommunications, Inc. ("Townes"), Tatum Telephone Company ("Tatum Telephone") and Tatum Cellular Telephone Company ("Tatum Cellular") filed a suit in the District Court of Rusk County, Texas, against both TDS and USM as defendants. Plaintiff Townes alleges that it entered into an oral agreement with defendants which established a joint venture to develop cellular business in certain markets. Townes alleges that defendants usurped a joint venture opportunity and breached fiduciary duties to Townes by purchasing interests in nonwireline markets in Texas RSA #11 and the Tyler (Texas) MSA on their own behalf rather than on behalf of the alleged joint venture. In its Fifth Amended Original Petition, Townes seeks unspecified damages not to exceed $33 million for usurpation, breach of fiduciary duty, civil conspiracy, breach of contract and tortious interference. Townes also seeks imposition of a constructive trust on defendants' profits from Texas RSA #11 and the Tyler (Texas) MSA and transfer of those interests to the alleged joint venture. In addition Townes seeks reasonable attorneys' fees equal to one-third of the judgment, along with the prejudgment interest. Plaintiffs Tatum Telephone and Tatum Cellular seek a declaration that transfers by defendants of a 49% interest in Tatum Cellular violated a five-year restriction on alienation of Tatum Cellular shares contained in a written shareholders' agreement. Tatum Telephone and Tatum Cellular seek to void the transfers. All plaintiffs together seek as much as $200 million in punitive damages. Defendants have asserted meritorious defenses to each of the plaintiffs' claims and are vigorously defending this case. Discovery is ongoing. A jury trial in this case is set to commence on April 25, 1994. - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1993. 30 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Exhibit 13, Annual Report sections entitled "TDS Stock and Dividend Information" and "Market Price per Common Share by Quarter." - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from Exhibit 13, Annual Report section entitled "Selected Consolidated Financial Data," except for ratios of earnings to fixed charges, which are incorporated herein by reference from Exhibit 12 to this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from Exhibit 13, Annual Report sections entitled "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)," and "Report of Independent Public Accountants." - -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 31 - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from Exhibit 99.1 sections entitled "Election of Directors" and "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from Exhibit 99.1 section entitled "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from Exhibit 99.1 sections entitled "Security Ownership of Management" and "Principal Shareholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from Exhibit 99.1 section entitled "Certain Relationships and Related Transactions." 32 - -------------------------------------------------------------------------------- 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 35 II. Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties for each of the Three Years in the Period Ended December 31, 1993.................. page 35 III. Condensed Financial Information of Registrant-Balance Sheets as of December 31, 1993 and 1992 and Statements of Income and Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 1993.................................................................................. page 36 V. Property, Plant and Equipment for each of the Three Years in the Period Ended December 31, 1993.... page 40 VI. Reserve for Depreciation for each of the Three Years in the Period Ended December 31, 1993......... page 43 VIII. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1993............................................................................................... page 46 X. Supplementary Income Statement Information for each of the Three Years in the Period Ended December 31, 1993........................................................................................... page 47 Los Angeles SMSA, Nashville/Clarksville MSA, and Baton Rouge MSA Limited Partnership Combined Financial Statements.................................................................................................. page 48 Compilation Report of Independent Public Accountants on Combined Financial Statements.............. page 49 Reports of Other Independent Accountants........................................................... page 50 Combined Statements of Operations (Unaudited)...................................................... page 55 Combined Balance Sheets (Unaudited)................................................................ page 56 Combined Statements of Cash Flows (Unaudited)...................................................... page 57 Combined Statements of Changes in Partners' Capital (Unaudited).................................... page 58 Notes to Unaudited Combined Financial Statements................................................... page 59 All other schedules have been omitted because they are not applicable or not required because the required information is shown in the financial statements or notes thereto.
33 (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. 10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981. 10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated May 28, 1991. 10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson. 10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the Company and LeRoy T. Carlson. 10.5 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the Company and LeRoy T. Carlson, Jr. 10.6 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company and James Barr III. 10.7(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company. 10.7(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company. 10.7(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company. 10.8 1985 Incentive Stock Option Plan of the Company.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1993. TDS filed a Report on Form 8-K dated October 18, 1993, which described certain completed and pending acquisitions. The Report filed the financial statements of several companies which were acquired or which became pending in 1993 and unaudited consolidated pro forma financial statements reflecting the effects of the completed and pending acquisitions. TDS filed a Form 8-K dated November 17, 1993, which discussed the completion of a rights offering by United States Cellular Corporation. The Form 8-K included a press release by United States Cellular Corporation as an exhibit. No other reports on Form 8-K were filed during the quarter ended December 31, 1993. 34 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Shareholders and Board of Directors of Telephone and Data Systems, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Telephone and Data Systems, Inc. and Subsidiaries Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 8, 1994. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the change in the method of accounting for cellular sales commissions, with respect to the change in the method of accounting for postretirement benefits other than pensions and with respect to the change in the method of accounting for income taxes as discussed in Note 1, Note 1 and Note 2, respectively, of the Notes to Consolidated Financial Statements; and an explanatory paragraph calling attention to certain litigation as discussed in Note 14 of the Notes to Consolidated Financial Statements. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The financial statement schedules listed in Item 14(a)(2) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. Chicago, Illinois February 8, 1994 - -------------------------------------------------------------------------------- SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
COLUMN D COLUMN E DEDUCTIONS --------------------- BALANCE AT END OF COLUMN B (2) PERIOD BALANCE AT (1) AMOUNTS -------------------- COLUMN A BEGINNING COLUMN C AMOUNTS WRITTEN (1) (2) NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED OFF CURRENT NOT CURRENT - -------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, 1993 Independent Cellular Telephone Company, Inc.(1) $ 542 $ -- $ -- $ -- $ -- $ 542 Gregory E. Webb(2) $ 235 $ -- $ 235 $ -- $ -- $ -- - -------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1992 Independent Cellular Telephone Company, Inc.(1) $ 542 $ -- $ -- $ -- $ -- $ 542 Gregory E. Webb(2) $ -- $ 235 $ -- $ -- $ 235 $ -- Jerry W. Masters(2) $ 156 $ 120 $ 276 $ -- $ -- $ -- - -------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1991 Independent Cellular Telephone Company, Inc.(1) $ 381 $ 161 $ -- $ -- $ -- $ 542 Jerry W. Masters(2) $ -- $ 156 $ -- $ -- $ 156 $ -- - -------------------------------------------------------------------------------------------------------------------------------- (1) The promissory note face amount, together with simple interest at an annual rate of 6.68%, is due June 29, 1994. (2) The promissory note was a bridge loan connected with the purchase of a residence. The note bore no interest and was fully payable within 15 days of the availability of funds from the sale of the maker's previous residence.
35 SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) BALANCE SHEETS ASSETS - --------------------------------------------------------------------------------
DECEMBER 31, -------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 24,651 $ 505 Temporary investments 57 171 Notes receivable from affiliates 119,786 256,772 Advances to affiliates 1,616 2,689 Accounts receivable Due from subsidiaries--Income taxes 9,008 10,228 Due from subsidiaries--Other 9,618 8,098 Other 1,130 6,538 Other current assets 632 352 -------------------------------- 166,498 285,353 - ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT IN SUBSIDIARIES Underlying book value 1,242,274 771,504 Cost in excess of underlying book value at date of acquisition 49,821 34,417 -------------------------------- 1,292,095 805,921 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER INVESTMENTS Minority interests in telephone and cellular companies and other investments 57,187 32,512 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES Debt issuance expenses 2,020 1,482 Development and acquisition expenses 1,036 427 Other 3,138 3,028 -------------------------------- 6,194 4,937 - ---------------------------------------------------------------------------------------------------------------------------------- $ 1,521,974 $ 1,128,723 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 36 SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
DECEMBER 31, -------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt and preferred stock $ 3,339 $ 4,739 Notes payable 6,000 46,140 Notes payable to affiliates 1,818 1,993 Advances from affiliates 348 348 Accounts payable Due to subsidiaries--Federal income taxes 4,212 9,481 Due to subsidiaries--Other 472 374 Other 1,722 1,159 Accrued interest 8,078 5,557 Accrued taxes 2,463 -- Other 1,257 837 -------------------------------- 29,709 70,628 - ---------------------------------------------------------------------------------------------------------------------------------- DEFERRED LIABILITIES AND CREDITS Investment tax credits (2,117) (2,224) Income taxes 6,218 1,762 Postretirement benefits obligation other than pensions (Note D) 12,856 14,149 Other 3,526 3,487 -------------------------------- 20,483 17,174 - ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT, excluding current portion (Note B) 205,032 122,106 - ---------------------------------------------------------------------------------------------------------------------------------- REDEEMABLE PREFERRED SHARES, excluding current portion (Note A) 25,632 27,163 - ---------------------------------------------------------------------------------------------------------------------------------- NONREDEEMABLE PREFERRED SHARES 16,833 14,233 - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding 43,503,584 and 34,383,483 shares, respectively 43,504 34,383 Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,881,001 and 6,863,819 shares, respectively 6,881 6,864 Common Shares issuable, 304,328 shares 15,189 -- Capital in excess of par value 1,069,022 761,706 Retained earnings 89,689 74,466 -------------------------------- 1,224,285 877,419 - ---------------------------------------------------------------------------------------------------------------------------------- $ 1,521,974 $ 1,128,723 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 37 SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) STATEMENTS OF INCOME - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ---------------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------------- Operating sales and service revenues $ 17,179 $ 14,849 $ 13,887 Cost of sales and expenses 17,109 14,896 13,959 ---------------------------------------- Net operations 70 (47) (72) Other income Interest income received from affiliates 27,333 15,792 12,707 Other, net (1,128) (2,969) (270) ---------------------------------------- 26,205 12,823 12,437 Interest expense (18,934) (16,428) (15,920) Federal income tax credit (expense) 2,602 (4,710) 10,064 ---------------------------------------- Corporate operations 9,943 (8,362) 6,509 Equity in net income of subsidiaries and other investments 23,953 46,882 9,569 ---------------------------------------- Net income before extraordinary item and cumulative effect of accounting changes 33,896 38,520 16,078 Extraordinary item (Note C) -- (769) -- Cumulative effect of accounting changes (Note D) -- (6,866) -- ---------------------------------------- Net income $ 33,896 $ 30,885 $ 16,078 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
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 $1.7 million, $10.8 million, $11.4 million, $1.2 million and $249,000 for the years 1994 through 1998, respectively. Note B: The annual requirements for principal payments on long-term debt are $1.6 million, $1.4 million, $406,000, $386,000 and $482,000 for the years 1994 through 1998, respectively. Note C: During 1992 the Company retired at a premium $20.8 million of its Senior Notes. The notes carried interest rates of 9.75% to 13.75% and were due in 1996 through 2004. The transaction resulted in an extraordinary loss of $769,000, net of income tax benefits of $491,000. Note D: The Company implemented SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," effective January 1, 1992. See Note 1 of Notes to Consolidated Financial Statements, included in the Annual Report, for a discussion of the Company's postretirement benefit plans.
38 SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------------------ (DOLLARS IN THOUSANDS) 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 33,896 $ 30,885 $ 16,078 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Extraordinary item -- 769 -- Cumulative effect of accounting change -- 6,866 -- Depreciation and amortization 2,547 1,568 1,355 Deferred taxes 4,563 3,459 (2,976) Equity income (23,953) (46,882) (9,569) Other noncash expense 6 3,156 332 Change in accounts receivable 1,076 (6,440) (3,670) Change in accounts payable (4,603) 5,430 531 Change in accrued taxes 2,463 428 (1,149) Change in other assets and liabilities 2,689 (447) 3,074 ------------------------------------------ 18,684 (1,208) 4,006 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 91,601 7,235 98,946 Repayment of long-term debt (11,935) (28,780) (8,449) Premium on retirement of long-term debt -- (1,117) -- Change in notes payable (40,140) 6,511 (29,971) Change in notes payable to affiliates (175) (5,727) 2,871 Change in advances from affiliates -- (6,103) 2,906 Common stock issued 109,972 78,592 3,146 Redemption of preferred shares (220) (407) (106) Dividends paid (17,830) (13,902) (11,293) ------------------------------------------ 131,273 36,302 58,050 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions Value of assets acquired (331,225) (154,569) (185,614) Common Shares issued 281,605 134,612 150,288 Preferred Shares issued 3,000 -- 23,059 ------------------------------------------ Net cash paid for acquisitions (46,620) (19,957) (12,267) Investments in subsidiaries (126,108) (2,923) (9,321) Dividends from subsidiaries 16,266 21,544 15,705 Investments in cellular minority interests (28) (299) (493) Other investments 1,452 (5,585) (833) Change in notes receivable from affiliates 28,040 (28,460) (53,235) Change in advances to affiliates 1,073 127 (1,036) Change in temporary investments 114 17 (43) ------------------------------------------ (125,811) (35,536) (61,523) - -------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,146 (442) 533 CASH AND CASH EQUIVALENTS-- Beginning of period 505 947 414 ------------------------------------------ End of period $ 24,651 $ 505 $ 947 - -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 39 SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1993 - --------------------------------------------------------------------------------
COLUMN C BALANCE AT COLUMN D COLUMN B DATE OF COLUMN F ACQUISITION COLUMN C LESS COLUMN E COLUMN A BALANCE AT OF COMPANIES RETIREMENTS BALANCE AT BEGINNING ACQUIRED ADDITIONS OR SALES OTHER END CLASSIFICATION OF PROPERTY OF PERIOD IN 1993 AT COST AT COST CHANGES OF PERIOD - --------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Telephone Plant in Service and Under Construction: Organization $ 5,657 $ 44 $ -- $ 26 $ (6) $ 5,669 Land 2,598 228 127 3 -- 2,950 Buildings 35,839 2,810 2,068 256 -- 40,461 Central office equipment 207,100 15,235 29,224 21,480 -- 230,079 Station apparatus 2,783 508 304 75 -- 3,520 Station connections 2,721 131 -- 1,752 -- 1,100 Pole lines 19,869 656 1,567 268 -- 21,824 Aerial cable 93,326 895 8,244 1,486 -- 100,979 Buried cable 256,385 20,489 27,774 1,982 -- 302,666 Underground conduit 4,947 1,250 870 (3) -- 7,070 Furniture and office equipment 39,291 1,742 4,157 762 206 44,634 Vehicles and other work equipment 24,083 1,406 4,003 2,127 12 27,377 Plant under construction 32,313 271 2,526 -- (137) 34,973 Plant acquisition adjustment 8,002 -- -- -- 15 8,017 Early retirements 894 29 88 -- (387) 624 Nonregulated investment 13,443 52 2,094 1,041 -- 14,548 - --------------------------------------------------------------------------------------------------------------------------------- Total Telephone Property 749,251 45,746 83,046 31,255 (297) 846,491 - --------------------------------------------------------------------------------------------------------------------------------- Cellular Telephone Switching and cell site equipment 161,003 24,837 68,829 597 93 254,165 Other 32,678 2,729 18,588 1,949 (93) 51,953 License costs 495,361 261,209 49,083 -- -- 805,653 Deferred start-up costs 10,161 909 979 839 (242) 10,968 - --------------------------------------------------------------------------------------------------------------------------------- Total Cellular Telephone 699,203 289,684 137,479 3,385 (242) 1,122,739 - --------------------------------------------------------------------------------------------------------------------------------- Radio Paging Pagers 33,289 508 19,031 17,469 -- 35,359 Transmitting equipment and other 22,961 200 9,542 730 -- 31,973 Deferred charges 11,608 4,078 1,465 201 -- 16,950 - --------------------------------------------------------------------------------------------------------------------------------- Total Radio Paging 67,858 4,786 30,038 18,400 -- 84,282 - --------------------------------------------------------------------------------------------------------------------------------- Other $ 54,415 $ -- $ 7,648 $ 4,771 $ (64) $ 57,228 - ---------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION Depreciation is provided for book purposes using the straight-line method. Composite depreciation rates, as applied to the average cost of depreciable property, were 7.3% for telephone, 10.5% for cellular telephone, 17.4% for radio paging, and 12.9% for other property. 40 SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1992 - --------------------------------------------------------------------------------
COLUMN C BALANCE AT COLUMN D COLUMN B DATE OF COLUMN F ACQUISITION COLUMN C LESS COLUMN E COLUMN A BALANCE AT OF COMPANIES RETIREMENTS BALANCE AT BEGINNING ACQUIRED ADDITIONS OR SALES OTHER END CLASSIFICATION OF PROPERTY OF PERIOD IN 1992 AT COST AT COST CHANGES OF PERIOD - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Telephone Plant in Service and Under Construction: Organization $ 111 $ 3 $ -- $ -- $ 5,543 $ 5,657 Land 2,424 72 132 4 (26) 2,598 Buildings 33,355 752 2,130 203 (195) 35,839 Central office equipment 189,750 3,055 22,497 8,202 -- 207,100 Station apparatus 2,499 30 406 152 -- 2,783 Station connections 8,225 160 -- 5,020 (644) 2,721 Pole lines 19,657 98 1,096 982 -- 19,869 Aerial cable 89,002 553 6,044 2,273 -- 93,326 Buried cable 234,416 3,705 21,695 3,431 -- 256,385 Underground conduit 4,527 27 397 4 -- 4,947 Furniture and office equipment 36,548 199 3,069 525 -- 39,291 Vehicles and other work equipment 22,492 405 3,123 1,937 -- 24,083 Plant under construction 25,827 147 4,741 -- 1,598 32,313 Plant acquisition adjustment 2,337 -- -- -- 5,665 8,002 Early retirements 1,036 14 126 -- (282) 894 Nonregulated investment 12,917 342 1,594 1,888 478 13,443 - ---------------------------------------------------------------------------------------------------------------------------------- Total Telephone Property 685,123 9,562 67,050 24,621 12,137 749,251 - ---------------------------------------------------------------------------------------------------------------------------------- Cellular Telephone Switching and cell site equipment 104,768 14,140 44,111 2,386 370 161,003 Other 22,685 1,798 9,654 1,089 (370) 32,678 License costs 312,159 100,879 86,090 3,735 (32) 495,361 Deferred start-up costs 8,669 1,247 694 131 (318) 10,161 - ---------------------------------------------------------------------------------------------------------------------------------- Total Cellular Telephone 448,281 118,064 140,549 7,341 (350) 699,203 - ---------------------------------------------------------------------------------------------------------------------------------- Radio Paging Pagers 28,918 410 16,437 12,476 -- 33,289 Transmitting equipment and other 19,342 200 3,905 486 -- 22,961 Deferred charges 7,978 3,813 91 -- (274) 11,608 - ---------------------------------------------------------------------------------------------------------------------------------- Total Radio Paging 56,238 4,423 20,433 12,962 (274) 67,858 - ---------------------------------------------------------------------------------------------------------------------------------- Other $ 35,695 $ -- $ 20,797 $ 1,499 $ (578) $ 54,415 - ----------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION Depreciation is provided for book purposes using the straight-line method. Composite depreciation rates, as applied to the average cost of depreciable property, were 7.2% for telephone, 10.5% for cellular telephone, 17.2% for radio paging, and 12.8% for other property. 41 SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1991 - --------------------------------------------------------------------------------
COLUMN C BALANCE AT COLUMN D COLUMN B DATE OF COLUMN F ACQUISITION COLUMN C LESS COLUMN E COLUMN A BALANCE AT OF COMPANIES RETIREMENTS BALANCE AT BEGINNING ACQUIRED ADDITIONS OR SALES OTHER END CLASSIFICATION OF PROPERTY OF PERIOD IN 1991 AT COST AT COST CHANGES OF PERIOD - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Telephone Plant In Service and Under Construction: Organization $ 103 $ 8 $ -- $ -- $ -- $ 111 Land 2,234 83 46 9 70 2,424 Buildings 29,659 1,651 2,230 115 (70) 33,355 Central office equipment 165,335 11,160 25,604 12,349 -- 189,750 Station apparatus 2,282 165 256 204 -- 2,499 Station connections 7,383 842 -- -- -- 8,225 Pole lines 18,144 987 1,211 685 -- 19,657 Aerial cable 80,053 4,740 5,540 1,331 -- 89,002 Buried cable 206,272 12,651 18,285 2,792 -- 234,416 Underground conduit 3,870 259 398 -- -- 4,527 Furniture and office equipment 30,671 841 5,465 429 -- 36,548 Vehicles and other work equipment 19,076 1,412 3,072 1,068 -- 22,492 Plant under construction 19,537 1,087 5,203 -- -- 25,827 Plant acquisition adjustment 1,075 -- -- -- 1,262 2,337 Early retirements 2,112 -- (720) 11 (345) 1,036 Nonregulated investment 10,785 633 1,881 382 -- 12,917 - ---------------------------------------------------------------------------------------------------------------------------------- Total Telephone Property 598,591 36,519 68,471 19,375 917 685,123 - ---------------------------------------------------------------------------------------------------------------------------------- Cellular Telephone Switching and cell site equipment 43,031 14,250 47,403 79 163 104,768 Other 10,301 1,953 11,319 725 (163) 22,685 License costs 91,697 198,182 22,280 -- -- 312,159 Deferred start-up costs 6,769 1,699 2,364 -- (2,163) 8,669 - ---------------------------------------------------------------------------------------------------------------------------------- Total Cellular Telephone 151,798 216,084 83,366 804 (2,163) 448,281 - ---------------------------------------------------------------------------------------------------------------------------------- Radio Paging Pagers 26,779 -- 10,004 7,865 -- 28,918 Transmitting equipment and other 16,141 -- 5,782 2,581 -- 19,342 Deferred charges 7,094 -- 884 -- -- 7,978 - ---------------------------------------------------------------------------------------------------------------------------------- Total Radio Paging 50,014 -- 16,670 10,446 -- 56,238 - ---------------------------------------------------------------------------------------------------------------------------------- Other $ 30,805 $ 963 $ 5,659 $ 1,760 $ 28 $ 35,695 - ----------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION Depreciation is provided for book purposes using the straight-line method. Composite depreciation rates, as applied to the average cost of depreciable property, were 6.7% for telephone, 10.4% for cellular telephone, 17.1% for radio paging, and 10.1% for other property. 42 SCHEDULE VI--RESERVE FOR DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1993 - --------------------------------------------------------------------------------
COLUMN E COLUMN C OTHER CHARGES BALANCE AT COLUMN C(1) ---------------------------- COLUMN B DATE OF ADDITIONS PROVISIONS SALVAGE COLUMN F BALANCE AT ACQUISITION OF CHARGED TO CHARGED TO LESS BALANCE AT COLUMN A BEGINNING OF COMPANIES COSTS AND COLUMN D CLEARING REMOVAL END DESCRIPTION PERIOD ACQUIRED EXPENSES RETIREMENTS ACCOUNTS COST OTHER OF PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Telephone Organization $ 313 $ -- $ 221 $ -- $ -- $ -- $ -- $ 534 Unclassified 785 -- -- -- -- -- (785) -- Buildings 11,679 1,186 1,283 256 -- 63 (135) 13,820 Central office equipment 81,486 4,502 22,611 21,480 -- 402 571 88,092 Station apparatus 1,710 298 357 76 -- (8 ) 1 2,282 Station connections 2,696 131 23 1,751 -- -- -- 1,099 Pole lines 9,736 470 1,354 268 -- (57 ) 24 11,259 Aerial cable 40,618 798 5,697 1,486 -- (393 ) 152 45,386 Buried cable 86,640 7,031 13,762 1,981 -- (28 ) 2 105,426 Underground conduit 1,496 348 200 (3 ) -- -- -- 2,047 Furniture and office equipment 20,190 527 6,376 750 73 (3 ) (73) 26,340 Vehicles and other work equipment 13,122 1,129 2,517 2,117 104 451 25 15,231 Plant acquisition adjustment 427 -- 226 -- -- -- -- 653 Nonregulated investment 9,283 26 1,697 1,041 -- 192 (25) 10,132 - ------------------------------------------------------------------------------------------------------------------------------------ Total Telephone Property 280,181 16,446 56,324 31,203 177 619 (243) 322,301 - ------------------------------------------------------------------------------------------------------------------------------------ Cellular Telephone Switching and cell site equipment 26,667 3,582 20,338 255 -- -- (3,014) 47,318 Other 8,066 219 5,327 1,065 -- -- (161) 12,386 License costs 25,001 148 17,281 -- -- -- 483 42,913 Deferred start-up costs 4,882 311 1,809 838 -- -- (145) 6,019 - ------------------------------------------------------------------------------------------------------------------------------------ Total Cellular Telephone 64,616 4,260 44,755 2,158 -- -- (2,837) 108,636 - ------------------------------------------------------------------------------------------------------------------------------------ Radio Paging Pagers 10,808 -- 7,174 7,725 -- -- -- 10,257 Transmitting equipment and other 10,810 -- 4,008 826 -- -- -- 13,992 Deferred charges 4,602 -- 2,210 -- -- -- 276 7,088 - ------------------------------------------------------------------------------------------------------------------------------------ Total Radio Paging 26,220 -- 13,392 8,551 -- -- 276 31,337 - ------------------------------------------------------------------------------------------------------------------------------------ Other $ 21,442 $ -- $ 7,347 $ 3,963 $ -- $ -- $ -- $ 24,826 - ------------------------------------------------------------------------------------------------------------------------------------ Note: (1) Depreciation and amortization as reflected in business segment information, included in Management's Discussion and Analysis (Results of Operations):
Telephone: Depreciation $ 55,856 Amortization 468 --------- included above 56,324 Depreciation not included above 168 Amortization of excess cost and other 3,070 --------- As shown in business segment information $ 59,562 --------- --------- Cellular: Depreciation $ 25,665 Amortization of licenses and deferred start-up costs 19,090 --------- included above 44,755 Amortization of other deferred costs 272 --------- As shown in business segment information $ 45,027 --------- --------- Paging: Depreciation $ 11,182 Amortization 2,210 --------- As shown in business segment information $ 13,392 --------- ---------
The depreciation charged to costs and expenses for "Other" is included in "Other income, net" in the Consolidated Statements of Income. 43 SCHEDULE VI--RESERVE FOR DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1992 - --------------------------------------------------------------------------------
COLUMN E COLUMN C COLUMN OTHER CHARGES BALANCE AT C(1) ---------------------------- COLUMN B DATE OF ADDITIONS PROVISIONS SALVAGE COLUMN F BALANCE AT ACQUISITION OF CHARGED TO CHARGED TO LESS BALANCE AT COLUMN A BEGINNING OF COMPANIES COSTS AND COLUMN D CLEARING REMOVAL END DESCRIPTION PERIOD ACQUIRED EXPENSES RETIREMENTS ACCOUNTS COST OTHER OF PERIOD - ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Telephone Organization $ -- $ 1 $ 312 $ -- $ -- $ -- $ -- $ 313 Unclassified 814 -- -- -- -- -- (29) 785 Buildings 10,787 250 1,101 203 -- (185 ) (71) 11,679 Central office equipment 69,062 1,363 18,270 8,202 -- 382 611 81,486 Station apparatus 2,087 27 288 152 -- (74 ) (466) 1,710 Station connections 7,721 150 35 5,020 -- 1 (191) 2,696 Pole lines 9,461 18 1,307 982 -- (45 ) (23) 9,736 Aerial cable 37,754 135 5,458 2,273 -- (443 ) (13) 40,618 Buried cable 77,248 1,556 11,947 3,431 -- (86 ) (594) 86,640 Underground conduit 1,323 23 160 4 -- 2 (8) 1,496 Furniture and office equipment 14,298 126 5,900 524 124 131 135 20,190 Vehicles and other work equipment 11,919 347 2,375 1,937 97 304 17 13,122 Plant acquisition adjustment 69 -- 358 -- -- -- -- 427 Nonregulated investment 8,286 332 1,773 1,888 -- 149 631 9,283 - ----------------------------------------------------------------------------------------------------------------------------------- Total Telephone Property 250,829 4,328 49,284 24,616 221 136 (1) 280,181 - ----------------------------------------------------------------------------------------------------------------------------------- Cellular Telephone Switching and cell site equipment 13,563 1,617 12,577 624 -- -- (466) 26,667 Other 4,585 167 4,029 457 -- -- (258) 8,066 License costs 14,861 -- 10,868 738 -- -- 10 25,001 Deferred start-up costs 3,220 144 1,959 124 -- -- (317) 4,882 - ----------------------------------------------------------------------------------------------------------------------------------- Total Cellular Telephone 36,229 1,928 29,433 1,943 -- -- (1,031) 64,616 - ----------------------------------------------------------------------------------------------------------------------------------- Radio Paging Pagers 11,196 -- 6,009 6,397 -- -- -- 10,808 Transmitting equipment and other 7,893 -- 3,326 445 -- -- 36 10,810 Deferred charges 3,798 -- 1,077 -- -- -- (273) 4,602 - ----------------------------------------------------------------------------------------------------------------------------------- Total Radio Paging 22,887 -- 10,412 6,842 -- -- (237) 26,220 - ----------------------------------------------------------------------------------------------------------------------------------- Other $ 16,950 $ -- $ 5,324 $ 1,199 $ -- $ -- $ 367 $ 21,442 - ----------------------------------------------------------------------------------------------------------------------------------- Note: (1) Depreciation and amortization as reflected in business segment information, included in Management's Discussion and Analysis (Results of Operations):
Telephone: Depreciation $ 48,653 Amortization 631 --------- included above 49,284 Depreciation not included above 177 Amortization of excess cost and other 2,485 --------- As shown in business segment information $ 51,946 --------- --------- Cellular: Depreciation $ 16,606 Amortization of licenses and deferred start-up costs 12,827 --------- included above 29,433 Amortization of other deferred costs 206 --------- As shown in business segment information $ 29,639 --------- --------- Paging: Depreciation $ 9,335 Amortization 1,077 --------- As shown in business segment information $ 10,412 --------- ---------
The depreciation charged to costs and expenses for "Other" is included in "Other income, net" in the Consolidated Statements of Income. 44 SCHEDULE VI--RESERVE FOR DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1991 - --------------------------------------------------------------------------------
COLUMN E COLUMN C COLUMN OTHER CHARGES BALANCE AT C(1) ---------------------------- COLUMN B DATE OF ADDITIONS PROVISIONS SALVAGE COLUMN F BALANCE AT ACQUISITION OF CHARGED TO CHARGED TO LESS BALANCE AT COLUMN A BEGINNING OF COMPANIES COSTS AND COLUMN D CLEARING REMOVAL END DESCRIPTION PERIOD ACQUIRED EXPENSES RETIREMENTS ACCOUNTS COST OTHER OF PERIOD - ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Telephone Unclassified $ 2 $ 785 $ 27 $ -- $ -- $ -- $ -- $ 814 Buildings 9,255 612 1,005 115 3 45 (18) 10,787 Central office equipment 63,356 4,373 13,489 12,338 3 445 (266) 69,062 Station apparatus 1,538 530 222 204 -- 5 (4) 2,087 Station connections 7,069 291 273 -- -- -- 88 7,721 Pole lines 8,283 508 1,300 686 -- (98 ) 154 9,461 Aerial cable 31,625 1,945 5,532 1,336 -- (331 ) 319 37,754 Buried cable 65,731 2,678 10,538 2,792 -- 64 1,029 77,248 Underground conduit 1,161 66 103 -- -- (1 ) (6) 1,323 Furniture and office equipment 8,919 640 4,999 424 160 8 (4) 14,298 Vehicles and other work equipment 9,947 833 2,069 1,081 42 214 (105) 11,919 Plant acquisition adjustment (58 ) -- -- -- -- -- 127 69 Nonregulated investment 6,981 428 1,263 394 -- 68 (60) 8,286 - ----------------------------------------------------------------------------------------------------------------------------------- Total Telephone Property 213,809 13,689 40,820 19,370 208 419 1,254 250,829 - ----------------------------------------------------------------------------------------------------------------------------------- Cellular Telephone Switching and cell site equipment 6,744 885 6,669 (1 ) -- -- (736) 13,563 Other 2,544 278 2,146 346 -- -- (37) 4,585 License costs 5,470 478 8,949 -- -- -- (36) 14,861 Deferred start-up costs 3,869 149 1,366 -- -- -- (2,164) 3,220 - ----------------------------------------------------------------------------------------------------------------------------------- Total Cellular Telephone 18,627 1,790 19,130 345 -- -- (2,973) 36,229 - ----------------------------------------------------------------------------------------------------------------------------------- Radio Paging Pagers 9,997 -- 5,484 4,300 -- -- 15 11,196 Transmitting equipment and other 6,593 -- 2,702 1,410 -- -- 8 7,893 Deferred charges 2,945 -- 861 -- -- -- (8) 3,798 - ----------------------------------------------------------------------------------------------------------------------------------- Total Radio Paging 19,535 -- 9,047 5,710 -- -- 15 22,887 - ----------------------------------------------------------------------------------------------------------------------------------- Other $ 14,937 $ 189 $ 3,392 $ 1,598 $ -- $ -- $ 30 $ 16,950 - ----------------------------------------------------------------------------------------------------------------------------------- Note: (1) Depreciation and amortization as reflected in business segment information, included in Management's Discussion and Analysis (Results of Operations):
Telephone: Depreciation $ 40,734 Amortization 86 --------- included above 40,820 Depreciation not included above 312 Amortization of excess cost and other 2,293 --------- As shown in business segment information $ 43,425 --------- --------- Cellular: Depreciation $ 8,814 Amortization of licenses and deferred start-up costs 10,316 --------- included above 19,130 Amortization of other deferred costs 139 --------- As shown in business segment information $ 19,269 --------- --------- Paging: Depreciation $ 8,186 Amortization 861 --------- As shown in business segment information $ 9,047 --------- ---------
The depreciation charged to costs and expenses for "Other" is included in "Other income, net" in the Consolidated Statements of Income. 45 TELEPHONE AND DATA SYSTEMS, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
COLUMN B COLUMN C(1) COLUMN C(2) COLUMN E BALANCE AT CHARGED TO CHARGED TO BALANCE AT COLUMN A BEGINNING OF COSTS AND OTHER COLUMN D END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, 1993 Deducted from deferred state tax asset: For unrealized net operating losses (1) $ (6,452) $ -- $ (2,252) $ -- $ (8,704) Deducted from accounts receivable: For doubtful accounts (1,608) (5,837) -- 5,352 (2,093) Deducted from marketable equity securities: For unrealized loss -- -- (626) -- (626) FOR THE YEAR ENDED DECEMBER 31, 1992 Deducted from accounts receivable: For doubtful accounts (1,200) (4,457) -- 4,049 (1,608) FOR THE YEAR ENDED DECEMBER 31, 1991 Deducted from accounts receivable: For doubtful accounts $ (733) $ (3,335) $ -- $ 2,868 $ (1,200) - ----------------------------------------------------------------------------------------------------------------------------------- Note: (1) The beginning balance represents the implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" on January 1, 1993.
46 SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993 - --------------------------------------------------------------------------------
COLUMN B COLUMN A CHARGED TO COSTS AND EXPENSES - ----------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 1991 ----------- ----------- ----------- Maintenance and repairs $ 58,348 $ 46,883 $ 42,523 Taxes, other than payroll and income taxes Gross receipts 4,432 3,370 2,999 Property 9,855 8,307 7,093 Advertising 13,645 10,848 6,835
47 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED FINANCIAL STATEMENTS The following financial statements are the combined financial statements of the cellular system partnerships listed below which are accounted for by the Company following the equity method. The combined financial statements were compiled from financial statements and other information obtained by the Company as a minority limited partner of the cellular limited partnerships listed below. The cellular system partnerships included in the combined financial statements, the periods each partnership is included, and the Company's ownership percentage of each cellular system partnership at December 31, 1993 are set forth in the following table.
THE PERIODS COMPANY'S INCLUDED LIMITED IN COMBINED PARTNERSHIP CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST - ------------------------------------------------------------------------------------------------------ ------------ ------------- Los Angeles SMSA Limited Partnership.................................................................. 1991-93 5.5% Nashville/Clarksville MSA Limited Partnership......................................................... 1991-93 49.0% Baton Rouge MSA Limited Partnership................................................................... 1991-93 52.0%
48 COMPILATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of TELEPHONE AND DATA SYSTEMS, INC.: The accompanying combined balance sheets of the Los Angeles SMSA Limited Partnership, the Nashville/Clarksville MSA Limited Partnership and the Baton Rouge MSA Limited Partnership as of December 31, 1993 and 1992 and the related combined statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1993, have been prepared from the separate financial statements, which are not presented separately herein, of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, as described in Note 1. We have reviewed for compilation only the accompanying combined financial statements, and, in our opinion, those statements have been properly compiled from the amounts and notes of the underlying separate financial statements of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, on the basis described in Note 1. The statements for the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships were audited by other auditors as set forth in their reports included on pages 50 through 54. The report of the other auditors of the Los Angeles SMSA Limited Partnership contains explanatory paragraphs with respect to the uncertainties discussed in the fourth and fifth paragraphs of Note 7. We have not been engaged to audit either the separate financial statements of the aforementioned limited partnerships or the related combined financial statements in accordance with generally accepted auditing standards and to render an opinion as to the fair presentation of such financial statements in accordance with generally accepted accounting principles. As discussed in "Change in Accounting Principle" in Note 2, the method of accounting for cellular sales commissions was changed effective January 1, 1991, for the Nashville/Clarksville MSA Limited Partnership and the Baton Rouge MSA Limited Partnership. ARTHUR ANDERSEN & CO. Chicago, Illinois February 11, 1994 49 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of LOS ANGELES SMSA LIMITED PARTNERSHIP: We have audited the balance sheets of Los Angeles SMSA Limited Partnership as of December 31, 1993 and 1992, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1993; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Los Angeles SMSA Limited Partnership as of December 31, 1993 and 1992, and results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 9 to the financial statements, two cellular agents filed complaints against the Partnership. The outcome of these matters is uncertain and, accordingly, no accrual for these matters has been made in the financial statements. In addition, as discussed in Note 9, a class action suit was filed against the Partnership alleging violations of state and federal antitrust laws. The outcome of this matter is uncertain and, accordingly, no accrual for this matter has been made in the financial statements. COOPERS & LYBRAND Newport Beach, California February 4, 1994 50 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1993, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1993, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1994 51 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1992, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1992, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1993 To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1991, and the related statements of operations, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/ Clarksville MSA Limited Partnership as of December 31, 1991, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Partnership changed its method of accounting for commissions in 1991. COOPERS & LYBRAND Atlanta, Georgia February 10, 1992 52 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1993, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1993, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1994 To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1992, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1992, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1993 53 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1991, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1991, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Partnership changed its method of accounting for commissions in 1991. COOPERS & LYBRAND Atlanta, Georgia February 10, 1992 54 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1992 1991 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Revenues................................................................... $ 506,028 $ 400,738 $ 338,494 Expenses Selling, general and administrative...................................... 287,299 235,038 169,912 Depreciation and amortization............................................ 57,357 46,740 40,687 ----------- ----------- ----------- Total expenses........................................................... 344,656 281,778 210,599 ----------- ----------- ----------- Operating income........................................................... 161,372 118,960 127,895 Other income............................................................... 272 477 81 ----------- ----------- ----------- Net income before cumulative effect of a change in accounting principle.... 161,644 119,437 127,976 Cumulative effect of a change in accounting principle (Note 2)............. -- -- (3,178) ----------- ----------- ----------- Net Income................................................................. $ 161,644 $ 119,437 $ 124,798 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. 55 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED BALANCE SHEETS (UNAUDITED) ASSETS
DECEMBER 31, ------------------------ 1993 1992 ----------- ----------- (DOLLARS IN THOUSANDS) Current Assets Cash.................................................................................. $ 27 $ 26 Accounts receivable--customers, net................................................... 81,656 58,141 Accounts receivable--affiliates....................................................... 29,981 16,074 Notes receivable--affiliates.......................................................... 3,756 3,751 Other current assets.................................................................. 5,689 7,823 ----------- ----------- 121,109 85,815 Property, Plant and Equipment, net...................................................... 304,926 277,228 Other................................................................................... 1,631 4,846 ----------- ----------- Total Assets............................................................................ $ 427,666 $ 367,889 ----------- ----------- ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL DECEMBER 31, ------------------------ 1993 1992 ----------- ----------- (DOLLARS IN THOUSANDS) Current Liabilities Accounts payable--other............................................................... $ 38,776 $ 33,433 Accounts payable--affiliates.......................................................... 1,039 1,061 Customer deposits..................................................................... 2,996 2,499 Other current liabilities............................................................. 22,101 18,721 ----------- ----------- 64,912 55,714 ----------- ----------- Deferred Rent........................................................................... 4,571 4,015 Capital Lease Obligation................................................................ 713 592 Long-Term Debt.......................................................................... -- 281 Partners' Capital....................................................................... 357,470 307,287 ----------- ----------- Total Liabilities and Partners' Capital................................................. $ 427,666 $ 367,889 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. 56 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
DECEMBER 31, 1993 --------------------------------------- 1993 1992 1991 ------------ ------------ ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................. $ 161,644 $ 119,437 $ 124,798 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of a change in accounting principle................ -- -- 3,178 Depreciation and amortization........................................ 57,357 46,740 40,687 Deferred revenue and other credits................................... 497 (3) (4) Loss on asset dispositions........................................... 3,838 4,294 397 Change in prepaid expenses........................................... (22) 4 14 Change in accounts receivable........................................ (37,422) (3,417) (28,599) Change in accounts payable and accrued expenses...................... 6,097 17,307 1,997 Change in other assets and liabilities............................... 4,942 3,967 834 ------------ ------------ ----------- 196,931 188,329 143,302 ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Change in notes payable.............................................. -- (2,305) 2,114 Change in notes receivable........................................... (5) (3,751) 556 Principal payments on capital lease obligations...................... (612) (442) -- Capital contribution................................................. -- 2,474 5,802 Capital distribution................................................. (111,461) (114,876) (71,032) ------------ ------------ ----------- (112,078) (118,900) (62,560) ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment, net of retirements....... (86,011) (68,595) (76,297) Decreases (increases) in other assets................................ 1,335 (856) (4,180) Change in deferred charges........................................... (202) (36) (266) Proceeds from sale of assets......................................... 26 61 -- ------------ ------------ ----------- (84,852) (69,426) (80,743) ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH.......................................... 1 3 (1) CASH Beginning of period.................................................. 26 23 24 ------------ ------------ ----------- End of period........................................................ $ 27 $ 26 $ 23 ------------ ------------ ----------- ------------ ------------ -----------
The accompanying notes are an integral part of these combined financial statements. 57 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, 1991...................................................... $ 240,684 Contributions................................................................. 5,802 Distributions................................................................. (71,032) Net Income for the year ended December 31, 1991............................... 124,798 --------- Balance at December 31, 1991.................................................... 300,252 Contributions................................................................. 2,474 Distributions................................................................. (114,876) Net Income for the year ended December 31, 1992............................... 119,437 --------- Balance at December 31, 1992.................................................... 307,287 Distributions................................................................. (111,461) Net Income for the year ended December 31, 1993............................... 161,644 --------- Balance at December 31, 1993.................................................... $ 357,470 --------- ---------
The accompanying notes are an integral part of these combined financial statements. 58 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................................................................ 1991-93 5.5% Nashville/Clarksville MSA Limited Partnership....................................................... 1991-93 49.0% Baton Rouge MSA Limited Partnership................................................................. 1991-93 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, 1993, and substantially all of the combined net income for the year then ended. USM's investment in and advances to Los Angeles SMSA Limited Partnership totalled $15,212,000 as of December 31, 1993, of which $17,398,000 represents its proportionate share of net assets of the Partnership. USM's investment in and advances to the Nashville/Clarksville MSA Limited Partnership totalled $14,300,000 as of December 31, 1993, which represents its proportionate share of net assets. USM's investment in and advances to the Baton Rouge MSA Limited Partnership totalled $8,935,000 as of December 31, 1993, $6,207,000 of which represents its proportionate share of net assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR COMBINED ENTITIES: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated lives: Buildings.............................................. 10-15 years Equipment.............................................. 3-10 years Furniture and Fixtures................................. 5-10 years Leasehold Improvements................................. 10 years
59 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) Property, Plant and Equipment consists of:
DECEMBER 31, ------------------------ 1993 1992 ----------- ----------- (DOLLARS IN THOUSANDS) Land.................................................................................... $ 1,819 $ 1,510 Buildings and Leasehold Improvements.................................................... 79,704 69,150 Equipment............................................................................... 355,376 293,176 Furniture and Fixtures.................................................................. 19,734 12,634 Under Construction...................................................................... 32,052 31,677 ----------- ----------- 488,685 408,147 Less Accumulated Depreciation........................................................... 183,759 130,919 ----------- ----------- $ 304,926 $ 277,228 ----------- ----------- ----------- -----------
Included in buildings are costs relating to the acquisition of cell site leases; such as legal, consulting, and title fees. Lease acquisition costs are capitalized when incurred and amortized over the period of the lease. Costs related to unsuccessful negotiations are expensed in the period the negotiations are terminated. Gains and losses on disposals are included in income at amounts equal to the difference between net book value and proceeds received upon disposal. During 1993 and 1992, one of the Partnerships recorded capital lease additions of $827,000 and $513,000, respectively. Commitments for future equipment acquisitions amounted to $22,734,000 at December 31, 1993. On January 10, 1994, one of the Partnerships entered into an agreement with its major supplier to purchase $77 million in equipment. OTHER ASSETS Other assets consist primarily of the costs of acquiring the right to serve certain customers previously served by resellers and are being amortized over three years using the straight-line method. Accumulated amortization was $4,806,000 and $2,797,000 at December 31, 1993 and 1992, respectively. CHANGE IN ACCOUNTING PRINCIPLE In the third quarter of 1991, the General Partner of two of the Partnerships changed its policy of capitalizing certain third party sales commissions and amortizing them over the average customer life. The General Partner's parent effected this change to standardize the accounting treatment of sales commissions throughout its consolidated cellular operations. These amounts will be expensed in the period in which they are incurred by the agent. In 1991, this change in accounting principle was retroactively applied as of January 1, 1991. Had the change not been made, 1991 net income before the cumulative effect of a change in accounting principle would have increased $1,838,000. REVENUE RECOGNITION Revenues from operations primarily consist of charges to customers for monthly access charges, cellular airtime usage, and roamer charges. Revenues are recognized as services are rendered. Unbilled revenues, resulting from cellular service provided from the billing cycle date to the end of each month and from other cellular carriers' customers using the partnership's cellular systems for the last half of each month, are estimated and recorded as receivables. Unearned monthly access charges relating to the periods after month-end are deferred and netted against accounts receivable. 60 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) INCOME TAXES No provisions have been made for federal or state income taxes since such taxes, if any, are the responsibility of the individual partners. 3. LEASE COMMITMENTS: Future minimum rental payments required under operating leases for real estate that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1993, are as follows: (DOLLARS IN THOUSANDS) 1994............................................................. $ 11,445 1995............................................................. 10,890 1996............................................................. 10,643 1997............................................................. 9,983 1998............................................................. 9,696 Thereafter....................................................... 51,910 --------- $ 104,567 --------- ---------
The initial lease terms generally range from 5 to 25 years with the majority of them having initial terms of 10 years and providing for one renewal option of 5 years and for rental escalation. Included in selling, general and administrative expense are rental costs of $7,897,000, $5,996,000 and $4,463,000 for the years ended December 31, 1993, 1992 and 1991, respectively. One of the Partnerships leases office facilities under a ten-year lease agreement which provides for free rent incentives for six months and rent escalation over the ten-year period. The Partnership recognizes rent expense on a straight-line basis and recorded the related deferred rent as a noncurrent liability to be amortized as an adjustment to rental costs over the life of the lease. 4. CAPITAL LEASE OBLIGATION: One of the Partnerships leases equipment under capital lease agreements. At December 31, 1993 and 1992, respectively, the amount of such equipment included in property, plant and equipment is $3,324,000 and $2,638,000 less accumulated amortization of $1,914,000 and $1,451,000. Future minimum annual lease payments on noncancellable capital leases are as follows:
(DOLLARS IN THOUSANDS) 1994............................................................... $ 768 1995............................................................... 526 1996............................................................... 216 1997............................................................... 20 --------- Total future minimum lease payments................................ 1,530 Less amounts representing interest............................... 129 --------- Present value of net future minimum lease payments................. 1,401 Less current portion............................................. 688 --------- Lease obligation, noncurrent....................................... $ 713 --------- ---------
5. RELATED PARTY TRANSACTIONS: Certain affiliates of these cellular limited partnerships provide services for the system operations, legal, financial, management and administration of these entities. These affiliates are reimbursed for both direct and allocated costs (totaling $57.1 million in 1993 $52.2 million in 1992 and $50.0 million in 1991) related to providing these services. In addition, certain affiliates have established a credit facility with certain partnerships to provide working capital to the partnership. One of the partnerships participates in a centralized cash management arrangement with its general partner. At December 31, 1993 61 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) and 1992, the interest-bearing balance amounted to $29,981,000 and $16,074,000, respectively. Effective January 1, 1989, the general partner pays or charges the Partnership monthly interest, computed using the general partner's average borrowing rate, on the amounts due to or from the Partnership. Interest earned in 1993, 1992 and 1991 was $1,294,000, $1,396,000 and $675,000, respectively. 6. REGULATORY INVESTIGATIONS: The California Public Utilities Commission (CPUC) has issued an Order Instituting Investigation of the regulation of cellular radiotelephone utilities operating in the State of California under Order Number I.88-11-040. The intent of the investigation was to determine the appropriate regulatory objectives for the cellular industry, and whether current regulations applicable to the cellular industry and its operators meet those objectives or should be modified. On October 6, 1992, the CPUC adopted an Order which, among other things, imposes an accounting methodology on cellular utilities to separate wholesale and retail costs, permits resellers to operate a reseller switch interconnected to the cellular carrier's facilities, and requires the unbundling of certain wholesale rates to the resellers. On May 19, 1993, the CPUC granted limited rehearing of the decision. In addition, the CPUC rescinded its order to modify the method for allocating costs between wholesale and retail operations. On December 17, 1993, the CPUC adopted a new Order Instituting Investigation into the regulation of mobile telephone service and wireless communications, Order Number I.93-12-007. The investigation proposes a regulatory program which would encompass all forms of mobile telephone service. Currently, one of the Partnerships affected is unable to quantify the precise impact of these Orders on its future operations, but that impact may be material to the Partnership under certain circumstances. In January 1992, the CPUC commenced a separate investigation of all cellular companies operating in the State to determine their compliance with General Order number 159 (G.O. 159). The investigation will address whether cellular utilities have complied with local, state or federal regulations governing the approval and construction of cellular sites in the State. The CPUC may advise other agencies of violations in their jurisdictions. One of the Partnerships affected has prepared and filed the information requested by the CPUC. The CPUC will review the information provided by the Partnership and, if violations of G.O. 159 are found, it may assess penalties against the Partnership. The outcome of this investigation is uncertain and accordingly, no accrual for this matter has been made. 7. CONTINGENCIES AND COMMITMENTS: On June 28, 1993, an applicant for an unserved area license in the Los Angeles market filed an informal objection with the FCC to one of the Partnerships' System Information Update map. The applicant claims the Partnership was not legally authorized to provide service in parts of its described service area. The applicant requests that the FCC correct the Partnership's service area to eliminate such areas and suggests the FCC impose "such sanctions as it deems appropriate." The Partnership filed a response with the FCC in which it reported that, in its review of the applicant's allegations, it found certain errors that were made in its filings but disputed any of these were intentional. The FCC could assess penalties against the partnership for nonconformance with its license. The outcome of this matter remains uncertain and, accordingly, the Partnership has not recorded an accrual. The Partnership intends to defend its position vigorously. The Partnership filed for its 10-year license renewal for the Los Angeles market on August 30, 1993. The Partnership is currently operating with FCC authority while the renewal application is pending resolution of the FCC's decision on claims mentioned above. The Partnership fully expects that its license will be renewed. 62 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) Two agents of a competing carrier have named one of the Partnerships in several complaints against the carrier. The general allegations include violations of California Unfair Practices Act and price fixing. The ultimate outcome of both these actions is uncertain at this time. Accordingly, no accrual for these contingencies has been made. The Partnership intends to defend its position vigorously. On November 24, 1993, a class action suit was filed against one of the Partnerships and another cellular carrier alleging conspiracy to fix the price of cellular service in violation of state and federal antitrust laws. The plaintiffs are seeking substantial monetary damages and injunctive relief in excess of $100 million. The outcome of this matter is uncertain and, accordingly, the Partnership has not recorded an accrual. The Partnership intends to defend its position vigorously. One of the Partnerships is a party to various other lawsuits arising in the ordinary course of business. In the opinion of management, based on a review of such litigation with legal counsel, any losses resulting from these actions are not expected to materially impact the financial condition of the Partnership. Two of the Partnerships provide cellular service and sell cellular telephones to diversified groups of consumers within concentrated geographical areas. The general partner performs credit evaluations of the Partnerships' customers and generally does not require collateral. Receivables are generally due within 30 days. Credit losses related to customers have been within management's expectations. One of the Partnerships purchases substantially all of its equipment from one supplier. The General Partner of two of the Partnerships entered into agreements with an equipment vendor on behalf of the Partnerships to replace the Partnerships' cellular equipment with new cellular technology which will support both analog and digital voice transmissions. 63 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 (PRINCIPAL FINANCIAL OFFICER) By: /S/ GREGORY J. WILKINSON ------------------------------------------ Gregory J. Wilkinson, VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
Dated March 28, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - -------------------------------------------------------------------- ----------- --------------------- /S/ LEROY T. CARLSON DIRECTOR March 28, 1994 ----------------------------------------------- LeRoy T. Carlson /S/ LEROY T. CARLSON, JR. DIRECTOR March 28, 1994 ----------------------------------------------- LeRoy T. Carlson, Jr. /S/ MURRAY L. SWANSON DIRECTOR March 28, 1994 ----------------------------------------------- Murray L. Swanson /S/ RUDOLPH E. HORNACEK DIRECTOR March 28, 1994 ----------------------------------------------- Rudolph E. Hornacek /S/ JAMES BARR III DIRECTOR March 28, 1994 ----------------------------------------------- James Barr III /S/ LESTER O. JOHNSON DIRECTOR March 28, 1994 ----------------------------------------------- Lester O. Johnson /S/ DONALD C. NEBERGALL DIRECTOR March 28, 1994 ----------------------------------------------- Donald C. Nebergall /S/ HERBERT S. WANDER DIRECTOR March 28, 1994 ----------------------------------------------- Herbert S. Wander /S/ WALTER C. D. CARLSON DIRECTOR March 28, 1994 ----------------------------------------------- Walter C. D. Carlson /S/ DONALD R. BROWN DIRECTOR March 28, 1994 ----------------------------------------------- Donald R. Brown /S/ ROBERT J. COLLINS DIRECTOR March 28, 1994 ----------------------------------------------- Robert J. Collins
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EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 3.1(a) Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 1 on Form 8 dated February 5, 1992 to the Company's Report on Form 8-A. 3.1(b) Articles of Amendment to Articles of Incorporation relating to designation of Series RR Preferred Shares, is hereby incorporated by reference to Exhibit 4.4(b)to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 3.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 1 on Form 8 dated February 5, 1992 to the Company's Report on Form 8-A. 4.1(a) Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 1 on Form 8 dated February 5, 1992 to the Company's Report on Form 8-A. 4.1(b) Articles of Amendment to Articles of Incorporation relating to designation of Series RR Preferred Shares, is hereby incorporated by reference to Exhibit 4.4(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 4.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 1 on Form 8 dated February 5, 1992 to the Company's Report on Form 8-A. 4.3 The Indenture and Supplemental Indentures for the Company's Series A, B, C, D, E and F Subordinated Debentures are not being filed as exhibits because the total authorized subordinated debentures do not exceed 10% of the total assets of the Company and its Subsidiaries. The Company agrees to furnish a copy of such Indentures and Supplemental Indentures if so requested by the Commission. 4.4 The Indenture between the Company and Harris Trust and Savings Bank, Trustee, dated February 1, 1991, under which the Company's Medium-Term Notes are issuable, is hereby incorporated by reference to the Company's Current Report on Form 8-K filed on February 19, 1991. 9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by reference to an exhibit to Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-12943. 9.1(b) Amendment dated as of May 9, 1991 to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is hereby incorporated by reference to Exhibit 9.1(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984 is hereby incorporated by reference to the Company's Registration Statement on Form S-2, No. 2-92307. 10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-7, No. 2-74615.
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated as of May 28, 1991, is hereby incorporated by reference to Exhibit 10.2(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson, is hereby incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated as of March 14, 1988, between the Company and LeRoy T. Carlson, is hereby incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.5 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the Company and LeRoy T. Carlson, Jr., is hereby incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.6 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company and James Barr III, is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.7(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by reference to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated March 31, 1988. 10.7(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company. 10.7(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company. 10.8 1985 Incentive Stock Option Plan of the Company, is hereby incorporated by reference to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 24, 1986. 11 Statement regarding computation of per share earnings. 12 Statements regarding computation of ratios. 13 Incorporated portions of 1993 Annual Report to Security Holders. 21 List of Subsidiaries of the Company. 23.1 Consent of independent public accountants. 23.2 Consent of independent accountants. 99.1 Incorporated portions items as expected to be included in the 1994 Proxy Statement. 99.2 Pro Forma Financial Statements.
[LOGO] TELEPHONE AND DATA SYSTEMS, INC. 30 North LaSalle Street Chicago, Illinois 60602 312/630-1900 EX-10.7(B) 2 EXHIBIT 10.7(B) EXHIBIT 10.7(b) AMENDMENT NO. 1 TO TELEPHONE AND DATA SYSTEMS, INC. 1988 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN ---------------------------------------------------- The Plan is amended as follows to include: "4(d) Cessation of Employment by Retirement. If a Participant retires from the Company after having reached the age of 65, each Option or SAR held by the Participant shall be exercisable for a period of 90 days after the effective date of the retirement and only to the extent that such Option or SAR could have been exercised on such date; provided, however, that if such Participant shall die within such 90 day period, each such Option or SAR shall be exercisable (to the same extent) by the person to whom the Participant's rights under such Option or SAR shall pass by will or by the applicable laws of descent and distribution for a period ending 180 days after the effective date of such Participants' resignation." Existing Paragraph 4(d) is amended to become Paragraph 4(d) and Paragraph 4(e) is amended to become 4(f). EX-10.7(C) 3 EXHIBIT 10.7(C) EXHIBIT 10.7(c) AMENDMENT NO. 2 TO TELEPHONE AND DATA SYSTEMS, INC. 1988 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN ---------------------------------------------------- Section 6.4 of the Plan is hereby amended by adding thereto: An acceptable method by which a Participant may pay the Option Price shall include, but is not limited to, authorizing the Company to retain from the Common Shares purchased upon the exercise of an Option that number of whole Common Shares having an aggregate Fair Market Value on the date of exercise equal to the Option Price. Section 6.6 of the Plan is hereby amended by adding thereto: A Participant may elect to deliver to the Company (or authorize the Company to retain from the Common Shares purchased upon such exercise) whole Common Shares to satisfy the Company's obligation, if any, to withhold such taxes; provided, however, that in the case of a Participant who is an officer or director of the Company (within the meaning of Section 16 of the Securities Act of 1934), such election may not be made during the six-month period beginning on the date that an Option is granted (except in the case of the death or disability of the Participant) and must be made either (i) at least six months prior to the date on which the amount of such taxes is determined, or (ii) during the ten business day period beginning on the third business day following release of the Company's quarterly or annual summary of sales and earnings. EX-11 4 EXHIBIT 11 EXHIBIT 11 TELEPHONE AND DATA SYSTEMS, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1993 1992 1991 - ------------------------------------------------------------------------------------------ ----------- ----------- ----------- PRIMARY EARNINGS Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ 33,896 $ 38,520 $ 21,113 Dividends on Preferred Shares........................................................... (2,386) (2,237) (1,688) Minority income adjustment assuming issuance of a subsidiary's issuable securities...... -- (546) -- ----------- ----------- ----------- Net income before Extraordinary Item and Cumulative Effect of Accounting Changes applicable to Common................................................................... 31,510 35,737 19,425 Extraordinary Item...................................................................... -- (769) -- Cumulative Effect of Accounting Changes................................................. -- (6,866) (5,035) ----------- ----------- ----------- Net Income Available to Common.......................................................... $ 31,510 $ 28,102 $ 14,390 ----------- ----------- ----------- ----------- ----------- ----------- PRIMARY SHARES Weighted average number of Common and Series A Common Shares Outstanding................ 46,995 38,672 32,432 Additional shares assuming issuance of: Options and Stock Appreciation Rights................................................. 267 337 328 Convertible Preferred Shares.......................................................... -- 30 276 Common Shares Issuable................................................................ 4 2 -- Public offering shares................................................................ -- 33 -- ----------- ----------- ----------- Primary Shares.......................................................................... 47,266 39,074 33,036 ----------- ----------- ----------- ----------- ----------- ----------- PRIMARY EARNINGS PER COMMON SHARE Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ .67 $ .91 $ .59 Extraordinary Item...................................................................... -- (.02) -- Cumulative Effect of Accounting Changes................................................. -- (.17) (.15) ----------- ----------- ----------- Net Income.............................................................................. $ .67 $ .72 $ .44 ----------- ----------- ----------- ----------- ----------- ----------- FULLY DILUTED EARNINGS* Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ 33,896 $ 38,520 $ 21,113 Dividends on Preferred Shares........................................................... (2,386) (2,054) (1,688) Minority income adjustment assuming issuance of a subsidiary's issuable securities...... -- (546) -- ----------- ----------- ----------- Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes applicable to Common................................................................... 31,510 35,920 19,425 Extraordinary Item...................................................................... -- (769) -- Cumulative Effect of Accounting Changes................................................. -- (6,866) (5,035) ----------- ----------- ----------- Net Income Available to Common.......................................................... $ 31,510 $ 28,285 $ 14,390 ----------- ----------- ----------- ----------- ----------- ----------- FULLY DILUTED SHARES Weighted average number of Common and Series A Common Shares Outstanding................ 46,995 38,672 32,432 Additional shares assuming issuance of: Options and Stock Appreciation Rights................................................. 293 371 365 Convertible Preferred Shares.......................................................... -- 257 276 Common Shares issuable................................................................ 4 2 -- Public offering shares................................................................ -- 33 -- ----------- ----------- ----------- Fully Diluted Shares.................................................................... 47,292 39,335 33,073 ----------- ----------- ----------- ----------- ----------- ----------- FULLY DILUTED EARNINGS PER COMMON SHARE Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes........ $ .67 $ .91 $ .59 Extraordinary Item...................................................................... -- (.02) -- Cumulative Effect of Accounting Changes................................................. -- (.17) (.15) ----------- ----------- ----------- Net Income.............................................................................. $ .67 $ .72 $ .44 ----------- ----------- ----------- ----------- ----------- ----------- - ---------- * 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 5 EXHIBIT 12 EXHIBIT 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)
12 MONTHS ENDED 12/31/93 ---------------- EARNINGS: Income from Continuing Operations before Income Taxes........................................................ $ 60,393 Add (Deduct): Minority Share of Losses................................................................................. (4,860) Earnings on Equity Method................................................................................ (20,015) Distributions from Minority Subsidiaries................................................................. 11,943 Amortization of Non-Telephone Capitalized Interest....................................................... 42 Minority share of income in majority-owned subsidiaries that have fixed charges.......................... 1,308 -------- 48,811 Add fixed charges: Consolidated interest expense............................................................................ 37,282 Interest Portion (1/3) of Consolidated Rent Expense...................................................... 4,914 Amortization of debt expense and discount on indebtedness................................................ 184 -------- $ 91,191 -------- -------- FIXED CHARGES: Consolidated interest expense................................................................................ $ 37,282 Interest Portion (1/3) of Consolidated Rent Expense.......................................................... 4,914 Amortization of debt expense and discount on indebtedness.................................................... 184 -------- $ 42,380 -------- -------- RATIO OF EARNINGS TO FIXED CHARGES............................................................................. 2.15 -------- -------- Tax-Effected Redeemable Preferred Dividends.................................................................. $ 2,376 Fixed Charges................................................................................................ 42,380 -------- Fixed Charges and Redeemable Preferred Dividends........................................................... $ 44,756 -------- -------- RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS.......................................... 2.04 -------- -------- Tax-Effected Preferred Dividends............................................................................. $ 4,251 Fixed Charges................................................................................................ 42,380 -------- Fixed Charges and Preferred Dividends...................................................................... $ 46,631 -------- -------- RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS..................................................... 1.96 -------- --------
EX-13 6 EXHIBIT 13 TELEPHONE AND DATA SYSTEMS, INC. INCORPORATED PORTIONS OF 1993 ANNUAL REPORT TO SECURITIES HOLDERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified telecommunications company which provides high-quality telecommunications services to nearly 1.1 million consolidated telephone, cellular telephone and radio paging customer units in 37 states and the District of Columbia. The accompanying financial statements present the results of operations of the Company's three primary businesses: TDS Telecommunications Corporation ("TDS Telecom"), United States Cellular Corporation (AMEX symbol "USM"), and American Paging, Inc. (AMEX symbol "APP"), as well as TDS and its service subsidiaries. TDS's long-term business development strategy is to expand its operations through internal growth and acquisitions, and to explore and develop other telecommunications services. Rapid growth in customers served generated substantial increases in revenues and operating cash flows, while the costs of rapidly developing new cellular markets and vigorously adding cellular customers slowed growth in operating income and net income. TDS Telecom is expanding through the selective acquisition of local exchange telephone companies serving rural and suburban areas and by offering additional lines of telecommunications products and services to existing customers. USM is developing its cellular operations by rapidly building cell sites to broaden and improve its communications network, by vigorously marketing its services to rapidly growing number of customers, and by enhancing its cellular clusters through strategic acquisitions and trades. APP is rapidly growing by focusing its efforts on improving the quality of its messaging services and by vigorously marketing those services. CONSOLIDATED Consolidated operating results for 1993 and 1992 reflect primarily the effects of very rapid expansion and development of cellular operations, steady growth in telephone operations, dynamic increases in paging units in service, improving economies of scale in cellular and paging operations, continuing improvements in business processes and systems, the impact of acquisitions and trades and the costs of financing these high-growth activities. During 1993 and 1992, the Company's wireline telephone operations provided a growing foundation of operating cash flow and earnings to support development of its wireless cellular and paging operations. While wireless operations were not profitable during 1993 and 1992, they each contributed rapidly growing operating cash flow as they progressed toward overall profitability. Results for 1993 include a $2.3 million net-of-tax gain on sales of cellular interests and a $600,000 provision for discontinuance of national retailer distribution of pagers. Results for 1992 include net-of-tax gains on sales and exchanges of cellular interests totalling $14.7 million, the $6.9 million one-time cost of adopting a new accounting standard for postretirement benefits and other nonrecurring items totalling $200,000. On a comparable basis, excluding these nonrecurring and unusual items, net income available to common increased 44.5% to $29.8 million and earnings per share rose 18.9% to $.63.
Year Ended December 31, 1993 1992 1991 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Operating Income Telephone $ 79,110 $ 72,218 $ 65,242 Cellular telephone (8,656) (12,705) (16,831) Radio paging (721) (5,448) (7,750) -------------------------------------------- $ 69,733 $ 54,065 $ 40,661 -------------------------------------------- -------------------------------------------- Operating Margin Telephone 29.5% 30.3% 30.9% Cellular telephone (3.5%) (7.7%) (16.9%) Radio paging (1.0%) (10.0%) (17.6%) Consolidated 11.8% 11.8% 11.5% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Certain 1992 and 1991 amounts have been reclassified to conform to current year presentation. TDS Telecom has acquired nine telephone companies since December 31, 1991. These acquisitions added 24,100 access lines while internal growth added 28,100 lines. USM, TDS's 85.1%-owned subsidiary, has added 51 markets to consolidated operations through acquisitions and the initiation of cellular operations. USM currently provides cellular service through systems serving 116 majority-owned and managed markets. APP has acquired three paging systems which added approximately 21,000 pagers. APP provides service to its customers through 17 customer operations centers. OPERATING REVENUES increased 29.3% during 1993 and 28.8% during 1992 primarily as a result of increases in customers served and modest price changes. The rapid expansion of cellular telephone revenues, 41.9% and 35.9%, respectively, of total 1993 and 1992 revenues, reflects sharp increases in cellular telephones in service driven by vigorous marketing activities and rapid expansion of cellular telephone systems, strong growth in keeper roaming revenues and declines in average revenue per customer averaging 0.6% over the two-year period ended December 31, 1993. Growth in telephone revenues, 45.4% and 52.1%, respectively, of total 1993 and 1992 revenues, are the result of access line growth averaging 0.6% and modest changes in average revenue per access line averaging 4.6% during the two-year period. The rapid growth in paging revenues, 12.7% and 12.0%, respectively, of total 1993 and 1992 revenues, is due to increases in paging units in service of 43.0% during 1993 and 36.1% during 1992 offset by continuing decreases in average revenue per unit averaging 5.3% over the two-year period. OPERATING EXPENSES rose 29.3% ($118.2 million) in 1993 and 28.3% ($88.8 million) in 1992 as a result of the continued rapid growth in and start-up of USM's cellular telephone operations and the steady growth in TDS Telecom's and APP's operations. The increase in cellular expenses reflects the rapid expansion of this segment during the past three years. Telephone operating expenses increased due to the effects of acquisitions and growth in internal operations. Radio paging expenses increased to serve the growing customer base and to expand market share in certain service areas. OPERATING INCOME increased 29.0% ($15.7 million) in 1993 and 33.0% ($13.4 million) in 1992 due to improved operating results in all three business units. Management anticipates continued rapid growth in revenues as all three business units continue to add customers. This growth and additional expansion and market development costs are anticipated to slow the rate of growth in improvements in consolidated operating performance during 1994. CELLULAR INVESTMENT INCOME, representing the Company's share of income of markets in which the Company has a minority interest and follows the equity method of accounting, increased 70.3% ($6.5 million) in 1993 and 35.2% ($2.4 million) in 1992. GAIN ON SALE OF CELLULAR INTERESTS reflects the sale of a majority-owned and managed cellular system in 1992 and the sale or exchange of minority interests in 1993, 1992 and 1991. Approximately $2.9 million of the 1991 gain was offset by an equal amount of income tax expense, resulting in no effect on net income. MINORITY SHARE OF INCOME includes (a) the minority shareholders' share of USM's net income (1992) or losses (1993 and 1991), (b) the minority partners' share of income or loss of the cellular markets majority-owned by USM and (c) the minority shareholders' share of income of a telephone company majority-owned by TDS. MINORITY SHARE OF INCOME
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) United States Cellular Minority Shareholders' Share $ 4,270 $ (1,088) $ 4,250 Minority Partner's Share (3,496) (2,615) (1,467) ----------------------------------------- 774 (3,703) 2,783 TDS Telecom (1,249) -- -- ----------------------------------------- $ (475) $ (3,703) $ 2,783 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
OTHER INCOME, NET includes a $1.0 million pretax charge in 1993, as APP elected to cease national retailer distribution of pagers through its wholly owned subsidiary, American Paging Network ("APN"). INTEREST EXPENSE increase 14.9% ($4.9 million) in 1993 and 12.5% ($3.6 million) in 1992. Long-term debt under the TDS Medium-Term Note Program increased $92.5 million in 1993 and $7.5 million in 1992, and cellular vendor financing increased a net $35.4 million in 1992. Short-term interest expense declined 7.8% ($154,000) in 1993 and 46.8% ($1.7 million) in 1992, as interest rates declined in both years and as the average balance of notes payable during 1992 declined $11.9 million. The average amount of short-term debt outstanding totalled $32.3 million in 1993, $31.1 million in 1992 and $43.0 million in 1991. The average interest rate on such short-term debt was 3.9% in 1993, 4.5% in 1992 and 6.6% in 1991. See "Financial Resources and Liquidity" for a further discussion of short- and long-term debt. INCOME TAX EXPENSE decreased 11.0% ($3.3 million) in 1993 and increased 99.2% ($14.8 million) in 1992, reflecting primarily changes in pretax income. The effective income tax rates were 43.9%, 43.6% and 41.4% in 1993, 1992 and 1991, respectively. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 1, 1993. Income tax expense for 1993 reflects the new accounting principle; income tax expense for prior years has not been restated. The increase in the 1992 rate over 1991 reflects primarily the effect of USM's net income and the related pretax deduction for financial reporting purposes of the minority shareholders' share of such income. For purposes of income tax accounting under the then existing accounting principles, such pretax accounting deduction was a "permanent difference" and had the effect of increasing the effective tax rate in 1992. NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES was $33.9 million in 1993, $38.5 million in 1992 and $21.1 million in 1991. The decrease in 1993 from 1992 and the increase in 1992 over 1991 reflect the significant improvement in operating results of all three business segments and the $14.7 million (after income taxes and minority shareholders' share) gains on the sales of cellular interests in 1992. EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES were $.67 in 1993, $.91 in 1992 and $.59 in 1991. Changes in earnings per share reflect changes in net income and 21.0% and 18.3% increases in weighted average common shares outstanding in 1993 and 1992, respectively. TDS sold 1,320,000 and 2,000,000 Common Shares for cash in 1993 and 1992, respectively. Approximately 6.8 million and 3.7 million Common Shares have been issued in 1993 and 1992, respectively, in connection with acquisitions. EXTRAORDINARY ITEM: During 1992, the Company retired at a premium $20.8 million of its Senior Notes. The notes carried interest rates of 9.75% to 13.75% and were due in 1996 through 2004. The transaction resulted in an extraordinary loss of $769,000 ($.02 per share), net of income tax benefits of $491,000. CUMULATIVE EFFECT OF ACCOUNTING CHANGES: Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Approximately $11.3 million was recorded as the cumulative effect of an accounting change for the year ended December 31, 1992. The $6.9 million cumulative effect, net of related income tax benefits of $4.4 million, reduced earnings per share by $.17. Operating results for 1993 and 1992 reflect the new accounting standard. The 1991 financial statements have not been restated. Effective January 1, 1991, USM changed its method of accounting for sales commissions from capitalizing and amortizing these costs over 36 months to expensing as incurred. In addition, two of USM's equity method investees made a similar change. The cumulative effect of the change on years prior to 1991 was a charge to income of $5.0 million, or $.15 per share, net of USM's minority shareholders' share, $1.9 million, and income tax benefits of $3.4 million. EARNINGS PER COMMON SHARE were $.67 in 1993, $.72 in 1992 and $.44 in 1991, reflecting results of operations, the 1992 extraordinary item and the accounting changes in 1992 and 1991. Excluding significant nonrecurring and unusual items, net income available to common and earnings per share were approximately $29.8 million and $.63 for 1993 as compared to $20.6 million and $.53 for 1992 and $19.1 million and $.58 for 1991, as shown in the accompanying table. NET INCOME AVAILABLE TO COMMON
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT EARNINGS PER SHARE AMOUNTS) As Reported $31.5 $ 28.6 $ 14.4 Nonrecurring and Unusual Items (estimated net-of-tax): Provision for discontinuance of national retailer distribution of pagers through APN .6 -- -- Cumulative effect of accounting changes -- 6.9 5.0 Extraordinary loss on retirement of debt -- .8 -- Gain on sales or exchanges of cellular interests (net of USM minority share) (2.3) (14.7) (.3) TDS Telecom directory revenue settlement -- (1.0) -- ---------------------------------------- Excluding Nonrecurring and Unusual Items $ 29.8 $ 20.6 $ 19.1 ---------------------------------------- ---------------------------------------- Earnings Per Share, excluding Nonrecurring and Unusual Items $ .63 $ .53 $ .58 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TELEPHONE OPERATIONS
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS) OPERATING REVENUES Local service $ 72,191 $ 65,131 $ 61,313 Network access and long-distance 159,111 137,747 120,375 Miscellaneous 36,820 35,217 29,543 ------------------------------------------ 268,122 238,095 211,231 ------------------------------------------ OPERATING EXPENSES Plant operations 42,524 36,100 32,760 Depreciation 56,024 48,830 41,046 Amortization 3,538 3,116 2,379 Customer operations 39,416 35,103 31,255 Corporate and other 47,510 42,728 38,549 ------------------------------------------ 189,012 165,877 145,989 ------------------------------------------ OPERATING INCOME $ 79,110 $ 72,218 $ 65,242 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Telephone revenues as a percent of total revenues 45.4% 52.1% 59.6% Construction expenditures $ 82,233* $67,357* $ 67,856* Identifiable assets 829,489 723,855 674,712 Telephone plant in service per access line $ 2,317 $ 2,210 $ 2,209 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Companies 94 90 85 Access lines 356,200 321,700 304,000 Growth in access lines from prior year-end: Acquisitions 20,100 4,000 15,800 Internal growth 14,400 13,700 9,500 Average monthly revenue per access line $ 66 $ 63 $ 60 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- *Includes noncash amounts (in thousands) of $1,415, $1,705 and $(796), respectively.
OPERATING REVENUES from telephone operations increased 12.6% ($30.0 million) in 1993 and 12.7% ($26.9 million) in 1992. The increases in revenues were due to acquisitions, increased usage of the network, recovery of increased costs of providing long-distance services and internal access line growth. Acquisitions increased telephone revenues 4.9% ($11.7 million) in 1993 and 4.4% ($9.4 million) in 1992. Telephone results of operations include the results of acquired companies since the respective dates of acquisition. Local service revenues increased 10.8% ($7.1 million) in 1993 and 6.2% ($3.8 million) in 1992, with acquisitions increasing these revenues 3.8% ($2.5 million) in 1993 and 4.1% ($2.5 million) in 1992. Internal growth in access lines and sales of custom-calling and other features increased local service revenues approximately $3.3 million in 1993 and $3.1 million in 1992. 1991 revenues totalling $1.0 million for Extended Area Service ("EAS") were eliminated in 1992 due to a change in a revenue settlement arrangement. Network access and long-distance revenues increased 15.5% ($21.4 million) in 1993 and 14.4% ($17.4 million) in 1992. Acquisitions increased these revenues 5.5% ($7.6 million) in 1993 and 4.5% ($5.4 million) in 1992. Recovery of increased costs of providing long-distance services increased revenues $4.4 million in 1993 and $4.6 million in 1992. Changes in Federal Communications Commission ("FCC")-mandated cost separations rules increased revenues $2.1 million in 1993 and $2.0 million in 1992. Certain settlements relating to prior periods, due primarily to retroactively billed access services and finalization of cost separation studies, increased these revenues 2.2% ($3.0 million) in 1993. Network access service and long-distance revenues decreased 1.3% ($1.5 million) in 1992 as certain billing and collection revenues are now reported as miscellaneous revenues. The remainder of the revenue increases in 1993 and 1992 were primarily due to increased minutes of use, increases in access lines served and changes in rates of return. Miscellaneous revenues increased 4.6% ($1.6 million) in 1993 and 19.2% ($5.7 million) in 1992. Acquisitions increased miscellaneous revenues 4.8% ($1.7 million) in 1993 and 4.9% ($1.4 million) in 1992. A settlement relating to a directory agreement increased these revenues 5.9% ($1.8 million) in 1992. A new contract for billing and collection services decreased these revenues 1.6% ($550,000) in 1993. Certain billing and collection revenues previously reported as long-distance and network access revenues increased miscellaneous revenues 5.2% ($1.5 million) in 1992. The remaining increases in 1993 and 1992 are due to acquisitions, increased message volumes, providing billing and collection services for Alternate Operator Service providers, and additional non-regulated revenues as a result of increased marketing efforts and access line growth. OPERATING EXPENSES increased 13.9% ($23.1 million) in 1993 and 13.6% ($19.9 million) in 1992. The effects of acquisitions increased expenses 5.4% ($9.0 million) in 1993 and 5.5% ($8.0 million) in 1992. Plant operations expense increased 17.8% ($6.4 million) in 1993 and 10.2% ($3.3 million) in 1992, with acquisitions increasing this expense 8.1% ($2.9 million) in 1993 and 5.2% ($1.7 million) in 1992. The remaining increase in 1993 was primarily due to salary and work force changes along with the effects of general inflation. A change in a settlement arrangement for EAS revenues decreased these expenses 3.2% ($1.0 million) in 1992. Depreciation and amortization expense increased 14.7% ($7.6 million) in 1993 and 19.6% ($8.5 million) in 1992, with acquisitions increasing such expense 5.2% ($2.7 million) in 1993 and 6.4% ($2.8 million) in 1992. Lump-sum depreciation adjustments and increases in certain depreciation rates increased these expenses 4.3% ($2.2 million) in 1993 and 5.6% ($2.4 million) in 1992. The remainder of the increase in depreciation expense is due to growth in plant and equipment. The composite depreciation rate was 7.3% in 1993, 7.2% in 1992 and 6.7% in 1991. Customer operations expense increased 12.3% ($4.3 million) in 1993 and 12.3% ($3.8 million) in 1992, with acquisitions providing 3.9% ($1.4 million) of the increase in 1993 and 4.1% ($1.3 million) in 1992. The remainder of the increases are due primarily to increased marketing activities, increased customer billing and programming costs and the effects of inflation. Corporate and other expenses increased 11.2% ($4.8 million) in 1993 and 10.8% ($4.2 million) in 1992, with acquisitions increasing these expenses 4.6% ($2.0 million) in 1993 and 5.9% ($2.3 million) in 1992. The remainder of the increases are due primarily to the effects of inflation, employee-related costs, additional staffing and increases in legal and other costs related to new business development and long-range planning activities. OPERATING INCOME from telephone operations increased 9.5% ($6.9 million) in 1993 and 10.7% ($7.0 million) in 1992. The effects of acquisitions increased operating income 3.8% ($2.8 million) in 1993 and 2.1% ($1.3 million) in 1992. The telephone operating margin was 29.5% in 1993 compared to 30.3% in 1992 and 30.9% in 1991. TDS Telecom's revenues are expected to continue to increase in 1994. However, due to expected increases in customer operations expense (primarily due to increased marketing activities) and accelerated depreciation on certain switching equipment, the 1994 operating margin may be lower than the 1993 level. CELLULAR TELEPHONE OPERATIONS USM owns or has the right to acquire interests, both majority and minority, in 205 cellular telephone markets at December 31, 1993, representing 23,731,000 population equivalents ("pops") as summarized in the accompanying table. Consolidated revenues and expenses include 100% of the revenues and expenses of USM's majority-owned markets. The December 31, 1993 consolidated results of operations include 116 markets compared to 92 markets in 1992 and 67 markets in 1991. Investment and Other Income includes USM's pro rata share of the net income or loss of 18 minority-owned and managed markets and 15 minority-owned markets managed by others. USM's investments in 46 minority-owned markets managed by others, which are being held for sale or exchange, are accounted for by the cost method of accounting.
December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- Population Equivalents(1) Majority-Owned and Managed(2) 18,212 14,268 10,427 Minority-Owned and Managed 1,139 2,007 1,755 To Be Managed(4) 1,002 1,816 3,095 ---------------------------------------- Total Managed by USM 20,353 18,091 15,277 ---------------------------------------- Managed by Others(5) 3,378 3,474 3,229 ---------------------------------------- Total 23,731 21,565 18,506 ---------------------------------------- ---------------------------------------- TDS's proportionate share(6) 18,869 16,001 13,491 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- Markets Majority-Owned and Managed(2) 116 92 67 Minority-Owned and Managed(3) 20 24 24 To Be Managed(4) 8 13 21 -------------------------------------- Total Managed by USM 144 129 112 -------------------------------------- Managed by Others(5) 61 64 65 -------------------------------------- Total 205 193 177 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) 1993 Donnelley Marketing Service estimates are used for all years. Includes pops relating to interests which are acquirable in the future. (2) Includes one market managed by a third party in 1993 and 1992, and one wholly owned reseller operation in 1992 and 1991. (3) Includes markets where USM has the right to acquire an interest but did not own an interest at the respective dates (two markets in 1993, six in 1992 and seven in 1991). (4) Represents markets which are not yet operational or which are managed by third parties until USM acquires a majority interest in the markets. (5) Represents markets in which USM owns or has the right to acquire a minority or other noncontrolling interest and which are managed by others. Some markets were not in operation in 1991. (6) Based on TDS's ownership of USM, assuming all pending acquisitions have been completed.
CELLULAR TELEPHONE OPERATIONS
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS) OPERATING REVENUES Service $ 236,749 $ 154,822 $ 91,977 Equipment sales 10,510 9,263 7,500 --------------------------------------------- 247,259 164,085 99,477 --------------------------------------------- OPERATING EXPENSES System operations 67,251 48,373 30,746 Marketing and selling 43,478 30,643 18,053 Cost of equipment sold 25,688 17,311 13,575 General and administrative 74,471 50,824 34,665 Depreciation 25,665 16,606 8,814 Amortization 19,362 13,033 10,455 --------------------------------------------- 255,915 176,790 116,308 --------------------------------------------- OPERATING (LOSS) $ (8,656) $ (12,705) $ (16,831) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Cellular telephone revenues as a percent of total revenues 41.9% 35.9% 28.0% Additions to property, plant and equipment $ 94,088* $ 58,832* $ 66,037* Identifiable assets $ 1,275,569 $ 858,795 $ 612,981 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Majority-Owned, Managed and Consolidated Markets: Customers 261,000 150,800 97,000 Market penetration 1.35% 1.00% .84% Cell sites in service 522 320 186 Average monthly revenue per customer $ 99 $ 105 $ 100 Churn rate per month 2.3% 2.4% 2.2% Marketing cost per net customer addition $ 677 $ 765 $ 710 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- *Includes noncash amounts (in thousands) of $6,611, $2,799 and $3,039, respectively.
OPERATING REVENUES increased 50.7% ($83.2 million) in 1993 and 64.9% ($64.6 million) in 1992. Service revenues include monthly service fees for providing access, airtime, and value-added services to customers; for providing airtime to users roaming through USM's service areas; for other carriers providing airtime to USM's customers roaming through their service areas; and long- distance charges. Service revenues increased 52.9% ($81.9 million) in 1993 and 68.3% ($62.8 million) in 1992. The service revenue increases in 1993 and 1992 were primarily attributable to increases in the number of local retail telephone customers and growth in inbound roamer revenues. In addition, acquisitions of controlling interests and the start-up of operations in new markets increased revenues 16.0% ($26.2 million) in 1993 and 31.9% ($31.7 million) in 1992. Minutes of use averaged 103 per month in 1993 compared to 121 per month in 1992 and 130 in 1991. The decline in average local minutes of use follows an industry-wide trend and is believed to be related to the tendency of the early subscribers in a market to be the heaviest users. Average monthly service revenue per customer was $99 in 1993, $105 in 1992 and $100 in 1991. Management anticipates that average local minutes of use and average monthly revenue per customer will continue to decline as USM adds more customers and as the growth rate of USM's customer base exceeds the growth rate of inbound roamer revenue. Service revenues from local customers' usage of USM's systems increased 52.6% ($40.5 million) in 1993 and 53.2% ($26.8 million) in 1992. The revenue increases were primarily the result of the 73.1% and 55.5% customer growth, respectively, in majority-owned markets, offset somewhat by the decrease in average monthly local minutes of use. The decrease in average minutes of use resulted in a decrease in average monthly retail revenue per customer, to $49 in 1993 from $52 in 1992 and $55 in 1991. Inbound roaming revenues, earned when other systems' customers travel through USM's service areas increased 67.7% ($31.6 million) in 1993 and 110% ($24.5 million) in 1992. The increase is attributable to an increase in the number of customers from other systems using USM's systems as well as an increased number of USM-managed systems and cell sites within those systems. Pass-through roamer revenue, earned when USM's customers use systems other than their local systems,increased 27.0% ($5.2 million) in 1993 and 67.4% ($7.8 million) in 1992, due to USM's customer growth. Monthly roamer revenue per customer averaged $43, $45 and $37 in 1993, 1992 and 1991, respectively. Long-distance revenues increased 45.7% ($4.4 million) in 1993 and 77.3% ($4.2 million) in 1992 as the number of customers and the volume of long-distance calls increased. Equipment sales revenue reflects the sale of 83,000 cellular telephone units in 1993 compared to 44,400 in 1992 and 29,400 in 1991. The sale of cellular telephone units at discounted rates, a widespread industry practice, were the result of USM's use of marketing programs aimed at increasing customers and service revenues. The average revenue per telephone unit sold was $127 in 1993, $208 in 1992 and $255 in 1991. The average revenue per unit decline partially reflects USM's decision to reduce sales prices on cellular telephones to stimulate customer growth as well as reduced manufacturers' prices. Also, during the second half of 1993, USM used specific promotions which were based on increased equipment discounting. The success of these promotions led to both an increase in units sold and a decrease in average equipment sales revenue per unit. USM will continue to discount equipment prices in its systems, as it has done in the past, to maintain its market position, to meet competitive prices and to increase the number of customers. OPERATING EXPENSES increased 44.8% ($79.1 million) in 1993 and 52.0% ($60.5 million) in 1992. The increases in expenses were primarily due to increased customer activations, acquisitions, starting up operations in new markets and increased depreciation and amortization expense related to increases in fixed assets and license costs. The acquisition of controlling interests and the start-up of operations in new markets increased operating expenses 19.0% ($33.6 million) in 1993 and 32.7% ($38.1 million) in 1992. System operations expenses increased 39.0% ($18.9 million) in 1993 and 57.3% ($17.6 million) in 1992 as a result of increases in customer usage expenses and costs associated with operating USM's increased number of cellular systems. Costs are expected to continue to increase as the number of cell sites within these systems increases. Customer usage expenses represent charges from other telecommunications service providers for local interconnection to the landline network, toll charges and roamer expenses from USM's customers' use of systems other than their local systems. Customer usage expenses grew 36.2% ($13.5 million) in 1993 and 72.0% ($15.7 million) in 1992 primarily due to the increase in roamer expenses. Maintenance, utility and cell site expenses grew 48.8% ($5.4 million) in 1993 and 21.8% ($1.9 million) in 1992 reflecting growth in the number of cells to 522 in 1993 from 320 in 1992 and 186 in 1991, growth in the number of switches in service, and the effects of acquisitions and start-up markets. Marketing and selling expenses increased 41.9% ($12.8 million) in 1993 and 69.7% ($12.6 million) in 1992. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales personnel, agent commissions, promotional expenses and local advertising and public relations expenses. These expenses increased in 1993 and 1992 primarily due to the increased number of customer activations and, in 1992, also due to the use of various marketing programs which increased promotional expense. Excluding the effects of acquisitions and divestitures, USM added 86,600 and 50,600 net new customers in 1993 and 1992, respectively. Cost of equipment sold reflects the increased unit sales related to the increase in gross customer activations and second half 1993 promotional sales discussed above, offset somewhat by falling manufacturers' prices. The average cost of a telephone unit sold was $309 in 1993, $390 in 1992 and $462 in 1991. General and administrative expenses increased 46.5% ($23.6 million) in 1993 and 46.6% ($16.2 million) in 1992. These expenses include the cost of operating USM's local business offices and its corporate expenses. The increases result from the expanding number of consolidated markets, due to both acquisitions and the start-up of operations in new markets, as well as the growth in the customer base in existing markets. USM is using its clustering concept to combine local operations wherever feasible in order to reduce its administrative expenses. Depreciation expense increased 54.6% ($9.1 million) in 1993 and 88.4% ($7.8 million) in 1992, reflecting increases in average fixed asset balances of 55.6% and 77.3%, respectively. Amortization expense, primarily amortization of license costs, increased 48.6% ($6.3 million) in 1993 and 24.7% ($2.6 million) in 1992 due to increases in license costs. The increase in 1992 was offset somewhat by a change in the amortization period for license costs, from 20 to 40 years, beginning January 1, 1992. OPERATING LOSS was $8.7 million in 1993, $12.7 million in 1992 and $16.8 million in 1991. Operating margin, while still negative, improved to (3.5%) in 1993 from (7.7%) in 1992 and (16.9%) in 1991. The improvement in the 1993 operating loss was primarily due to improved results in the more established markets and increased revenues from growth in the customer base, offset somewhat by the start-up and acquisition of operations in new markets and increased losses on equipment sales. The improvement in the 1992 operating loss is primarily due to the improved operating results of the more established markets. The Company expects service revenues to continue to grow in 1994 as USM begins operations in new markets, as customers are added to USM's existing markets and as it realizes a full year of revenue from customers added in 1993. Additionally, the Company expects expenses to continue to increase significantly in 1994 as a full year of expenses are recognized for markets and cell sites added in 1993 and as USM initiates service in new markets in 1994. At least 14 additional markets are expected to be added to consolidated operations during 1994. Accordingly, the Company expects that the costs of constructing and developing the new systems may exceed revenue growth during the next few quarters. As a result, operating losses maybe generated over the next few quarters. CELLULAR INVESTMENT INCOME includes USM's and TDS's share of the net incomes or losses of cellular markets in which they have a minority interest and for which they follow the equity method of accounting, net of amortization of license costs relating to these minority interests.
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Cellular Investment Income (Loss), Net of License Cost Amortization Cellular Markets Managed by USM $ (307) $ (976) $ (1,817) Managed by Others 16,011 10,200 8,641 ------------------------------------------ $ 15,704 $ 9,224 $ 6,824 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
TDS's share of USM's net income (loss) before the cumulative effect of an accounting change was $(21.2) million in 1993. $5.1 million in 1992 and $(20.1) million in 1991. The net income (loss) excludes the USM minority shareholders' share of such income (loss). The net income (loss) from cellular telephone operations does not include federal income tax expense or benefits from the inclusion of USM in TDS's consolidated federal tax return. In accordance with a tax allocation agreement, TDS does not reimburse USM currently for income tax benefits and credits. Instead, such benefits and credits are being carried forward until they can be used by USM. TDS owned an aggregate of 59,548,450 shares of common stock of USM at December 31, 1993, representing over 85% of the combined total of USM's outstanding Common and Series A Common Shares and over 97% of their combined voting power. Assuming USM's Common Shares are issued in all instances in which USM has the choice to issue its Common Shares or other consideration and assuming all issuances of USM's common stock to TDS and third parties for completed and pending acquisitions and redemptions of USM and TDS Preferred Stock had been completed at December 31, 1993, TDS would have owned approximately 79.5% of the total outstanding common stock of USM and controlled over 95% of the combined voting power of both classes of its common stock. In the event TDS's ownership of USM falls below 80% of the total value of all of the outstanding shares of USM's stock, TDS and USM would be deconsolidated for federal income tax purposes. TDS and USM have the ability to defer or prevent deconsolidation, if deferring or preventing deconsolidation would be advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's Common Shares in connection with certain acquisitions. RADIO PAGING OPERATIONS
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS) SERVICE OPERATIONS Revenues $ 64,384 $ 48,582 $ 41,021 ------------------------------------------ Costs and expenses Cost of services 15,836 12,147 9,852 Selling and advertising 11,131 10,419 10,229 General and administrative 24,785 20,585 19,543 Depreciation 11,182 9,335 8,186 Amortization 2,210 1,077 861 ------------------------------------------ 65,144 53,563 48,671 ------------------------------------------ Service Operating (Loss) (760) (4,981) (7,650) ------------------------------------------ EQUIPMENT SALES Revenue 10,979 6,134 2,952 Cost of equipment sold 10,940 6,601 3,052 ------------------------------------------ Equipment Sales Income (Loss) 39 (467) (100) ------------------------------------------ OPERATING (LOSS) $ (721) $ (5,448) $ (7,750) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Radio paging revenues as a percent of total revenues 12.7% 12.0% 12.4% Additions to property and equipment $ 24,813* $ 15,501* $ 13,322* Identifiable assets $ 74,923 $ 57,080 $ 41,726 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Pagers in service 460,900 322,200 236,800 Average monthly revenue per customer $ 13.65 $ 14.93 $ 15.28 Transmitters in service 685 532 484 Churn rate per month 2.9% 2.9% 3.2% Marketing cost per net customer addition $ 80 $ 127 $ 290 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- *Includes noncash amounts (in thousands) of $2,177, $1,128 and $522, respectively.
Certain 1992 and 1991 amounts have been reclassified to conform to current year presentation. SERVICE REVENUES increased 32.5% ($15.8 million) in 1993 and 18.4% ($7.6 million) in 1992, primarily as a result of growth in the number of pagers in service, offset somewhat by a decline in average monthly revenue per unit. Pagers in service increased 43.0% (138,700, including 10,700 from acquisitions) in 1993 and 36.1% (85,400, including 10,000 from an acquisition) in 1992. Average monthly revenue per unit was $13.65 in 1993, $14.93 in 1992 and $15.28 in 1991. This decline reflects the industry trend of declining average monthly revenue per unit, which APP expects to continue. However, APP's average monthly revenue per unit has been consistently above the industry average. Declining average monthly revenue per unit is related to competitive factors and a shift toward resellers and customers purchasing pagers through retail operations. Average monthly revenue per unit for customer-owned pagers and pagers served through resellers is lower than for leased pagers because the customers do not pay monthly fees to lease pagers and because resellers purchase paging services at wholesale rates. Growth in the customer base increased revenues by $21.8 million in 1993 and $8.7 million in 1992, while the decline in average monthly revenue per unit (8.6% in 1993 and 2.3% in 1992) reduced revenues by $6.0 million in 1993 and $1.1 million in 1992. Increased use of lower revenue but higher margin distribution channels and price competition contributed to the decline in average monthly revenue per unit in 1993 and 1992. SERVICE OPERATING EXPENSES increased 21.6% ($11.6 million) in 1993 and 10.1% ($4.9 million) in 1992 primarily as a result of the costs of serving new customers added through both internal growth and acquisitions and the costs of system expansion. Cost of services increased 30.4% ($3.7 million) in 1993 and 23.3% ($2.3 million) in 1992. The additional costs of providing service to the increased customer base, which include alphanumeric transcription, nationwide and local reseller and telephone expenses, increased cost of services approximately $3.0 million in 1993 and $1.6 million in 1992. The remainder of the increases in cost of services were due primarily to the costs of upgrading and expanding APP's transmission systems to improve reliability and coverage. APP had 685 transmitters in service at year-end 1993, 532 at year-end 1992 and 484 at year-end 1991. Selling and advertising expense increased 6.8% ($712,000) in 1993 and 1.9% ($190,000) in 1992. Selling and advertising expense increased at a slower rate than the rate of growth in pagers in service due to improved productivity of sales personnel and increased use of lower-cost distribution channels (such as resellers and retail outlets). Cost per gross additional customer added, excluding acquisitions, was $42 in 1993, $62 in 1992 and $88 in 1991. General and administrative expense increased 20.4% ($4.2 million) in 1993 and 5.3% ($1.0 million) in 1992. Additional employees added in 1993 to serve the growing customer base increased these expenses $1.6 million. Bad debt expense increased $1.1 million 1993 due to APP's increased use of retail distribution and the increase in the customer base. The 1992 increase reflects additional personnel costs incurred for employees added to serve the growing customer base, largely offset by decreases in 1992 due to the elimination of one-time personnel costs related to a 1991 strategic exchange of customers and related economies of scale resulting from the exchange. Certain amounts formerly included as general and administrative expenses in prior years have been reclassified as equipment sales revenues and cost of equipment sold to conform to 1993's presentation. Depreciation and amortization charges increased 28.6% ($3.0 million) in 1993 and 15.1% ($1.4 million) in 1992, reflecting the increased investment in pagers and related equipment. APP's gross fixed assets balance grew 19.7% in 1993 and 16.6% in 1992, primarily due to increases in terminals and transmitters added to improve service quality and coverage and increases in pagers due to the growth in customers. EQUIPMENT SALES REVENUE increased 79.0% ($4.8 million) in 1993 and 108% ($3.2 million) in 1992 due to APP's increased emphasis on selling pagers to customers, particularly through retail stores and resellers. Cost of equipment sold increased 65.7% ($4.3 million) in 1993 and 116% ($3.5 million) in 1992. While APP generally plans to break even on equipment sales, it may at times, in selected locations, discount paging equipment due to competitive pressures, sales promotions or sales of discontinued pagers. In June of 1993, APP elected to cease national retailer distribution of pagers through its wholly owned subsidiary, APN. The decision to cease operations at APN resulted in a pretax charge of $1.0 million, included in other income, net in the Consolidated Statements of Income. OPERATING LOSS was $721,000 in 1993, $5.4 million in 1992 and $7.8 million in 1991. Operating margin, while still negative, improved to (1.0)% in 1993 from (10.0%) in 1992 and (17.6%) in 1991. The improvement in operating loss reflects a) rapid growth in revenues, offset by a continuing decline in average monthly revenue per unit and APP's increased use of lower revenue but higher margin distribution channels, and b) increased operating expenses due to growth in the number of customers served, tempered by APP's efforts to reduce costs through process improvements and economies of scale. The lower revenue distribution channels, while reducing the rate of revenue growth, are associated with lower customer acquisition costs. The Company expects service revenues to continue to grow in 1994 as customers are added to APP's existing service areas and as it realizes a full year of revenue from customers added in 1993. The industry trend of declining average monthly revenue per unit is expected to continue in 1994. However, APP's average monthly revenue per unit has consistently been above the industry average and the Company expects this to continue. The Company expects expenses to continue to increase in 1994 as the customer base grows and as APP continues to upgrade and expand its transmission systems to further improve reliability and coverage. PARENT AND SERVICE COMPANY OPERATIONS OTHER INCOME, NET includes the operating income of TDS's computer, engineering and printing service companies and costs of corporate operations. Additionally, 1993's amount includes the $1.0 million charge to cease operations at APN, as discussed previously.
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Additions to property and equipment $ 7,386* $ 20,555* $ 7,359* Identifiable assets $ 79,202 $ 56,756 $ 38,726 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- *Includes noncash amounts (in thousands) of $(426), $7,994 and $54, respectively.
INFLATION Management believes that inflation effects TDS's business to no greater extent than the general economy. ACCOUNTING FOR POSTEMPLOYMENT BENEFITS The Financial Accounting Standards Board ("FASB") issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which became effective in January 1994, requiring employers to recognize the obligation to provide benefits to former or inactive employees after employment but before retirement. Based on a study of the provisions of SFAS No. 112, the Company estimates that implementation of the new standard will result in a charge to income (to be treated as the cumulative effect of an accounting change) estimated to be approximately $725,000 net-of-tax. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES The FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in May 1993, which became effective in January 1994. SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in one of three categories: a) held-to-maturity securities, reported at amortized cost; b) trading securities, reported at fair value; and c) available-for-sale securities, reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Based on a review of the provisions of SFAS No. 115, management believes that implementation will not have a material effect on results of operations or financial condition. FINANCIAL RESOURCES AND LIQUIDITY TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid growth has caused financing requirements for construction, expansion and acquisition programs to exceed internally generated cash flow in recent years. Accordingly, TDS and USM have obtained substantial funds from external sources to finance construction and development of cellular telephone systems and to fund acquisitions during the past three years. Continued requirements for construction, expansion and acquisition activities will require substantial additional funds from external sources. CASH FLOWS FORM OPERATING ACTIVITIES, as presented in the Consolidated Statements of Cash Flows, totalled $160.2 million in 1993, $115.4 million in 1992 and $77.8 million in 1991. Cash flows from operating activities increased 38.9% ($44.8 million) in 1993 and 48.2% ($37.5 million) in 1992. The increase in cash flows represents primarily improved operating results in all three business segments and increases in operating payables. Consolidated operating cash flows (operating income plus depreciation and amortization) totalled $187.7 million in 1993, $146.1 million in 1992 and $112.4 million in 1991. The increase in operating cash flows in 1993 reflects the increase in the operating cash flows of all three business segments. The increase in 1992's operating cash flows represents primarily increases in telephone and cellular cash flows. Cash flows for other operating activities (investment and other income, interest and income tax expense, and changes in working capital and other assets and liabilities) required $27.5 million in 1993, $30.7 million in 1992 and $34.6 million in 1991.
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Operating cash flow (Operating income plus depreciation and amortization) Telephone $ 138,672 $ 124,164 $ 108,667 Cellular telephone 36,371 16,934 2,438 Radio paging 12,671 4,964 1,297 ------------------------------------------- 187,714 146,062 112,402 Other operating activities (27,518) (30,703) (34,564) ------------------------------------------- $ 160,196 $ 115,359 $ 77,838 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES totalled $131.0 million in 1993, $83.2 million in 1992 and $108.4 million in 1991. Sales of debt securities and common stock by TDS and common stock by USM provided most of the external financing requirements during 1993. Sales of common stock by TDS provided most of the Company's external financing requirements during 1992. Sales of debt securities by TDS and common stock by USM provided most of the external financing requirements during 1991. TDS has used short-term debt to finance its cellular telephone and radio paging operations, for acquisitions and for general corporate purposes. Proceeds from the sale of the long-term debt and equity securities from time to time have retired such short-term debt. TDS sold 1.3 million Common Shares for cash during 1993. The $65.6 million net proceeds were used to retire short-term bank debt totalling $58.9 million and for general corporate purposes. TDS sold 2.0 million Common Shares at $35 per share through a public offering during 1992. The $68.2 million net proceeds from this offering were used to retire short-term bank debt totalling $54.0 million and for general corporate purposes. During 1993, the Company sold $92.5 million under its Medium-Term Note ("MTN") program, most of which was used to retire short-term debt. During 1991, the Company sold $100 million under this MTN program. Approximately $93.0 million of the proceeds was used to retire short-term debt. During 1993, USM sold approximately 1.1 million of its Common Shares to parties other than TDS pursuant to a rights offering. TDS used the $37 million proceeds to retire existing short-term debt. In 1991, USM sold 2.0 million Common Shares to the public at an offering price of $18 and an additional 368,000 Common Shares at $18 per share to one of its major shareholders pursuant to a Common Stock Purchase Agreement. The net proceeds of over $40 million were used to repay short-term debt. TDS and USM have also issued TDS Common Shares, TDS Preferred Shares and USM Common Shares to third parties to acquire telephone companies and cellular interests. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TDS Telecom and USM have also used long-term debt to finance their construction and development activities. Telephone subsidiaries borrowed $28.2 million in 1993, $14.4 million in 1992 and $8.1 million in 1991 under the Rural Electrification Administration and the Rural Telephone Bank long-term federal government loan programs. Financing under these programs comprises 98.6% of total outstanding telephone subsidiary long-term debt at an average annual interest rate of 5.3%. USM financed cellular system equipment and construction costs totalling $36.6 million in 1992 and $17.5 million in 1991 under two vendor financing arrangements. Loans under these programs bear interest approximating the prime rate and have terms of seven to eight years. Consolidated equity capital increased to 62.3% of total capitalization at December 31, 1993, compared to 54.5% at the end of 1990, primarily as a result of equity offerings and stock issuances in connection with acquisitions. TDS targets a ratio of equity to total capital in the range of 55% to 60%. CASH FLOWS FROM INVESTING ACTIVITIES required cash totalling $276.3 million in 1993, $194.8 million during 1992 and $192.6 million during 1991. Such cash flows primarily consist of additions to property, plant and equipment requiring the use of cash and cash flows for acquisitions and for investments in cellular telephone partnerships. Expenditures for property, plant and equipment additions totalled $198.7 million in 1993, $148.6 million during 1992 and $151.8 million during 1991 as summarized in the following table: PROPERTIES AND EQUIPMENT ADDITION
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) TELEPHONE Central offices $ 30,287 $ 24,447 $ 28,034 Outside plant 39,861 31,765 27,848 Other 12,085 11,145 11,974 ------------------------------------------- 82,233 67,357 67,856 ------------------------------------------- CELLULAR TELEPHONE Switching office and cell site equipment 73,471 47,412 50,140 Other 20,617 11,420 15,897 ------------------------------------------- 94,088 58,832 66,037 ------------------------------------------- RADIO PAGING Pagers 13,990 11,621 7,732 Terminals and transmitters 7,009 2,597 3,413 Other 3,814 1,283 2,177 ------------------------------------------- 24,813 15,501 13,322 ------------------------------------------- OTHER 7,386 20,555 7,359 ------------------------------------------- 208,520 162,245 154,574 ------------------------------------------- Less noncash amounts (9,777) (13,626) (2,819) ------------------------------------------- As shown on consolidated statements of cash flows $ 198,743 $ 148,619 $ 151,755 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
TDS Telecom installed 54 digital switches in 1993, 18 in 1992 and 51 in 1991 and made substantial improvements in outside plant facilities during each year. TDS Telecom now serves over 96% of its access lines with digital switching. USM added three switching offices and 138 cell sites in 1993, three switching offices and 107 cell sites during 1992 and seven switching offices and 67 cell sites during 1991. In addition to substantial expenditures for pagers in the past three years, APP added 153 new transmitters in 1993, 107 in 1992 and 185 transmitters during 1991 to improve signal quality and expand the coverage areas of its paging systems. During the past three years, TDS purchased telephone, cellular and paging interests as part of its ongoing acquisition program. During 1993, the Company completed the purchase of four telephone companies (which also own cellular interests representing 416,000 population equivalents), one paging company, and cellular interests representing 3.8 million population equivalents, including controlling interests in 25 cellular markets and several minority cellular interests. Some of the entities acquired during 1993 were subject to acquisition agreements prior to 1993. During 1992, the Company completed the purchase of five telephone companies, two paging companies and cellular interests representing 2.6 million population equivalents including controlling interests in 13 cellular markets and several minority interests. During 1991, the Company completed the purchase of seven telephone companies and cellular interests representing 4.0 million population equivalents including controlling interests in 32 cellular markets and several minority interests. The consideration paid for these acquisitions is shown in the following table.
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Cash $ 58.8 $ 27.6 $ 20.3 Long-term Debt -- -- 3.5 TDS Common Shares (6.8 million, 3.7 million and 4.4 million, respectively) 277.1 134.5 147.0 TDS Series A Common Shares (199,000) -- .1 -- TDS Preferred Shares (30,000 and 231,000, respectively) 3.0 -- 23.1 TDS Common Shares Issuable (94,000 and 59,000, respectively) 4.5 -- 1.9 USM Common Shares (157,000, 130,000 and 260,000, respectively) 4.7 2.8 3.8 USM Common Shares Issuable in the future, primarily in 1994 or later (140,000, 778,000 and 5.2 million, respectively) 3.0 16.7 109.9 Subsidiary preferred stock (29,000) 2.9 -- -- -------------------------------------- Total Consideration $ 354.0 $ 181.7 $ 309.5 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
ANTICIPATED REQUIREMENTS for 1994 reflect the Company's construction, expansion and acquisition programs. Telephone, cellular telephone, radio paging and other property, plant and equipment additions are anticipated to aggregate approximately $305 million for 1994. The telephone plant additions budget totals approximately $110 million in 1994, including about $45 million for new digital switches and other switching facilities and $47 million for improvements to outside plant facilities. The cellular capital additions budget totals $160 million for 1994 including anticipated expenditures for both enhancements to existing systems and construction of new systems. Planned expenditures for enhancements of existing majority-owned cellular systems, including additional radio channel capacity as well as new cell sites, total about $140 million. Anticipated expenditures for construction of switching offices and digital expansion total $7 million. Radio paging property and equipment additions, primarily the purchase of pagers, are anticipated to total about $25 million in 1994. Other fixed asset expenditures are estimated to total $10 million in 1994. Investments in cellular partnerships, primarily minority-owned and managed partnerships, are expected to total $5 million in 1994. TDS's active acquisition program may require substantial external financing during 1994. The Company maintains shelf registration of its Common Shares for use in connection with acquisitions. The following table shows outstanding Common and Series A Common Shares, Common Shares reserved for pending acquisitions, and Common Shares registered under the shelf registration.
Common and Series A Common Shares - ------------------------------------------------------------------------------- (SHARES IN THOUSANDS) Shares outstanding December 31, 1993 50,385 Shares issuable 304 Shares reserved for pending acquisitions under definitive agreements 3,540 ------ Total shares outstanding and committed 54,229 - ------------------------------------------------------------------------------- Unissued shares previously registered for acquisitions, including shares reserved under definitive agreements 6,706 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
At December 31, 1993, the Company had agreements awaiting regulatory approvals to acquire controlling interests in two telephone companies (which also own cellular interests representing approximately 90,000 population equivalents) for an aggregate consideration of $53.2 million. Completion of these pending acquisitions will require the issuance of approximately 1.1 million TDS Common Shares. TDS and/or USM have entered into definitive agreements at December 31, 1993, to acquire controlling interests in nine cellular markets plus a minority interest representing an aggregate of approximately 1.2 million population equivalents for an aggregate consideration estimated to be $128.4 million. If all of these acquisitions are completed as planned, TDS and/or USM will issue approximately 2.4 million TDS Common Shares, 49,000 USM Common Shares and will pay approximately $6.2 million in cash. Any cellular interests acquired by TDS in these transactions are expected to be assigned to USM, and at the time this occurs, USM will reimburse TDS for TDS's consideration delivered and costs incurred in such acquisitions in the form of USM Common Shares and notes payable. In addition to the agreements discussed above, the Company has pending agreements to acquire interests representing 302,000 population equivalents in three cellular markets. The consideration for these acquisitions will be determined based on future appraisals of the fair market value of the interests to be acquired. TDS and USM plan to continue to acquire additional cellular interests in markets that strengthen USM's position, while at the same time considering the disposition of interests in some markets that do not fit well with USM's long- term plans. TDS and USM are currently negotiating agreements for the acquisition of additional cellular interests. TDS is also currently negotiating agreements for the acquisition of additional telephone and paging companies. TDS is a party to legal proceeding before the FCC involving its cellular license in a Wisconsin Rural Service Area. Pending the resolution of the issues in the Wisconsin proceeding, further FCC grants to TDS and its subsidiaries will be conditioned on the outcome of that proceeding. TDS's and USM's ability to sell or exchange properties with third parties while such proceeding is pending may be affected. See Note 14 of Notes to Consolidated Financial Statements, Legal Proceedings (LaStar Application), for a discussion of the proceeding involving the Wisconsin Rural Service Area. LIQUIDITY. Management believes that TDS has sufficient internal and external resources to finance the anticipated requirements of its business development, construction and acquisition programs. TDS and its subsidiaries have cash and temporary investments totalling $73.4 million and longer-term investments in marketable non-equity securities totalling $64.6 million at December 31, 1993. These cash and other investments are primarily the result of telephone operations' internally generated cash. While certain regulated telephone subsidiaries' debt agreements place limits on intercompany dividend payments, these restrictions are not expected to affect the Company's ability to meet its cash obligations. TDS and its subsidiaries also have access to a variety of external capital sources. The TDS Telecom telephone subsidiaries had $93.9 million in unadvanced loan funds from federal government programs at year-end to finance the telephone construction program. These loan commitments have a weighted average annual interest rate of 6.1%. TDS and its subsidiaries had $117.3 million of bank lines of credit for general corporate purposes at December 31, 1993, all of which were committed. Unused amounts of such lines totalled $111.0 million, all of which were committed. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. TDS and USM also have access to debt and equity capital markets, including shelf registration statements to issue common stock and preferred stock for acquisitions. TDS's shelf registration statement for Common Shares for acquisitions had 6.7 million unissued shares at December 31, 1993, including 2.5 million shares reserved under definitive agreements. TDS filed a $300 million universal shelf registration statement in September 1993 which may be used from time to time to issue debt securities and/or Common Shares for cash. As of December 31, 1993, $282.6 million remained unused on the universal shelf. In February 1994, APP issued 3.5 million Common Shares in an initial public offering at a price of $14.00 per share. The $45.6 million proceeds (after underwriting discount) were used to reduce TDS's short-term debt and for general corporate purposes. The Company plans to continue financing its telephone construction program primarily using internally generated cash supplemented by long-term financing from federal government programs. Internally generated cash financed 60.1% of telephone property, plant and equipment additions in 1993, 76.4% in 1992 and 88.3% in 1991. Financing from federal government programs provided 39.9% of telephone construction in 1993, 23.6% in 1992 and 11.7% in 1991. Management believes that TDS's internal cash flows and funds available from cash and cash investments provide substantial financial flexibility. TDS also has substantial lines of credit and longer-term financing commitments to meet its short- and longer-term financing needs. Moreover, TDS and USM have access to public and private capital markets and anticipate issuing debt and equity securities when capital requirements (including acquisitions), financial market conditions and other factors warrant. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31, 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating Revenues $ 590,744 $ 456,896 $ 354,681 $ 294,574 $ 239,803 Operating Income 69,733 54,065 40,661 47,124 26,906 Net Income before Extraordinary Item and Cumulative Effect of Accounting Changes 33,896 38,520 21,113 27,208 11,051 Extraordinary Item -- (769) -- -- -- Cumulative Effect of Accounting Changes -- (6,866) (5,035) -- -- Net Income 33,896 30,885 16,078 27,208 11,051 Net Income Available to Common $ 31,510 $ 28,648 $ 14,390 $ 26,047 $ 9,768 Weighted Average Common Shares (000s) 47,266 39,074 33,036 30,415 27,543 Earnings per Common Share: Before Extraordinary Item and Cumulative Effect of Accounting Changes $ .67 $ .91 $ .59 $ .86 $ .35 Extraordinary Item -- (.02) -- -- -- Cumulative Effect of Accounting Changes -- (.17) (.15) -- -- Net Income $ .67 $ .72 $ .44 $ .86 $ .35 Pretax Profit on Revenues 10.2% 14.9% 10.2% 14.8% 7.9% Effective Income Tax Rate (Before Extraordinary Item and Cumulative Effect of Accounting Changes) 43.9% 43.6% 41.4% 37.6% 41.8% Dividends per Common and Series A Common Share $ .34 $ .32 $ .30 $ .28 $ .26 Cash and Cash Equivalents and Temporary Investments 73,385 58,145 53,346 65,824 57,296 Property, Plant and Equipment (Net) 1,738,298 1,275,516 997,187 624,541 514,020 Total Assets 2,259,182 1,696,486 1,368,145 940,289 771,181 Notes Payable 6,309 46,816 41,283 70,571 1,465 Long-term Debt (including current portion) 537,566 426,885 395,960 270,066 269,762 Redeemable Preferred Shares (including current portion) 27,367 27,967 28,779 6,965 11,258 Common Stockholders' Equity 1,224,285 877,419 645,290 429,666 361,321 Construction Expenditures $ 208,520 $ 162,245 $ 154,574 $ 111,002 $ 81,750 Current Ratio 1.1 .9 .9 .8 1.5 Common Equity per Share $ 24.15 $ 21.27 $ 18.42 $ 14.17 $ 12.22 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1993 1992 1991 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING REVENUES Telephone $268,122 $238,095 $211,231 Cellular telephone 247,259 164,085 99,477 Radio paging 75,363 54,716 43,973 ----------------------------------------------------- 590,744 456,896 354,681 - -------------------------------------------------------------------------------------------------- OPERATING EXPENSES Telephone 189,012 165,877 145,989 Cellular telephone 255,915 176,790 116,308 Radio paging 76,084 60,164 51,723 ----------------------------------------------------- 521,011 402,831 314,020 - -------------------------------------------------------------------------------------------------- OPERATING INCOME 69,733 54,065 40,661 - -------------------------------------------------------------------------------------------------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 8,082 7,708 8,100 Minority share of cellular (income) losses (475) (3,703) 2,783 Cellular investment income, net of license cost amortization 15,704 9,224 6,824 Gain on sale of cellular interests 4,970 31,396 3,407 Other income, net (155) 2,207 3,275 ----------------------------------------------------- 28,126 46,832 24,389 - -------------------------------------------------------------------------------------------------- INCOME BEFORE INTEREST AND INCOME TAXES 97,859 100,897 65,050 Interest expense 37,466 32,610 28,993 - -------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 60,393 68,287 36,057 Income tax expense 26,497 29,767 14,944 - -------------------------------------------------------------------------------------------------- NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 33,896 38,520 21,113 Extraordinary Item -- (769) -- Cumulative Effect of Accounting Changes -- (6,866) (5,035) - -------------------------------------------------------------------------------------------------- NET INCOME 33,896 30,885 16,078 Preferred Dividend Requirement (2,386) (2,237) (1,688) - -------------------------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON $ 31,510 $ 28,648 $ 14,390 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES (000s) 47,266 39,074 33,036 EARNINGS PER COMMON SHARE: Before Extraordinary Item and Cumulative Effect of Accounting Changes $ .67 $ .91 $ .59 Extraordinary Item -- (.02) -- Cumulative Effect of Accounting Changes -- (.17) (.15) ----------------------------------------------------- Net Income $ .67 $ .72 $ .44 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .34 $ .32 $ .30 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 33,896 $ 30,885 $ 16,078 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Extraordinary item -- 769 -- Cumulative effect of accounting changes -- 6,866 5,035 Depreciation and amortization 127,509 98,986 76,841 Deferred taxes 5,846 6,999 2,829 Equity income (20,015) (13,265) (9,404) Minority share of cellular income (losses) 475 3,703 (2,783) Gain on sale of cellular interests (4,970) (31,396) (3,407) Other noncash expense 5,336 10,128 2,120 Change in accounts receivable (11,262) (10,057) (10,934) Change in accounts payable 11,308 6,984 (1,392) Change in accrued taxes 4,661 1,087 (965) Change in other assets and liabilities 7,412 3,670 3,820 ----------------------------------------------------- 160,196 115,359 77,838 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 122,275 59,294 125,334 Repayment of long-term debt (37,969) (40,517) (19,654) Premium on retirement of long-term debt -- (1,117) -- Change in notes payable (40,533) 5,507 (30,294) Common stock issued 69,644 72,201 2,146 Minority partner capital (distributions) contributions (1,528) 1,690 1,640 Redemption of preferred shares (220) (407) (226) Dividends paid (17,830) (13,902) (11,294) Sale of stock by a subsidiary 37,154 407 40,742 ---------------------------------------------------- 130,993 83,156 108,394 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (198,743) (148,619) (151,755) Investments in and advances to cellular minority partnerships (14,595) (16,981) (26,124) Distributions from partnerships 11,943 9,676 4,637 Proceeds from investment sales 6,750 7,343 8,595 Other investments (35,054) (16,934) (16,807) Acquisitions, excluding cash acquired (51,579) (30,117) (17,653) Change in temporary investments 4,945 864 6,529 ---------------------------------------------------- (276,333) (194,768) (192,578) - ------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,856 3,747 (6,346) CASH AND CASH EQUIVALENTS-- Beginning of period 40,810 37,063 43,409 ---------------------------------------------------- End of period $ 55,666 $ 40,810 $ 37,063 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED BALANCE SHEETS-ASSETS
December 31, 1993 1992 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) CURRENT ASSETS Cash and cash equivalents $ 55,666 $ 40,810 Temporary investments 17,719 17,335 Construction funds 1,473 709 Accounts receivable Due from customers, net 37,802 28,644 Other, principally connecting companies 42,994 35,865 Materials and supplies, at average cost 13,870 9,681 Other 10,032 10,334 -------------------------------- 179,556 143,378 - ------------------------------------------------------------------------------------------------- INVESTMENTS Cellular limited partnership interests 101,210 87,060 Cellular license acquisition costs, net of amortization 92,277 80,132 Marketable equity securities 19,368 19,557 Other 115,532 84,652 -------------------------------- 328,387 271,401 - ------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Telephone In service and under construction, substantially at original cost 846,491 749,251 Less accumulated depreciation 322,301 280,181 -------------------------------- 524,190 469,070 Franchise and other costs in excess of the underlying book value of subsidiaries, net of amortization 114,658 97,248 -------------------------------- 638,848 566,318 -------------------------------- Cellular Telephone In service and under construction 306,118 193,681 License acquisition costs 816,621 505,522 -------------------------------- 1,122,739 699,203 Less accumulated depreciation and amortization 108,636 64,616 -------------------------------- 1,014,103 634,587 -------------------------------- Radio Paging In service 84,282 67,858 Less accumulated depreciation and amortization 31,337 26,220 -------------------------------- 52,945 41,638 -------------------------------- Other In service 57,228 54,415 Less accumulated depreciation and amortization 24,826 21,442 -------------------------------- 32,402 32,973 -------------------------------- 1,738,298 1,275,516 - ------------------------------------------------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES 12,941 6,191 -------------------------------- $2,259,182 $1,696,486 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED BALANCE SHEETS- LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1993 1992 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) CURRENT LIABILITIES Current portion of long-term debt and preferred stock $ 24,859 $ 22,707 Notes payable 6,309 46,816 Accounts payable 82,878 58,193 Advance billings and customer deposits 17,273 13,720 Accrued interest 8,968 6,314 Accrued taxes 7,995 3,070 Other 15,249 13,422 --------------------------------- 163,531 164,242 - -------------------------------------------------------------------------------------------------- DEFERRED LIABILITIES AND CREDITS Investment tax credits 6,285 7,120 Income taxes 59,842 46,949 Postretirement benefits obligation other than pensions 14,213 14,414 Other 10,639 7,026 --------------------------------- 90,979 75,509 - -------------------------------------------------------------------------------------------------- LONG-TERM DEBT, excluding current portion 514,442 404,982 - -------------------------------------------------------------------------------------------------- REDEEMABLE PREFERRED SHARES, excluding current portion 25,632 27,163 - -------------------------------------------------------------------------------------------------- MINORITY INTEREST in subsidiaries 223,480 132,938 - -------------------------------------------------------------------------------------------------- NONREDEEMABLE PREFERRED SHARES 16,833 14,233 - -------------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding 43,503,584 and 34,383,483 shares, respectively 43,504 34,383 Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,881,001 and 6,863,819 shares, respectively 6,881 6,864 Common Shares issuable, 304,328 shares 15,189 -- Capital in excess of par value 1,069,022 761,706 Retained earnings 89,689 74,466 --------------------------------- 1,224,285 877,419 --------------------------------- $ 2,259,182 $ 1,696,486 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Year Ended December 31, 1993 1992 1991 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) COMMON SHARES Balance beginning of period $ 34,383 $ 28,319 $ 23,680 Add Acquisitions 7,477 3,720 4,449 Employee stock ownership plans 158 155 37 Dividend reinvestment plan 26 29 26 Sales of Common Shares 1,320 2,000 -- Conversion of Preferred Shares 140 160 127 -------------------------------------------------------- Balance end of period $ 43,504 $ 34,383 $ 28,319 - ----------------------------------------------------------------------------------------------------- SERIES A COMMON SHARES Balance beginning of period $ 6,864 $ 6,645 $ 6,637 Add Acquisitions -- 199 -- Dividend reinvestment plan 17 20 8 -------------------------------------------------------- Balance end of period $ 6,881 $ 6,864 $ 6,645 - ----------------------------------------------------------------------------------------------------- COMMON SHARES ISSUABLE Balance beginning of period $ -- $ 1,936 $ -- Add (Deduct) Acquisitions 15,189 -- 1,936 Shares issued pursuant to acquisition agreements -- (1,936) -- -------------------------------------------------------- Balance end of period $ 15,189 $ -- $ 1,936 - ----------------------------------------------------------------------------------------------------- CAPITAL IN EXCESS OF PAR VALUE Balance beginning of period $ 761,706 $550,096 $345,576 Add (Deduct) Acquisitions 299,146 132,980 143,903 Employee stock ownership plans 2,578 4,053 1,324 Dividend reinvestment plans 1,835 1,605 972 Sales of Common Shares 64,271 66,160 -- Capital stock expense (333) (284) (211) Conversion of Preferred shares 1,972 5,309 2,031 (Loss) gain on sale of subsidiary stock (62,153) 1,787 56,501 -------------------------------------------------------- Balance end of period $1,069,022 $761,706 $550,096 - ----------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance beginning of period $ 74,466 $ 58,294 $ 53,773 Add net income 33,896 30,885 16,078 -------------------------------------------------------- 108,362 89,179 69,851 -------------------------------------------------------- Deduct Dividends Common and Series A Common Shares 16,287 12,466 9,841 Preferred Shares 2,386 2,247 1,716 -------------------------------------------------------- 18,673 14,713 11,557 -------------------------------------------------------- Balance end of period $ 89,689 $ 74,466 $ 58,294 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Telephone and Data Systems, Inc. and its subsidiaries ("TDS" or the "Company") conform to generally accepted accounting principles. The accounting records of the telephone subsidiaries are maintained in accordance with the uniform systems of accounts prescribed by the regulatory bodies under whose jurisdiction the subsidiaries operate. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of TDS, its majority-owned subsidiaries since acquisition and the cellular telephone partnerships in which TDS has a majority general partnership interest. All material intercompany items have been eliminated. TDS includes as investments in subsidiaries the value of the consideration given and all direct and incremental costs relating to acquisitions accounted for as purchases. All costs relating to unsuccessful negotiations for acquisitions are expensed. TDS includes as investments in cellular licenses all direct and incremental costs incurred in participating in the Federal Communications Commission ("FCC") lottery process to obtain cellular licenses. Such costs are being amortized in accordance with Company policy. CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS Cash and cash equivalents include cash and those short-term, highly-liquid investments with original maturities of three months or less. Those investments with original maturities of three months to twelve months are classified as temporary investments. Temporary investments are stated at cost, which approximates market. Cash and cash equivalents and temporary investments consist of the following:
December 31, 1993 1992 - ------------------------------------------------------------ (DOLLARS IN THOUSANDS) General funds $30,966 $21,238 Government agency securities 8,158 5,021 Tax-exempt municipal bonds 1,000 9,353 Certificates of deposit 8,761 6,033 Money-market preferred stock -- 16,500 Commercial paper 24,500 -- ----------------- $73,385 $58,145 - ------------------------------------------------------------
INVESTMENTS Investments in cellular limited partnership interests consists of amounts invested in cellular entities in which TDS holds a minority interest. The Company follows the equity method of accounting, which recognizes TDS's proportionate share of the income and losses accruing to it under the terms of its partnership or shareholder agreements, for its long-term investments ($87.9 million and $71.3 million at December 31, 1993 and 1992, respectively). Income and losses from these entities are reflected in the consolidated income statements on a pretax basis. The cost method of accounting is followed for those minority interests which TDS is holding for sale of exchange ($13.3 million and $15.8 million at December 31, 1993 and 1992, respectively). TDS's unaudited proportionate share of the income or (loss) of such cellular investments which are accounted for under the cost method and are therefore not included in the consolidated income statements were approximately $979,000 in 1993, $840,000 in 1992 and $(199,000) in 1991. TDS's proportionate share of all such losses since the inception of operations or acquisition was $1.8 million at December 31, 1993. Cellular license acquisition costs consist of costs incurred in acquiring FCC licenses or minority interests which have been awarded FCC licenses to provide cellular service. These costs include amounts paid to license applicants and owners of interest in cellular entities awarded licenses; amounts paid for legal, engineering, and consulting services; amounts incurred by TDS in acquiring these interests; and goodwill. These costs are capitalized and had been amortized through charges to expense over 20 years upon commencement of operations. Effective January 1, 1992, the Company prospectively changed its amortization period for license costs from 20 years to 40 years to conform with industry practices. Amortization amounted to $1.6 million in 1993, $607,000 in 1992 and $1.0 million in 1991. Accumulated amortization of cellular license costs was $4.4 million and $3.2 million at December 31, 1993 and 1992, respectively. Cellular license costs with an unamortized financial reporting basis of approximately $16 million have no tax basis because the associated purchase transactions were structured to be tax-free. This basis difference is goodwill and no deferred taxes have been provided. Marketable equity securities are stated at the lower of cost or market value. At December 31, 1993, the aggregate market value of such securities exceeded their cost by $207,000. Other investments consist of the following:
December 31, 1993 1992 - ---------------------------------------------------------- (DOLLARS IN THOUSANDS) Minority telephone interests $ 32,238 $ 31,924 Marketable non-equity securities, at cost which approximates market 64,556 35,814 Rural Telephone Bank Stock, at cost 4,863 4,419 Long-term notes receivable 7,764 6,768 Other 6,111 5,727 ----------------- $115,532 $ 84,652 - ----------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The equity method of accounting is followed for investments in which TDS holds common stock ownership of at least 20% or can influence policies of the affiliated company. Earnings from these investments are reflected in the consolidated income statements net of applicable tax effects. At December 31, 1993, the cumulative share of income from investments accounted for under the equity method was $58.7 million, of which $16.7 million was undistributed. Other investments are stated at cost. Amortization of excess cost relating to minority telephone interests totalled $545,000 in 1993, $485,000 in 1992 and $306,000 in 1991. Shares of Rural Telephone Bank ("RTB") Class B stock are purchased as a condition of obtaining long-term financing from the RTB. Holders of Class B stock are entitled to patronage dividends in the form of additional Class B stock. Such stock must be held until the related RTB loan is repaid. PROPERTY, PLANT AND EQUIPMENT TELEPHONE plant in service and under construction is stated at the original cost of construction including the capitalized costs of certain taxes, payroll- related expenses, and an allowance for funds used during construction ("AFUDC"). AFUDC, a noncash item of nonoperating income, totalled $698,000 in 1993, $559,000 in 1992 and $430,000 in 1991. The composite weighted average rates were 9.2% in 1993, 8.6% in 1992 and 9.4% in 1991. The amount of such allowance has varied principally as a result of changes in the level of construction work in progress and in the cost of capital. Renewals and betterments of units of property are added to telephone plant in service. The original cost of depreciable property retired is removed from plant in service and, together with removal costs less any salvage realized, is charged to accumulated depreciation. Repairs and renewals of minor items of property are included in plant operations expense. No gain or loss is recognized on ordinary retirements of depreciable telephone property. Telephone franchise and other costs include the costs in excess of the underlying book value of acquired telephone companies. Costs in excess of the underlying book value relating to acquisitions initiated before November 1, 1970, aggregating $6.5 million, are not being amortized. At December 31, 1993, costs aggregating $125.1 million relating to acquisitions since November 1, 1970 are being amortized on a straight-line basis over a 40-year period. Amortization amounted to $3.0 million in 1993, $2.4 million in 1992 and $2.3 million in 1991. Accumulated amortization of excess cost was $16.9 million and $13.9 million at December 31, 1993 and 1992, respectively. CELLULAR TELEPHONE property and equipment is stated at cost. Costs incurred in acquiring FCC licenses or interests in entities which have filed for or have been awarded FCC licenses to provide cellular service have been capitalized. These costs include amounts paid for legal, engineering, and consulting services; amounts paid to license applicants and owners of interest in cellular entities awarded licenses; amounts incurred by TDS in acquiring these interests; and goodwill. These costs had been amortized on a straight-line basis over 20 years upon commencement of operations. Effective January 1, 1992, the Company prospectively changed its amortization period for license costs from 20 years to 40 years to conform with industry practices. Amortization amounted to $17.3 million in 1993, $10.9 million in 1992 and $8.9 million in 1991. Cellular license costs with an unamortized financial reporting basis of approximately $242 million have no tax basis because the associated purchase transactions were structured to be tax-free. This basis difference is goodwill and no deferred taxes have been provided. Costs incurred prior to the commencement of cellular service in cellular telephone markets have been capitalized and are amortized over five years upon commencement of operations. RADIO PAGING property and equipment is stated at cost. Costs relating to the acquisition and development of radio paging licenses have been capitalized and are being amortized over five to ten years upon commencement of operations. OTHER property and equipment is stated at cost. Certain costs relating to the development of computer software for internal use are capitalized and are amortized over the estimated five-year life of the software. DEPRECIATION is provided for book purposes using the straight-line method. Composite depreciation rates, as applied to the average cost of depreciable property, are as follows:
Year Ended December 31, 1993 1992 1991 - ---------------------------------------------------------- Telephone 7.3% 7.2% 6.7% Cellular Telephone 10.5 10.5 10.4 Radio Paging 17.4 17.2 17.1 Other 12.9 12.8 10.1 - ----------------------------------------------------------
REVENUE RECOGNITION TDS's revenues are recognized when earned. Telephone network access and long-distance services are furnished jointly with other companies, primarily AT&T Communications, Inc, and the Bell Operating Companies. Compensation for interstate access services is based on tariffed access charges to interstate long-distance carriers as filed by the National Exchange Carrier Association with the FCC on behalf of TDS. Such compensation amounted to 31% of telephone revenues in 1993, 28% in 1992 and 26% in 1991. Compensation for intrastate toll and access service is based on tariffed access charges, cost separation studies, nation-wide average schedules or special settlement arrangements with intrastate long-distance carriers. Network access and long-distance revenues based on cost separation studies represent estimates pending completion and acceptance of final cost studies. Management believes that recorded amounts represent reasonable estimates of the final amounts. PENSION PLAN Telephone and Data Systems, Inc. Employees' Pension Trust I (the "Pension Trust"), a qualified non-contributory defined contribution pension plan, provides pension benefits for most of the employees of TDS, its telephone subsidiaries and its service companies. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employees of certain of the telephone subsidiaries not covered by the Pension Trust are covered under other pension plans or receive direct pension payments. Total pension costs were $3.3 million in 1993, $2.4 million in 1992 and $2.4 million in 1991. OTHER POSTRETIREMENT BENEFITS The Company adopted Statements of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers's Accounting for Postretirement Benefits Other than Pensions" effective January 1, 1992. SFAS 106 requires companies to accrue postretirement benefits during the employment years. The Company provides health care benefits and life insurance coverage which were expensed as paid in 1991. Such payments totalled $401,000, $302,000 and $241,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The Company sponsors two defined benefit post-retirement plans that cover most of the employees of TDS, its telephone subsidiaries and its service companies. One plan provides medical benefits and the other provides life insurance benefits. Both plans are contributory, with retiree contributions adjusted annually. The accounting for the medical plan anticipates future cost- sharing changes to the written plan that are consistent with the Company's intent to increase retiree contributions by the health care cost trend rate. During 1992 the Company established a Medical Benefit Fund (the "Fund") within the Pension Trust, under Internal Revenue Code Section 401(h). The Fund was established to pay for part of the cost of the medical benefits. An amount equal to 25% of the contribution to the pension plan will be contributed to the Fund annually. The Company established a Voluntary Employees' Beneficiary Association during 1993 to fund the costs of the life insurance benefits. The following table sets forth the plans' combined funded status reconciled with the amount shown in the Company's consolidated balance sheet at December 31, 1993 (dollars in thousands): Accumulated postretirement benefit obligation: Retirees $ 4,384 Fully eligible active plan participants 2,400 Other active plan participants 9,277 ------ 16,061 Plan assets at fair value 2,184 ------ Accumulated postretirement benefit obligation in excess of plan assets 13,877 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 336 ------ Accrued postretirement benefit cost at December 31, 1993 $ 14,213 - --------------------------------------------------------------------------------
The Company's medical and life insurance plans are underfunded. The accumulated postretirement benefit obligations for the health care plan and the life insurance plan are $13.7 million and $2.4 million, respectively. Plan assets for the health care plan and the life insurance plan totalled $1.9 million and $243,000, respectively, at December 31, 1993. The Company's accumulated postretirement benefit for both plans as of January 1, 1992 totalled approximately $12.9 million. Of this amount, $1.6 million was capitalized to telephone plant by the Company's regulated operations. The remaining $11.3 million, net of related income tax benefits of $4.4 million, was recorded as the cumulative effect of a change in accounting principle for the year ended December 31, 1992. The Consolidated Statement of Income for 1991 was not restated. The effect of the change in 1992 is shown below (dollars in thousands, except per share amounts): Net Income before extraordinary item and cumulative effect of change $ (830) Cumulative effect of change (6,866) -------- Net Income $(7,696) - -------------------------------------------------------------------------------- Earnings per share before extraordinary item and cumulative effect of change $ (.02) Cumulative effect of change (.17) -------- Earnings per Common Share $ (.19) - --------------------------------------------------------------------------------
Net postretirement cost for 1993 and 1992 includes the following components:
December 31, 1993 1992 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Service cost $ 806 $ 652 Interest cost on accumulated post-retirement benefit obligation 1,378 1,094 Actual return on plan assets (64) -- Net amortization and deferral (49) -- ----------------- Net postretirement cost $ 2,071 $ 1,746 - --------------------------------------------------------------------------------
For measurement purposes, an 11.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1993; the rate was assumed to decrease over nine years to 6.1% and to remain at 6.1% thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care costs trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993, by $2.9 million and the aggregate of the service and interest cost components of postretirement expense for the year then ended by $432,000. The weighted average discount rate and rate of compensation increase used in determining the accumulated postretirement benefit obligation were 7.0% and 5.0%, respectively. The trust that holds the plan assets is subject to federal income taxes at a 39.6% marginal tax rate. ACCOUNTING FOR POSTEMPLOYMENT BENEFITS The Financial Accounting Standards Board issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which became effective in January 1994, requiring employers to recognize the obligation to provide benefits to former or inactive employees after employment but before retirement. Based on a study of the provisions of SFAS No. 112, the Company estimates that implementation of the new standard will result in a charge to income in 1994 (to be treated as the cumulative effect of an accounting change) estimated to be approximately $725,000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GAIN ON SALE OF CELLULAR INTERESTS Gains in 1993 reflect primarily the sale of two minority cellular interests. USM received $6.8 million cash consideration on the sales. Gains in 1992 reflect the sales and exchange of minority- and majority-owned cellular interests as follows: (a) USM transferred its controlling interests in two Rural Services Areas ("RSAs"), its minority interests in two Metropolitan Statistical Areas ("MSAs") and approximately $2.9 million in cash in exchange for controlling interests in two other MSAs and a minority interest in a combined MSA/RSA system. The exchange of the controlling interests in the RSAs has been recorded using book values, with no gain or loss recognized on the exchange. The exchange of the minority interests in the two MSAs has been recorded at the fair market value of approximately $15.7 million. A gain of $11.4 million, representing the excess of the fair market value of the MSA interests traded over the book value of such interests, was included in income for 1992. (b) USM sold a majority interest in an MSA in exchange for certain marketable equity securities then valued at $18.2 million. A gain of $17.1 million was recognized on the sale. (c) USM sold a minority interest in an MSA for $3.8 million in cash. A gain of $2.9 million was recognized on the sale. Gains in 1991 reflect primarily sales of cellular minority interests. Approximately $2.9 million of the gain in 1991 equals the income tax liability associated with the sale. EXTRAORDINARY ITEM During 1992 the Company retired at a premium $20.8 million of its Senior Notes. The notes carried interest rates of 9.75% to 13.75% and were due in 1996 through 2004. The transaction resulted in an extraordinary loss of $769,000 ($.02 per share), net of income tax benefits of $491,000. CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 1991, USM changed its method of accounting for sales commissions from capitalizing and amortizing these costs over 36 months to expensing as incurred. Also in 1991, two of USM's equity-method investees made a similar accounting change. The ($5.0 million) cumulative effect of both USM's and its equity-method investees' changes on prior years after reduction for the minority USM shareholders' share of $1.9 million and income tax benefits of $3.4 million is included in income for the twelve months ended December 31, 1991. The effect of the changes in 1991 was to decrease net income and earnings per share before the cumulative effect of accounting changes by $463,000 and $.01, respectively, and to decrease net income and earnings per share by $5.5 million and $.16, respectively. EARNINGS PER COMMON SHARE Earnings per Common Share were computed by dividing Net Income Available to Common, less (in 1992) an amount due to a subsidiary's issuable securities ("the minority income adjustment") by the weighted average number of Common Shares, Series A Common Shares and dilutive common equivalent shares outstanding during the year. The minority income adjustment, $546,000 in 1992 reflects the additional minority share of the subsidiary's income computed as if all of the subsidiary's issuable securities were outstanding. Dilutive common stock equivalents consist of Common Shares issuable upon conversion of dilutive series of Preferred Shares and Common Share options. The calculation of Earnings per Common Share assuming full dilution had no effect. Preferred dividend requirements include all dividends paid on Preferred Shares which are not dilutive common stock equivalents. For the year ended December 31, 1993, the preferred dividend requirement on all outstanding Preferred Shares was $2.4 million. SUPPLEMENTAL CASH FLOW DISCLOSURES Following are supplemental cash flow disclosures for interest and income taxes paid, acquisitions and other noncash transactions. TDS paid interest of $34.4 million, $32.4 million and $26.1 million and income taxes of $17.3 million, $20.2 million and $13.4 million during 1993, 1992 and 1991, respectively. TDS has acquired operating telephone and paging companies, certain cellular licenses and operating companies and certain other assets since January 1, 1991. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed, and Common Shares and Preferred Shares issued:
Year Ended December 31, 1993 1992 1991 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Property, plant and equipment $ 78,252 $ 33,987 $ 70,784 Cellular licenses 312,656 157,966 257,017 Minority interest (14,115) 132 1,000 Increase (decrease) in equity method investment in cellular interests (4,690) (8,159) (3,922) Long-term debt (23,930) (2,492) (18,759) Deferred credits (5,300) (754) (2,043) Other assets and liabilities, excluding cash and cash equivalents 3,821 3,548 559 Common Shares issued and issuable (281,553) (134,612) (150,288) Preferred Shares issued (3,000) -- (23,059) USM stock issued and issuable (7,653) (19,499) (113,636) Subsidiary preferred stock issued (2,909) -- -- ----------------------------- Decrease in cash due to acquisitions $ 51,579 $ 30,117 $ 17,653 - --------------------------------------------------------------------------------
TDS issued Common Shares aggregating $2.1 million in 1993, $5.5 million in 1992 and $2.2 million in 1991 for TDS Preferred Shares and subsidiary preferred stock converted into Common Shares. TDS issued Common Shares in 1993 aggregating $40.3 million for certain cellular acquisitions completed in prior years. The consideration specified in the original acquisition agreements was USM Common shares. The Company also added $7.1 million in other property and equipment financed with long-term obligations in 1992. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 INCOME TAXES TDS files a consolidated federal income tax return. Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires companies to record all deferred tax liabilities or assets for the deferred tax consequences of all temporary differences. Additionally, the statement requires that deferred tax balances be adjusted to reflect new tax rates when they are enacted into law. The cumulative effect of the implementation of SFAS 109 on years prior to 1993 had no material effect on net income or earnings per share. Income tax expense for 1993 reflects the new method of accounting; income tax expense for prior years has not been restated. Income tax provisions charged to net income before extraordinary items and the cumulative effect of accounting changes are summarized as follows:
Year Ended December 31 1993 1992 1991 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Current: Federal $ 15,562 $ 17,564 $ 10,294 State 4,521 5,008 2,593 Deferred: Federal 6,696 8,344 3,236 State 1,510 851 523 Amortization of deferred investment tax credits (1,792) (2,000) (1,702) ----------------------------- Total income tax expense $ 26,497 $ 29,767 $ 14,944 - --------------------------------------------------------------------------------
In August of 1993, the Revenue Reconciliation Act of 1993 increased the 1993 statutory federal corporate income tax rate from 34 percent to 35 percent. As a result of this change, federal tax expense increased by $568,000. Effective with the adoption of SFAS 109 in 1993, deferred income taxes were provided for the temporary differences between the amount of the Company's assets and liabilities for financial reporting purposes and their tax bases. The Company's current deferred tax assets totalled $2.6 million as of December 31, 1993, which primarily represents the deferred tax effects of unearned revenues. The temporary differences that gave rise to the noncurrent deferred tax assets and liabilities as of December 31, 1993 are as follows:
Deferred Income Taxes ------------------------ Assets Liabilities - -------------------------------------------------------------------------------- Property, plant and equipment $ -- $ 65,141 Alternative minimum tax credit carryforwards 19,553 -- State operating loss carryforwards 14,610 -- Postretirement benefits 5,251 -- Partnership investments -- 9,722 Licenses -- 7,313 Marketable equity securities -- 6,797 Minority Share of USM income 5,823 Effects of corporations not included in consolidated federal return -- 3,878 Other 10,281 2,159 ------------------- 49,695 100,833 Less valuation allowance (8,704) -- ------------------- Total $ 40,991 $100,833 - --------------------------------------------------------------------------------
At December 31, 1993 TDS had $19.5 million of federal alternative minimum tax credit carryforwards available to offset regular income tax payable in future years, and $211 million of state net operating loss carryforwards expiring between 1999 and 2008. Income tax benefits of $1.4 million associated with Company employee stock purchase plans and certain stock option arrangements were recorded directly to Common Stockholders' Equity in 1993. Investment tax credits resulting from investments in telephone plant and equipment have been deferred and are being amortized over the service lives of the related property. A valuation allowance of $6.5 million has been established upon the adoption of SFAS 109 since it is more likely than not that a portion of the state operating loss carryforwards will expire before they can be utilized. During 1993, the valuation allowance increased $2.2 million due primarily to the increase in state operating loss carryforwards. The statutory federal income tax rate is reconciled to TDS's effective income tax rate before an extraordinary item and the cumulative effect of accounting changes below.
Year Ended December 31, 1993 1992 1991 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 34.0% 34.0% State income taxes, net of federal benefit 6.2 5.5 5.7 Amortization of license acquisition costs and costs in excess of book value 4.8 3.6 7.0 Amortization of deferred investment tax credits (3.0) (2.7) (4.4) Effects of corporations not included in consolidated federal tax return 1.9 1.8 1.1 Minority share of USM income (loss) -- .5 (4.0) Deferred tax rate differential (.7) (.7) (1.1) Gain on sale of cellular interest -- .5 4.0 Other differences, net (.3) 1.1 (.9) ----------------------------------- Effective income tax rate 43.9% 43.6% 41.4%
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total income tax provision for the years ended December 31, 1992 and 1991, including the extraordinary item and cumulative effect of accounting changes, was $25.5 million and $11.6 million, respectively. The effective income tax rate, including the extraordinary item and cumulative effect of accounting changes, was 45.7% in 1992 and 41.9% in 1991. Upon the adoption of SFAS 109, TDS's telephone subsidiaries recorded additional deferred income tax liabilities related primarily to temporary differences not deferred under rate-making policy. Deferred income tax balances were also adjusted to recognize the current federal income tax rate of 35%. Deferred income tax assets were recorded to recognize unamortized investment tax credits as a temporary difference. A corresponding regulatory asset or liability has been established to offset these deferred income tax adjustments. The unamortized regulated asset and liability balances as of December 31, 1993, are $6.7 million and $7.9 million, respectively. These amounts are being amortized over the lives of the related temporary differences. NOTE 3 BUSINESS SEGMENT INFORMATION TDS's operations are classified into three principal segments: Telephone, Cellular Telephone and Radio Paging operations. See Management's Discussion and Analysis of Results of Operations and Financial Condition, specifically "Results of Operations" for certain required financial information regarding TDS's business segments. NOTE 4 ACQUISITIONS During 1993 and 1992, TDS and its subsidiaries completed the following business combinations.
Consideration ------------------------------ TDS and USM Common Stock, TDS Preferred Shares, Cash, Notes and and Subsidiary Long-term Debt Preferred Stock - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Acquisitions During 1993 Majority interest in four telephone companies $34,396 $ 32,821 Cellular interest 19,538 262,346 Paging interests 4,896 -- Acquisitions During 1992 Five telephone companies $ 279 $ 15,844 Cellular interests 22,674 138,267 Paging interest 4,650 -- - --------------------------------------------------------------------------------
Assuming that these acquisitions which were accounted for as purchases had taken place on January 1, 1992, unaudited pro forma results of operations from continuing operations would have been as follows: Year Ended December 31, 1993 1992 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating revenues $608,020 $503,992 Net income before extraordinary item and cumulative effect of accounting changes 29,393 30,765 Earnings per share before extraordinary item and cumulative effect of accounting changes $ .49 $ .42 - --------------------------------------------------------------------------------
NOTE 5 FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of Cash and Cash Equivalents, Temporary Investments, Marketable Non-Equity Securities and Short- and Long-term Debt approximate fair value. The following assumptions were used by the Company for its fair value estimates for financial instruments: Cash and Cash Equivalents and Short-term Debt: based on face amounts. Temporary Investments and Marketable Non-Equity Securities: based on quoted market prices. Long-term Debt: estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying value of the Company's Redeemable Preferred Shares, $27.4 million, is less that its fair value, estimated to be $33.4 million. The fair value was estimated using discounted cash flow analyses based on the Company's current dividend yield on issues of its non-convertible preferred shares, and, for convertible series, the net present value of the common stock to be issued upon conversion (valued at the December 31, 1993 quoted market price). It was not practicable to estimate the fair value of the Company's cost method investments in other companies because of the lack of quoted market prices. The carrying amounts at December 31, 1993 represent the original cost of the investments, which management believes is not impaired. NOTE 6 NOTES PAYABLE TDS has used short-term debt to finance its investments in cellular telephone and radio paging operations, for acquisitions, and for general corporate purposes. Long-term debt and equity financing from time to time have retired such short-term debt. Proceeds from the sale of medium-term debt retired $91.4 million of short-term debt in 1993 and $7.5 million in 1992. Proceeds of TDS's sales of Common Shares retired $58.9 million of short- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS term debt in 1993 and $54 million of short-term debt in 1992. Proceeds from a USM rights offering (see Note 7) reduced $29.6 million of short-term debt in 1993. TDS and its subsidiaries had $117 million of bank lines of credit for general corporate purposes at December 31, 1993, all of which were committed. Unused amounts of such lines totalled $111 million, all of which were committed. These line-of-credit agreements provide for borrowings at negotiated rates up to the prime rate. Information concerning notes payable is shown in the table below.
December 31 1993 1992 1991 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Balance at end of period $ 6,309 $46,816 $41,283 Weighted average interest rate at end of period 3.6% 4.3% 5.8% Maximum amount outstanding during the period 49,851 $71,803 $80,035 Average amount outstanding during the period(1) $32,270 $31,053 $42,959 Weighted average interest rate during the period (1) 3.9% 4.5% 6.6% - -------------------------------------------------------------------------------- (1) The average was computed based on month-end balances.
NOTE 7 SALE OF STOCK BY A SUBSIDIARY In 1993, USM sold 5.9 million Common Shares and 5.5 million Series A Common Shares at a price of $33 per share pursuant to a rights offering. Approximately 4.8 million of the Common Shares and all of the Series A Common Shares were issued to TDS in exchange for a reduction in the amount of debt USM owes TDS of approximately $341 million. In 1991, USM sold 2.0 million Common Shares at a public offering price of $18 per share. Immediately prior to the public offering, $110 million of USM's debt to TDS was converted into additional USM Common Shares, also at $18 per share. USM issued Common Shares during 1993, 1992 and 1991 in connection with acquisitions and employee stock purchase plans. In addition, certain 1993, 1992 and 1991 acquisitions require USM to deliver Common Shares in the future. The USM Common Share transactions were recorded at fair market values which were substantially either less than or in excess of TDS's book value investment in USM. The (decrease) increase in TDS's book value investment (as a result of these issues and commitments to issue Common Shares) totalled ($62.2 million) in 1993, $1.8 million in 1992 and $56.5 million in 1991, and was (debited) credited to capital in excess of par value. NOTE 8 LONG-TERM DEBT Long-term debt as of December 31, 1993 and 1992 is as follows:
December 31 1993 1992 - ------------------------------------------------------------ (DOLLARS IN THOUSANDS) Telephone and Data Systems, Inc. (Parent) Medium-term notes, 8% to 10%, due through 2023 $ 200,000 $ 107,500 Senior notes, 8.875% to 14% -- 10,970 Purchase contracts, 8% to 14%, due through 2003 4,272 4,417 Subordinated debentures, 8.0% to 14.5%, due through 2008 2,364 3,154 --------------------------------- 206,636 126,041 Less current portion 1,604 3,935 --------------------------------- Total parent debt 205,032 122,106 - --------------------------------------------------------------- Subsidiaries REA, RTB and FFB Mortgage Notes, due through 2030 2% 30,141 29,698 4% to 6% 162,714 135,390 6.05% to 9% 59,846 52,661 9.025% to 11% 6,994 7,183 --------------------------------- 259,695 224,932 Vendor financing, approximating prime 62,931 64,866 Other long-term notes, 6% to 13%, due through 2003 8,304 11,046 --------------------------------- 330,930 300,844 Less current portion 21,520 17,968 --------------------------------- Total subsidiaries' debt 309,410 282,876 - --------------------------------------------------------------- Total long-term debt $ 514,442 $ 404,982 - --------------------------------------------------------------- - ---------------------------------------------------------------
The Company sold $92.5 million and $7.5 million of senior unsecured debt securities in 1993 and 1992, respectively, under its Medium-Term Note Program. The proceeds were used principally to retire short-term debt, as well as for working capital and general corporate purposes. The mortgage notes issued under certain loan agreements with the Rural Electrification Administration ("REA"), Rural Telephone Bank ("RTB") and Federal Financing Bank ("FFB"), agencies of the United States of America, are to be repaid in equal monthly or quarterly installments covering principal and interest beginning six months to three years after dates of issue and expiring through 2030. Substantially all telephone plant is pledged under REA and RTB mortgage notes and various other obligations of the subsidiaries. USM has financing arrangements with an equipment vendor for cellular system equipment and construction costs. The borrowings are collateralized by a secured interest in some or all of the assets of USM's operating subsidiaries. Borrowings have terms of seven to eight years at interest rates approximating the prime rate (6.0% at December 31, 1993). The annual requirements for principal payments on long-term debt are approximately $23.1 million, $23.2 million, $21.0 million, $19.9 million and $20.2 million for the years 1994 through 1998, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 PREFERRED SHARES TDS Cumulative Voting Preferred Shares, authorized 5,000,000 shares, have a stated value of $100 per share. The Preferred Shares are issuable in series by the Board of Directors who establish the terms of the issue. Those issues which contain mandatory redemption features or which are redeemable at the option of the holder are classified as Redeemable Preferred Shares. Those issues which are not redeemable or which are redeemable at the option of TDS are classified as Nonredeemable Preferred Shares. REDEEMABLE PREFERRED SHARES Redeemable Preferred Shares include outstanding series of TDS Cumulative Voting Preferred Shares with redemption features as described below. Dividends on Series MM through QQ are payable in additional shares of each of those series. All other dividends are payable in cash. At December 31, 1993, Series W,X and DD are convertible into TDS Common Shares as shown in the following table.
Outstanding Amount Outstanding Dividend Conversion Preferred December 31, Series Rate Ratio Shares 1993 1992 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT DIVIDEND RATES) H $7.00 -- 1,594 $ 174 $ 211 N 8.00 -- 5,495 550 628 O 9.00 -- 709 71 71 W 7.50 9/1 8,500 850 850 X 6.00 7.88/1 1,700 170 170 CC 6.00 5.25/1 -- -- 14 DD 7.00 5.25/1 12,000 1,200 2,400 HH 6.00 -- 2,627 263 367 II 6.00 -- 6,738 674 674 JJ 6.00 -- 6,738 674 674 KK 6.00 -- 6,735 674 674 LL 6.00 -- 6,735 674 674 MM 4.00 -- 9,425 942 906 NN 4.00 -- 9,058 905 870 OO 4.00 -- 55,895 5,589 5,371 PP 4.00 -- 48,582 4,858 4,669 QQ 4.00 -- 90,992 9,099 8,744 ------------------------------------------ 273,523 27,367 27,967 Less current portion 1,735 804 ---------------- $25,632 $27,163 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Series H Preferred Shares are required to be redeemed at $119 per share and are stated on the balance sheets at redemption price. Series N through LL Preferred Shares are redeemable at the option of the holder at $100 per share plus accrued and unpaid dividends. Series MM through QQ Preferred Shares are redeemable at the option of the holder into (at TDS's option) a specified number of USM Common Shares, a number of TDS Common Shares having a market value equal to the specified number of USM Common Shares, or a combination of USM and TDS Common Shares. The annual requirements for redemption of Redeemable Preferred Shares are $1.7 million, $10.8 million, $11.4 million, $1.2 million and $249,000 for the years 1994 through 1998, respectively. The following is a schedule of the Redeemable Preferred Shares' activity.
Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Balance, beginning of period $27,967 $28,779 $ 6,965 Add: Acquisitions -- -- 23,059 Stock dividends 834 802 68 Less: Redemption of preferred (220) (407) (106) Conversion of preferred (14) -- -- Expiration of redemption feature (1,200) (1,207) (1,207) -------------------------------------------------- Balance, end of period $ 27,367 $ 27,967 $ 28,779 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES Nonredeemable Preferred Shares include outstanding series of TDS Cumulative Voting Preferred Shares which have no mandatory redemption features. Outstanding Nonredeemable Preferred Shares are redeemable at the option of TDS (except Series S, which is not redeemable) at $100 per share, plus accrued and unpaid dividends. At December 31, 1993, Series V through RR Preferred Shares are convertible into TDS Common Shares as shown in the following table.
Outstanding Amount Outstanding Dividend Conversion Preferred December 31, Series Rate Ratio Shares 1993 1992 - -------------------------------------------------------------------------------- (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 3,100 310 370 AA 7.00 9/1 -- -- 1,259 BB 9.00 9/1 19,000 1,900 1,900 CC 6.00 5.25/1 -- -- 22 DD 7.00 5.25/1 48,000 4,800 3,600 EE 6.00 4.5/1 14,304 1,431 1,515 GG 5.00 2.3/1 46,400 4,640 4,800 RR 7.50 2.06/1 29,851 2,985 -- ----------------------------------------- 168,328 $16,833 $14,233 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The following is a schedule of the Nonredeemable Preferred Shares' activity.
Year Ended December 31 1993 1992 1991 - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Balance, beginning of period $ 14,233 $ 13,183 $ 13,134 Add: Acquisitions 3,000 -- -- Reclassification from Redeemable Preferred Shares 1,200 1,207 1,207 Less: Conversion of preferred (1,600) (157) (1,158) ------------------------------------------ Balance, end of period $16,833 $14,233 $13,183 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 RESTRICTION ON COMMON STOCK DIVIDENDS Under TDS's loan agreements at December 31, 1993, all of the consolidated retained earnings were available for the payment of cash dividends on shares of TDS common stock. Certain regulated telephone subsidiaries may not transfer funds to the parent in the form of cash dividends, loans or advances until certain financial requirements of their mortgages have been met. Of the $209 million underlying retained earnings of all TDS subsidiaries at December 31, 1993, $99 million was available for the payment of dividends on the subsidiaries' common stock. Of the $1.5 billion underlying net assets of the TDS subsidiaries at December 31, 1993, $1.1 billion was available for transfer to TDS. NOTE 11 COMMON STOCK COMMON SHARES ISSUABLE Certain telephone and cellular acquisition agreements require TDS to deliver Common Shares in 1994. In connection with these agreements, TDS expects to deliver these Common Shares during the first quarter of 1994. EMPLOYEE AND SHAREHOLDER STOCK PLANS The following table summarizes Common and Series A Common Shares issued for the employee stock ownership plans and dividend reinvestment plans described below.
Year Ended December 31, 1993 1992 1991 - ---------------------------------------------------------------------------- Common Shares Employee stock purchase plan 31,065 44,399 945 Tax-deferred savings plan 29,760 31,539 23,312 Employee stock options and stock appreciation rights 96,877 78,195 12,938 Dividend reinvestment plan 26,070 29,468 25,569 -------------------------------------- 183,772 183,601 62,764 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Series A Common Shares Dividend reinvestment plan 17,182 20,525 7,206 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 125,000 Common Shares for sale to the employees of TDS and its subsidiaries at $44.73 per share in connection with the 1993 Employee Stock Purchase Plan. TAX-DEFERRED SAVINGS PLAN. TDS has reserved 218,569 Common Shares for issue under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions in TDS Common Shares, USM Common Shares or four other nonaffiliated funds. Employer matching contributions, equal to 20% of employee contributions up to a certain limit, are made in TDS Common Shares. EMPLOYEE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. TDS has reserved 574,342 Common Shares for options granted to key employees. TDS has established certain plans that provide for the grant of stock options and stock appreciation rights to officers and employees. The options are exercisable over a specified period not in excess of ten years. The options expire from 1994 to 2003, or the date of the employee's termination of employment, if earlier. The following table summarizes the status of the plans.
Weighted Number Average Stock Options of Shares Option Prices - ------------------------------------------------------------------------------- Outstanding January 1, 1991 (174,593 exercisable) 532,963 $11.68 Granted 24,000 $32.24 Exercised (11,925) $ 9.52 ---------------------------- Outstanding December 31, 1991 (233,542 exercisable) 545,038 $12.63 Granted 1,125 $32.36 Exercised (128,439) $13.15 ---------------------------- Outstanding December 31, 1992 (174,751 exercisable) 417,724 $12.52 Granted 11,125 $35.54 Exercised (133,414) $ 9.62 ---------------------------- Outstanding December 31, 1993 (104,411 exercisable) 295,435 $14.70 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
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, 1993 1992 1991 - ------------------------------------------------------------------------------ Outstanding beginning of period 22,076 20,725 24,024 Granted 9,410 9,828 10,015 Exercised (22,386) (8,477) (13,314) ------------------------------------------ Outstanding end of period 9,100 22,076 20,725 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Compensation expense, measured on the difference between the year-end market price of the Common Shares and option prices, was $644,000 in 1993, $553,000 in 1992 and $378,000 in 1991. DIVIDEND REINVESTMENT PLANS. TDS has reserved 205,597 Common Shares for issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and 244,337 Series A Common Shares for issue under the Series A Common Share Automatic Dividend Reinvestment Plan. These plans enable holders of TDS's Common Shares and Preferred Shares to reinvest cash dividends in newly issued Common Shares and holders of Series A Common Shares to reinvest cash dividends in newly issued Series A Common Shares. The purchase price of the shares is 95% of the market value, based on the average of the daily high and low sales prices for TDS's Common Shares on the American Stock Exchange for the ten trading days preceding the date on which the purchase is made. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONVERTIBLE PREFERRED SHARES TDS has reserved 2,401,399 Common Shares for the possible conversion of its convertible Preferred Shares (See Note 9). TDS issued 139,689 Common Shares in 1993, 160,166 in 1992 and 126,917 in 1991 for shares of TDS and subsidiary preferred stock converted. SERIES A COMMON SHARES The holders of Common Shares and the outstanding Preferred Shares are entitled to one vote per share. The holders of Series A Common Shares are entitled to ten votes per share. Series A Common Shares are convertible, on a share-for-share basis, into Common Shares. TDS has reserved 6,881,001 Common Shares for possible issuance upon such conversion. PUBLIC OFFERING TDS issued 1.3 million Common Shares for cash under its shelf registration statements in 1993. Proceeds aggregated $65.6 million. TDS sold 2.0 million Common Shares at $35.50 per share in connection with a public offering in 1992. Proceeds to TDS were $34.08 per share, or $68.2 million. NOTE 12 COMMITMENTS The primary purpose of TDS's construction and expansion program is to provide for normal growth, to upgrade telephone service, to expand into new communication areas, and to take advantage of service-enhancing and cost- reducing technological developments. Telephone construction expenditures are estimated to be approximately $110 million during 1994. Property and equipment expenditures for cellular telephone operations are estimated to be approximately $160 million during 1994. Radio paging fixed asset expenditures are estimated to be approximately $25 million during 1994. Other fixed asset expenditures are estimated to be approximately $10 million during 1994. Investments in cellular partnerships, primarily in minority-owned and managed systems, are expected to total $5 million in 1994. The Company has an ongoing acquisition program to acquire telephone companies and cellular telephone interests. For a discussion of pending acquisitions, see Management's Discussion and Analysis of Results of Operations and Financial Condition, specifically "Financial Resources and Liquidity." TDS and its subsidiaries have leases for certain cellular plant facilities, office space and data processing equipment, most of which are classified as operating leases. For the years 1993, 1992 and 1991, rent expense for term leases was $7.8 million, $6.7 million and $6.5 million, respectively, and rent expense under cancelable and short-term leases was $5.4 million, $3.1 million and $3.1 million, respectively. At December 31, 1993, the aggregate minimum rental commitments under noncancelable operating leases for the years 1994 through 1998 are approximately $7.9 million, $7.0 million, $6.2 million, $5.3 million and $4.9 million, respectively. NOTE 13 INVESTMENTS IN UNCONSOLIDATED ENTITIES The following summarizes the unaudited combined assets, liabilities and equity, and the unaudited results of operations of the telephone and cellular companies in which TDS's investments are accounted for by the equity method.
December 31, 1993 1992 - -------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Assets Current assets $ 186,931 $ 147,100 Due from affiliates 34,159 18,993 Property and other 570,594 535,015 --------------------------------------- $ 791,684 $ 701,108 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Liabilities and Equity Current liabilities $ 136,636 $ 97,952 Due to affiliates 35,591 41,614 Deferred credits 6,777 5,839 Long-term debt 84,781 97,470 Partners' capital and stockholders' equity 527,899 458,233 ----------------------------------------- $ 791,684 $ 701,108 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Results of Operations Revenues $ 765,983 $ 599,548 $ 491,233 Costs and expenses (568,458) (446,149) (338,708) Other income (expense) (8,045) 3,086 1,231 Interest expense (9,046) (8,288) (2,231) Income taxes (3,596) (4,593) (3,707) Cumulative effect of accounting changes 432 (1,495) (4,658) ----------------------------------------- Net income $ 177,270 $ 142,109 $ 143,160 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 LEGAL PROCEEDINGS The Company is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain landline or cellular telephone systems. The more significant proceedings involving the Company are described in the following paragraphs. LA STAR APPLICATION. Star Cellular Telephone Company, Inc. ("Star Cellular"), an indirect wholly owned subsidiary of USM, is a 49% owner of La Star Cellular Telephone Company ("La Star"), an applicant for a construction permit for a cellular system in St. Tammany Parish in the New Orleans MSA. In June 1992, the FCC affirmed an Administrative Law Judge's order which had granted the mutually exclusive application of New Orleans CGSA, Inc. ("NOCGSA") and dismissed La Star's application. The ground for the FCC's action was its finding that Star Cellular, and not the 51% owner, SJI Cellular Inc. ("SJI"), in fact controlled La Star. La Star, TDS and USM have appealed that order to the United States Court of Appeals of the District of Columbia Circuit and those appeals are pending. In a footnote to its decision, the FCC stated, in part, that "Questions regarding the conduct of SJI and [USM] in this case may be revisited in light of the relevant findings and conclusions here in future proceedings where the other interests of these parties have decisional significance." Certain adverse parties have attempted to use the footnote in the La Star decision in a number of unrelated, contested proceedings which TDS and USM have pending before the FCC. In addition, since the La Star proceeding, FCC authorizations in uncontested FCC proceedings have been granted subject to any subsequent action the FCC may take concerning the La Star footnote. On February 1, 1994, in a proceeding involving a license originally issued to TDS for a Rural Service Area in Wisconsin, the FCC instituted a hearing to determine whether in the La Star case USM had misrepresented facts to, lacked candor in its dealing with or attempted to mislead the FCC and, if so, whether TDS possesses the requisite character qualifications to hold that Wisconsin license. The FCC stated that, pending resolution of the issues in the Wisconsin proceeding, further grants to TDS and its subsidiaries will be conditioned on the outcome of that proceeding. TDS was granted interim authority to continue to operate the Wisconsin system pending completion of the hearing. An adverse finding in the Wisconsin hearing could result in a variety of possible sanctions, ranging from a fine to loss of the Wisconsin license, and could, as stated in the FCC order, be raised and considered in other proceedings involving TDS and its subsidiaries. TDS and USM believe they acted properly in connection with the La Star application and that the findings and record in the La Star proceeding are not relevant in any other proceeding involving their FCC license qualifications. TOWNES TELECOMMUNICATIONS, INC., ET. AL. V. TDS, ET. AL. Plaintiffs Townes Telecommunications, Inc. ("Townes"), Tatum Telephone Company ("Tatum Telephone") and Tatum Cellular Telephone Company ("Tatum Cellular") filed a suit in the District Court of Rusk County, Texas, against both TDS and USM as defendants. Plaintiff Townes alleges that it entered into an oral agreement with defendants which established a joint venture to develop cellular business in certain markets. Townes alleges that defendants usurped a joint venture opportunity and breached fiduciary duties to Townes by purchasing interests in nonwireline markets in Texas RSA #11 and the Tyler (Texas) MSA on their own behalf rather than on behalf of the alleged joint venture. In its Fifth Amended Original Petition Townes seeks unspecified damages not to exceed $33 million for usurpation, breach of fiduciary duty, civil conspiracy, breach of contract and tortious interference. Townes also seeks imposition of a constructive trust on defendants' profits from Texas RSA #11 and the Tyler (Texas) MSA and transfer of those interests to the alleged joint venture. In addition, Townes seeks reasonable attorneys' fees equal to one-third of the judgment, along with prejudgment interest. Plaintiffs Tatum Telephone and Tatum Cellular seek a declaration that transfers by defendants of a 49% interest in Tatum Cellular violated a five-year restriction on alienation of Tatum Cellular shares contained in a written shareholders' agreement. Tatum Telephone and Tatum Cellular seek to void the transfers. All plaintiffs together seek as much as $200 million in punitive damages. Defendants have asserted meritorious defenses to each of the plaintiffs' claims and are vigorously defending this case. Discovery in ongoing. A jury trial is this case is set to commence on April 25, 1994. CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
Quarter Ended March 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1993 Operating Revenues $126,702 $144,781 158,650 $160,611 Operating Income 15,376 20,735 21,162 12,460 Net Income 6,803 8,967 11,887 6,239 Net Income Available to Common $6,207 $8,371 $11,290 $5,642 Weighted Average Common Shares (000s) 44,261 46,469 48,302 50,045 Earnings per Common Share $.14 $.18 $.23 $.11 1992 Operating Revenues $100,737 $111,189 $118,604 $126,366 Operating Income 14,305 15,039 14,038 10,683 Net Income Before Extraordinary Item and Cumulative Effect of Accounting Change 13,159 6,992 6,626 11,743 Extraordinary Item -- -- -- (769) Cumulative Effect of Accounting Change (6,866) -- -- -- Net Income 6,293 6,992 6,626 10,974 Net Income Available to Common $5,955 $6,432 $6,065 $10,416 Weighted Average Common Shares (000s) 36,877 39,479 40,027 40,637 Earnings per Common Share: Before Extraordinary Item and Cumulative Effect of Accounting Change $.35 $.16 $.15 $.26 Extraordinary Item -- -- -- (.02) Cumulative Effect of Accounting change (.19) -- -- -- Net Income $.16 $1.6 $.15 $.24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Telephone and Data Systems, Inc.: We have audited the accompanying consolidated balance sheets of Telephone and Data Systems, Inc. (an Iowa Corporation) and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telephone and Data Systems, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in "Changes in Accounting Principle" in Note 1 of the Notes to Consolidated Financial Statements, the method of accounting for cellular sales commissions was changed effective January 1, 1991. As discussed in "Other Postretirement Benefits" in Note 1, the method of accounting for postretirement benefits other than pensions was changed effective January 1, 1992. As discussed in Note 2 of the Notes to Consolidated Financial Statements, the method of accounting for income taxes was changed effective January 1, 1993. As discussed in Note 14 of the Notes to Consolidated Financial Statements, the Company is a defendant in a lawsuit involving a joint venture opportunity, a shareholders' agreement and other related matters. The ultimate outcome from the litigation cannot presently be determined. Accordingly, no provision for any liability which may result has been made in the consolidated financial statements. /s/ Arthur Andersen & Co. Chicago, Illinois February 8, 1994 EX-21 7 EXHIBIT 21 EXHIBIT 21 TELEPHONE AND DATA SYSTEMS, INC. LIST OF SUBSIDIARY COMPANIES AS OF DECEMBER 31, 1993 TELEPHONE COMPANIES TDS Telecommunications Corporation CENTRAL REGION - MID-CENTRAL DIVISION Arcadia Telephone Company Chatham Telephone Company Communications Corporation of Indiana Communication Corporation of Michigan Communications Corporation of Southern Indiana Continental Telephone Company Home Telephone Company, Inc. The Home Telephone Company of Pittsboro, Inc. Island Telephone Company Little Miami Communications Corporation Oakwood Telephone Company Shiawassee Telephone Company The Vanlue Telephone Company Wolverine Telephone Company CENTRAL REGION - MID-WEST DIVISION Badger Telecom, Inc. Black Earth Telephone Company, Inc. Bonduel Telephone Company Burlington, Brighton and Wheatland Telephone Company Central State Telephone Company Danube Telephone Company EastCoast Telecom, Inc. Grantland Telecom, Inc. KMP Telephone Company Mid-State Telephone Company Midway Telephone Company Mt. Vernon Telephone Company Riverside Telecom, Inc. Scandinavia Telephone Company Stockbridge & Sherwood Telephone Company, Inc. Tenney Telephone Company Waunakee Telephone Company, Inc. Winsted Telephone Company 1 TELEPHONE COMPANIES (Cont.) CENTRAL REGION - WESTERN DIVISION Arizona Telephone Company Asotin Telephone Company Cleveland County Telephone Company, Inc. Decatur Telephone Company Delta County Tele-Comm, Inc. Happy Valley Telephone Company Home Telephone Company Hornitos Telephone Company Lake Livingston Telephone Company, Inc. Mid-America Telephone Company, Inc. New London Telephone Company Oklahoma Communication Systems, Inc. Orchard Farm Telephone Company Potlatch Telephone Company The Stoutland Telephone Company Strasburg Telephone Company Troy Telephone Company, Inc. Winterhaven Telephone Company Wyandotte Telephone Company NORTHEAST REGION Chichester Telephone Company, Inc. Edwards Telephone Company, Inc. Hartland & St. Albans Telephone Company The Island Telephone Company Kearsarge Telephone Company Ludlow Telephone Company Mahanoy & Mahantango Telephone Company Meriden Telephone Company, Inc. Northfield Telephone Company Oriskany Falls Telephone Corporation Perkinsville Telephone Company, Inc. Port Byron Telephone Company Somerset Telephone Company Sugar Valley Telephone Company Warren Telephone Company West Penobscot Telephone & Telegraph Company 2 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 SERVICE COMPANIES American Communications Consultants, Inc. American Portable Telecommunications, Inc. American Radio Communications, Inc CellVest CommVest, Inc. Integrated Communications Services, Inc. National Telephone & Telegraph Company Nortelco Rudevco, Inc. Suttle Press, Inc. TCC, Incorporated TDS Computing Services, Inc. TDS Oklahoma Holdings, Inc. TDS Realestate Investment Corporation Tel Radio Communications Properties, Inc. Telecommunications Technologies Fund, Inc. CABLE TV COMPANIES TDS Cable Communications Company Carolina Cable T.V. Co., Inc. Comvideo Systems, Inc. Condon TV Systems, Inc. Kearsarge Cable Communications, Inc. Lewisport Cable TV Volunteer TV Cable Company Warren Cable Company 4 RADIO PAGING COMPANIES American Paging, Inc. A. P. of Pennsylvania, Inc. American Paging, Inc. (of Arizona) American Paging, Inc. (of California) American Paging, Inc. (of Connecticut) American Paging, Inc. (of District of Columbia) American Paging, Inc. (of Florida) American Paging, Inc. (of Georgia) American Paging, Inc. (of Illinois) American Paging, Inc. (of Indiana) American Paging, Inc. (of Kentucky) American Paging, Inc. (of Louisiana) American Paging, Inc. (of Maryland) American Paging, Inc. (of Massachusetts) American Paging, Inc. (of Minnesota) American Paging of Missouri, Inc. American Paging, Inc. (of New Mexico) American Paging, Inc. (of New York) American Paging, Inc. (of North Carolina) American Paging, Inc. (of Ohio) American Paging, Inc. (of Oklahoma) American Paging, Inc. (of Rhode Island) American Paging, Inc. (of South Carolina) American Paging, Inc. (of Tennessee) American Paging, Inc. (of Texas) American Paging, Inc. (of Utah) American Paging, Inc. (of Virginia) American Paging, Inc. (of Wisconsin) American Paging Network, Inc. APIXUS, LLC. Texas Paging Transmission, Inc. 5 CELLULAR COMPANIES United States Cellular Corporation United States Cellular Investment Company United States Cellular Investment Co. of Allentown USCIC of Amarillo, Inc. USCIC of Arecibo, Inc. United States Cellular Investment Company of Baton Rouge United States Cellular Investment Company of Binghamton, Inc. USCIC of Brownsville, Inc. United States Cellular Investment Company of Eau Claire, Inc. Universal Cellular for Eau Claire MSA, Inc. United States Cellular Investment Company of Fresno, Inc. United States Cellular Investment Company of Ft. Smith United States Cellular Investment Company of Galveston United States Cellular Investment Company of Green Bay, Inc. United States Cellular Investment Company of Huntsville, Inc. United States Cellular Investment Company of Iowa City USCIC of Jackson, Inc. United States Cellular Investment Company of Lafayette United States Cellular Investment Corporation of Los Angeles United States Cellular Investment Company of Madison, Inc. USCIC of McAllen, Inc. USCIC of Midland, Inc. United States Cellular Investment Co. of Nashville USCIC of New Orleans, Inc. USCIC of Ocala, Inc. United States Cellular Investment Co. of Oklahoma City, Inc. United States Cellular Investment Company of Portsmouth, Inc. United States Cellular Investment Company of Raleigh-Durham USCIC of Reno, Inc. United States Cellular Investment Company of Rockford United States Cellular Investment Company of Santa Cruz United States Cellular Investment Company of Sarasota USCIC of Seattle, Inc. United States Cellular Investment Company of St. Cloud United States Cellllar Investment Company of Wheeling United States Cellular Operating Company United States Cellular Operating Company of Atlantic City, Inc. United States Cellular Operating Company of Bangor United States Cellular Operating Company of Biloxi United States Cellular Operating Company of Cedar Rapids 6 CELLULAR COMPANIES (CONT'D) United States Cellular Operating Company of Columbia USCOC of Cumberland, Inc. United States Cellular Operating Company - Des Moines United States Cellular Operating Company of Dubuque United States Cellular Operating Company of Evansville, Inc. United States Cellular Operating Company of Ft. Pierce USCOC of Gainesville, Inc. USCOC of Iowa City, Inc. United States Cellular Operating Company of Joplin United States Cellular Operating Company of Knoxville United States Cellular Operating Company of LaCrosse, Inc. United States Cellular Operating Company - Lawton, Inc. United States Cellular Operating Company of Lewiston-Auburn United States Cellular Operating Company of Manchester-Nashua, Inc. United States Cellular Operating Company of Medford Cellular Operating Company of Owensboro United States Cellular Operating Company of Peoria USCOC of Portland, Inc. United States Cellular Operating Company of Poughkeepsie, Inc. United States Cellular Operating Company - Quad Cities United States Cellular Operating Company of Richland United States Cellular Operating Company of Rochester United States Cellular Operating Company of Tulsa, Inc. USCOC of Victoria, Inc. United States Cellular Operating Company of Vineland, Inc. United States Cellular Operating Company of Waterloo United States Cellular Operating Company of Wausau, Inc. United States Cellular Operating Company of Wichita Falls, Inc. United States Cellular Operating Company of Williamsport United States Cellular Operating Company of Yakima USCC Real Estate Corporation ILP, Inc. 7 CELLULAR COMPANIES - JOINT VENTURES Canton Cellular Telephone Company Capitol Cellular, Inc. Carolina Cellular, Inc. Cellular America Telephone Company Central Cellular Telephones, Ltd. Central Florida Cellular Telephone Company, Inc. Chibardun Cellular Telephone Corporation CR Communications, Inc. CSII of Baton Rouge, Inc. Davenport Cellular Telephone Company, Inc. DRGP, Inc. Dutchess County Cellular Telephone Company, Inc. Four D, LTD. Huntsville Cellular Telephone Corp., Inc. Joplin Cellular Telephone Company LaCrosse Cellular Telephone Company, Inc. Lar-Tex Cellular Telephone Company, Inc. Lavaca Cellular Telephone Company Leaf River Valley Cellular Telephone Company Mississippi Cellular Telephone Company Star Cellular Communications, Inc. Star Cellular Telephone Company, Inc. Texahoma Cellular Telephone Corporation Tri-States Cellular Telephone Company Tulsa General Partners, Inc. Vineland Cellular Telephone Company, Inc. CELLULAR COMPANIES - RSA CORPORATIONS USCOC of Arkansas RSA #1, Inc. Arkansas RSA #9, Inc. Block B Cellular Corporation California Rural Service Area #1, Inc. California RSA #2, Inc. California RSA #9, Inc. USCIC of Colorado RSA #3, Inc. Florida RSA #2, Inc. Florida RSA #8, Inc. Florida RSA #10, Inc. USCOC of Georgia RSA #1, Inc. Georgia RSA #11, Inc. Georgia RSA #13, Inc. 8 CELLULAR COMPANIES - RSA CORPORATIONS (CONT'D) USCOC of Georgia RSA #14, Inc. USCOC of Hawaii 3, Inc. Idaho Invco of RSA #1, Inc. USCOC of Idaho RSA #5, Inc. USCOC of Idaho RSA #6, Inc. USCOC of Illinois RSA #1 Illinois RSA #3, Inc. USCOC of Illinois RSA #4, Inc. USCOC of Indiana RSA #2, Inc. USCOC of Iowa RSA #1, Inc. Iowa RSA #2, Inc. Indiana RSA #4, Inc. Indiana RSA #5, Inc. USCOC of Indiana RSA #7, Inc. Iowa RSA #3, Inc. Iowa RSA #9, Inc. Iowa RSA #12, Inc. Iowa 13, Inc. Kansas RSA #5, Inc. Kentucky RSA #2, Inc. Kentucky Invco of RSA #3, Inc. Kentucky RSA #3, Inc. Maine RSA #1, Inc. Maine RSA #4, Inc. MaryPennWest Invco of RSA #3, Inc. Michigan RSA #4, Inc. Minnesota Invco of RSA #5, Inc. Minnesota Invco of RSA #7, Inc. Minnesota Invco of RSA #8, Inc. Minnesota Invco of RSA #9, Inc. Minnesota Invco of RSA #10, Inc. Minnesota Invco of RSA #11, Inc. Mississippi RSA #9, Inc. USCOC of Missouri RSA #1, Inc. USCOC of Missouri RSA #3, Inc. USCOC of Missouri RSA #4, Inc. USCOC of Missouri RSA #5, Inc. USCOC of Missouri RSA #13, Inc. Missouri #15 Rural Cellular, Inc. Missouri RSA #17, Inc. 9 CELLULAR COMPANIES - RSA CORPORATIONS (CONT'D) NH #1 Rural Cellular, Inc. USCOC of New York RSA #1, Inc. USCOC of North Carolina RSA #13, Inc. North Carolina RSA #4, Inc. North Carolina RSA #5, Inc. North Carolina RSA No. 6, Inc. USCOC of North Carolina RSA #7, Inc. USCOC of North Carolina RSA #14, Inc. North Carolina RSA #9, Inc. North Carolina RSA #12, Inc. North Carolina RSA #14, Inc. Ohio RSA #1, Inc. USCOC of Ohio RSA #7, Inc. Ohio RSA #9, Inc. Oklahoma RSA #6, Inc. Oklahoma Opco of RSA #8, Inc. Oklahoma #9 Rural Cellular, Inc. USCOC of Oklahoma RSA #10, Inc. Oregon Invco of RSA # 2 West, Inc. Oregon RSA #2, Inc. Oregon RSA #3, Inc. USCOC of Oregon RSA #5, Inc. Oregon RSA #6, Inc. Pennsylvania Invco of RSA #5, Inc. Pennsylvania Invco of RSA #6, Inc. USCOC Pennsylvania RSA #9, Inc. USCOC of South Carolina RSA #4, Inc. TDS U2B Acquisition Corp. Tennessee RSA #3, Inc. Tennessee RSA #4 Sub 2, Inc. Tennessee RSA #6 B, Inc. Texas RSA #4, Inc. Texas RSA #5, Inc. Texas Invco of RSA #6, Inc. Texas RSA #11, Inc. Texas Invco of RSA #17, Inc. Texas #20 Rural Cellular, Inc. Virginia Invco of RSA #2, Inc. 10 CELLULAR COMPANIES - RSA CORPORATIONS (CONT'D) USCOC of Virginia RSA #4, Inc. Virginia RSA #4, Inc. Virginia RSA #5, Inc. Virginia RSA #7, Inc. USCOC of Washington-4, Inc. Washington RSA #5, Inc. Washington RSA #6, Inc. Western Colorado Cellular, Inc. USCOC of West Virginia RSA #2, Inc. West Virginia RSA #4, Inc. West Virginia RSA #5, Inc. USCOC of Wisconsin RSA #6, Inc. Wisconsin Invco of RSA #7, Inc. Wisconsin RSA #8, Inc. CELLULAR COMPANIES - RSA JOINT VENTURES Camden Cellular Telephone Company, Inc. Community Cellular Telephone Company Farmers Cellular Telephone Company, Inc. Farmers Mutual Cellular Telephone Company, Inc. Hancock Cellular Telephone Company, Inc. Hardy Cellular Telephone Company Hill City Cellular Telephone Company Humphreys County Cellular, Inc. Jefferson Cellular Telephone Company, Inc. Laurel Highland Cellular Telephone Company McDaniel Cellular Telephone Company Minford Cellular Telephone Company Peace Valley Cellular Telephone Company Pine Island Cellular Telephone Company Randolph Cellular Telephone Company Scott County Cellular Telephone Company South Canaan Cellular Telephone Company Spruce Knob Cellular Telephone Company Venus Cellular Telephone Company, Inc. Walnut Hill Cellular Telephone Company West Side Cellular Telephone Company 11 CELLULAR COMPANIES - PARTNERSHIPS Allentown SMSA Limited Partnership Amarillo Cellular Telephone Company, L.P. Baton Rouge MSA Limited Partnership Binghamton MSA Limited Partnership Boise City MSA Limited Partnership Brown County MSA Cellular Limited Partnership Cellular Mobile Systems of St. Cloud Cellular 7 Partnership Crook County RSA Limited Partnership Davenport Cellular Telephone Company Eau Claire Cellular Telephone Limited Partnership Evansville Cellular Telephone Company Fort Myers Cellular Telephone Company Fort Smith MSA Limited Partnership Fresno MSA Limited Partnership Galveston Cellular Partnership Georgia R.S.A. #8 Partnership Georgia R.S.A. #11 Partnership Georgia R.S.A. #12 Partnership GTE Mobilenet of Texas RSA #17 Limited Partnership Hiawathaland Cellular Limited Partnership Huntsville SMSA Limited Partnership Idaho RSA No. 1 Limited Partnership Indiana RSA No. 4 Limited Partnership Indiana RSA No. 5 Limited Partnership Iowa RSA No.9 Limited Partnership Iowa RSA No.12 Limited Partnership Kentucky RSA #3 Cellular General Partnership JHP Partnership Joplin Cellular Telephone Company, L.P. La Crosse Cellular Telephone Company, Inc. Lafayette Cellular Telephone Company Lake Champlain Cellular Partnership LaStar Cellular Telephone Company Lewiston CellTellCo Partnership Los Angeles SMSA Limited Partnership Madison SMSA Limited Partnership Maine RSA No. 4 Limited Partnership Marshall Cellular Partnership Medford MSA Limited Partnership 12 CELLULAR COMPANIES - PARTNERSHIPS (Cont.) Minnesota RSA 9 Limited Partnership Minnesota RSA 10 Limited Partnership Missouri RSA No. 6 Partnership Nashville/Clarksville MSA Limited Partnership New York RSA #4 Limited Partnership Northeast Cellular Telephone Company, L.P. Ohio RSA No. 1 Limited Partnership Oklahoma City SMSA Limited Partnership Oklahoma RSA 3 Limited Partnership Oklahoma RSA 5 West Partnership Oklahoma RSA Independent 5 General Partnership Oklahoma RSA 7 Limited Partnership Oklahoma Independent RSA 7 General Partnership Oklahoma RSA No. 8 Limited Partnership Oregon RSA No. 2 Limited Partnership Oregon RSA No. 3 Limited Partnership Pennsylvania RSA 1 Limited Partnership Pennsylvania RSA 5 Partnership Pennsylvania RSA No. 6 (I) Limited Partnership Pennsylvania RSA No. 6 (II) Limited Partnership Pennsylvania RSA No. 9 Limited Partnership Raleigh-Durham MSA Limited Partnership Reno Cellular Telephone Company Rochester Cellular Telephone Company, L.P. Rockford MSA Limited Partnership Saco River Cellular Telephone Company Sarasota Cellular Telephone Company Savannah MSA Cellular Partnership Seattle SMSA Limited Partnership SEG-Cellular Limited Partnership Spokane MSA Limited Partnership Tennessee RSA No. 3 Limited Partnership Texas RSA No. 2 Limited Partnership Texas RSA No. 5 - North Limited Partnership Texas RSA No. 6 Limited Partnership Tri-States Cellular Partnership United States Cellular Operating Company of Bangor United States Cellular Operating Company of Columbia United States Cellular Telephone Company (Lawton), L.P. United States Cellular Telephone Company (Asheville), L.P. 13 CELLULAR COMPANIES - PARTNERSHIPS (Cont.) United States Cellular Telephone Company (Greater Knoxville) United States Cellular Telephone Company (Greater Tulsa) Vermont Ind. Cellular Telephone G.P. Virginia RSA No. 2 Limited Partnership Ward Butte Joint Venture Waterloo-Cedar Falls CellTelCo Wausau Cellular Telephone Company Limited Partnership Western Colorado Cellular of Colorado Limited Partnership West Virginia RSA No. 4 Limited Partnership Wheeling Cellular Telephone Company Wichita Falls Cellular Telephone Company, L.P. Wisconsin #7 Limited Partnership Yakima MSA Limited Partnership Yakima Valley Paging Limited Partnership 14 EX-23.1 8 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 8, 1994, on the consolidated financial statements of Telephone and Data Systems, Inc. and Subsidiaries (the "Company") included in the Company's 1993 Annual Report to Shareholders, to the inclusion in this Form 10-K of our report dated February 8, 1994, on the financial statement schedules of the Company, and to the inclusion in this Form 10-K of our compilation report dated February 11, 1994, on the combined financial statements of the Los Angeles SMSA Limited Partnership, the Nashville/Clarksville MSA Limited Partnership, and the Baton Rouge MSA Limited Partnership, and to the incorporation of such reports into the Company's previously filed S-8 Registration Statements, File No. 33-1192, File No. 33-4420, File No. 33-35172, and File No. 33-50747, and into the Company's previously filed S-3 Registration Statements, File No. 33-8564, File No. 33-8857, File No. 33-8858, File No. 33-28348 and File No. 33-68456, and into the Company's previously filed S-4 Registration Statements, File No. 33-45570, File No. 33-65986 and File No. 33-68988. ARTHUR ANDERSEN & CO. Chicago, Illinois March 24, 1994 EX-23.2 9 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 4, 1994, on our audits of the financial statements of the Los Angeles SMSA Limited Partnership as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND Newport Beach, California March 24, 1994 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion in this Form 10-K of Telephone and Data Systems, Inc., of our reports dated February 11, 1994, February 11, 1993 and February 10, 1992, on our audits of the financial statements of the Nashville/Clarksville MSA Limited Partnership as of December 31, 1993, 1992 and 1991, and for the years ended December 31, 1993, 1992 and 1991; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND Atlanta, Georgia March 22, 1994 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion in this Form 10-K of Telephone and Data Systems, Inc., of our reports dated February 11, 1994, February 11, 1993 and February 10, 1992, on our audits of the financial statements of the Baton Rouge MSA Limited Partnership as of December 31, 1993, 1992 and 1991, and for the years ended December 31, 1993, 1992 and 1991; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND Atlanta, Georgia March 22, 1994 EX-99.1 10 EXHIBIT 99.1 EXHIBIT 99.1 INCORPORATED PORTIONS OF ITEMS AS EXPECTED TO BE INCLUDED IN THE NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT OF TELEPHONE AND DATA SYSTEMS, INC. ELECTION OF DIRECTORS The Company's Board of Directors is divided into three classes. Each year, one class is elected to serve for three years. At the Annual Meeting of Shareholders in 1994, three Class I directors will be elected for a term of three years or until their successors are elected and qualified. The nominees for election as Class I directors are identified in the tables below. The Company has no knowledge that any of the nominees will refuse or be unable to serve, but if any of the nominees becomes unavailable for election, the holders of the proxies reserve the right to substitute another person of their choice as nominee when voting at the Annual Meeting. NOMINEES CLASS I DIRECTORS-TERMS TO EXPIRE IN 1997 The following persons, if elected at the Annual Meeting of Shareholders in 1994, will serve as Class I directors for three years or until their successors are elected and qualified: NOMINEE FOR ELECTION BY HOLDERS OF COMMON SHARES AND HOLDERS OF PREFERRED SHARES (SERIES A, B, D, G, H AND N)
Position with TDS Served as Name Age and Principal Occupation Director since ---- --- ------------------------ -------------- Donald R. Brown 63 Director of the Company and 1979 Senior Vice President - Southeast Region of TDS Telecommunications Corporation
NOMINEES FOR ELECTION BY HOLDERS OF SERIES A COMMON SHARES AND HOLDERS OF PREFERRED SHARES (SERIES O, S, U, V, W, X, BB, DD, EE, GG, HH, II, JJ, KK, LL, MM, NN, OO, PP, QQ AND RR)
Position with TDS Served as Name Age and Principal Occupation Director since ---- --- ------------------------ -------------- Robert J. Collins 58 Director of the Company and 1974 Vice President - Northeast Region of TDS Telecommunications Corporation
Rudolph E. Hornacek 66 Vice President-Engineering and 1968 Director of the Company
Donald R. Brown was a Vice President of the Company between 1974 and 1990, and was the Wisconsin Region Manager between 1979 and 1992. Robert J. Collins was a Vice President of the Company between 1971 and 1990, and between 1974 and 1990 was the Northeast Region Manager. In 1990, Messrs. Brown and Collins resigned as Vice Presidents of the Company and were appointed as Vice Presidents of TDS Telecommunications Corporation ("TDS Telecom"), a subsidiary of the Company which operates local telephone companies. In 1992, Mr. Brown was appointed Senior Vice President - Southeast Region. Rudolph E. Hornacek has been Vice President-Engineering of the Company for more than five years. All of the nominees are current Class I directors. Mr. Brown was elected by the holders of Common Shares and holders of Preferred Shares issued before October 31, 1981. Messrs. Collins and Hornacek were elected by the holders of Series A Common Shares and the holders of Preferred Shares issued after October 31, 1981. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES. OTHER DIRECTORS CLASS II DIRECTORS-TERMS EXPIRE IN 1995 The following persons were elected at the Annual Meeting of Shareholders on May 15, 1992, to serve as Class II directors for three years or until their successors are elected and qualified:
Position with TDS Served as Name Age and Principal Occupation Director since ---- --- ------------------------ -------------- James Barr III 54 Director of the Company and 1990 President of TDS Telecommunications Corporation LeRoy T. Carlson, Jr. 47 President and Director of the 1968 Company (chief executive officer) Donald C. Nebergall 65 Director and Consultant to the Company 1977 and other companies Murray L. Swanson 52 Executive Vice President-Finance and 1983 Director of the Company (chief financial officer)
James Barr III was appointed President and chief executive officer of TDS Telecom in 1990. Prior to that, Mr. Barr served as a Sales Vice President for American Telephone and Telegraph Company from 1985 through 1989. Mr. Barr is also a director of American Paging, Inc. (AMEX Symbol "APP"), a subsidiary of the company which provides radio paging services. LeRoy T. Carlson, Jr., has been the President and chief executive officer for more than five years. Mr. Carlson is also Chairman and a director of APP and United States Cellular Corporation (AMEX symbol "USM"), a subsidiary of the Company which operates and invests in cellular telephone -2- companies and properties. Mr. Carlson is the son of LeRoy T. Carlson and the brother of Walter C.D. Carlson. Donald C. Nebergall served as the Vice President of The Chapman Company, a registered investment advisory company located in Cedar Rapids, Iowa, from 1986 to 1988. Prior to that, he was the Chairman of Brenton Bank & Trust Company, Cedar Rapids, Iowa, from 1982 to 1986, and was its President from 1972 to 1982. He has been a consultant to the Company and other companies since 1988. Murray L. Swanson has been Executive Vice President-Finance and chief financial officer for more than five years. Mr. Swanson is also a director of USM and APP. Mr. Barr was elected by the holders of Common Shares and Preferred Shares issued before October 31, 1981. Messrs. Carlson, Nebergall and Swanson were elected by the holders of Series A Common Shares and Preferred Shares issued after October 31, 1981. CLASS III DIRECTORS-TERMS EXPIRE IN 1996 The following persons, were elected at the Annual Meeting of Shareholders on May 14, 1993, to serve as Class III directors for three years or until their successors are elected and qualified:
Position with TDS Served as Name Age and Principal Occupation Director since ---- --- ------------------------ -------------- Lester O. Johnson 81 Director of the Company, 1968 Architect in private practice LeRoy T. Carlson 77 Chairman and Director of the Company 1968 Walter C.D. Carlson 40 Director of the Company, 1981 Partner, Sidley & Austin, Chicago, Illinois Herbert S. Wander 59 Director of the Company, 1968 Partner, Katten, Muchin & Zavis, Chicago, Illinois
All of the Class III Directors have had the principal occupations indicated for more than five years. LeRoy T. Carlson is the father of Walter C.D. Carlson and LeRoy T. Carlson, Jr. Messrs. LeRoy T. Carlson and Walter C.D. Carlson are also directors of USM. Mr. Johnson was elected by the holders of Common Shares and the holders of Preferred Shares issued before October 31, 1981. Messrs. L. Carlson, W. Carlson and Wander were elected by the holders of Series A Common Shares and holders of Preferred Shares issued after October 31, 1981. COMMITTEES AND MEETINGS The Board of Directors of the Company held six meetings during 1993. All of the directors attended at least 75% of the meetings of the Board of Directors. The Board of Directors does not have formal nominating or compensation committees. -3- The Audit Committee of the Board of Directors, among other things, determines audit policies, reviews external and internal audit reports and reviews recommendations made by the Company's internal auditing staff and independent public accountants. The members of the Audit Committee are: Donald C. Nebergall (Chairman), Walter C.D. Carlson, Lester O. Johnson and Herbert S. Wander. The committee met three times during 1993. All committee members attended at least 75% of the meetings of the Audit Committee. EXECUTIVE OFFICERS In addition to the executive officers identified in the tables regarding the election of directors, set forth below is a table identifying current officers of the Company and its subsidiaries who may be deemed to be executive officers of the Company for disclosure purposes under the rules of the Securities and Exchange Commission.
Name Age Position - ---- --- -------- H. Donald Nelson . . . . . . . . 60 President of United States Cellular Corporation John R. Schaaf . . . . . . . . . 48 President of American Paging, Inc. George L. Dienes . . . . . . . . 63 Vice President - Corporate Development C. Theodore Herbert. . . . . . . 58 Vice President - Human Resources Ronald D. Webster. . . . . . . . 44 Vice President and Treasurer Gregory J. Wilkinson . . . . . . 43 Vice President and Controller Michael G. Hron. . . . . . . . . 49 Secretary
H. Donald Nelson is a director of and has served as the President and chief executive officer of USM for more than five years. John R. Schaaf was appointed President of APP in 1991. Prior to that, Mr. Schaaf was Vice President-Operations of APP for more than five years. George L. Dienes has been Vice President - Corporate Development for more than five years. C. Theodore Herbert has been Vice President - Human Resources of the Company for more than five years. Ronald D. Webster was appointed a Vice President of the Company in 1993. He has been the Treasurer of the Company for more than five years. Gregory J. Wilkinson was appointed a Vice President of the Company in 1993. He has been the Controller of the Company for more than five years. Michael G. Hron has been the Secretary of the Company for more than five years. He has been a partner at the law firm of Sidley & Austin since 1989. Prior to that time he was a member of the law firm of Pope, Ballard, Shepard & Fowle, Ltd. for more than five years. All of TDS's executive officers devote substantially all of their time to the Company or its subsidiaries, except for Michael G. Hron who is a practicing attorney. -4- EXECUTIVE COMPENSATION The following table summarizes the compensation paid by TDS during 1993 to the chief executive officer of TDS and the four most highly compensated executive officers of the Company and its subsidiaries. SUMMARY COMPENSATION TABLE
Annual Compensation(1) Long Term Compensation Awards ------------------------ -------------------------------------------------------- Securities Underlying All Other Name and Principal Position Year Salary(2) Bonus(3) Options/SARs(4) Compensation(5) - --------------------------- ---- --------- -------- --------------- --------------- LeRoy T. Carlson 1993 $265,000 $45,000 -- $23,875 Chairman 1992 $245,000 $60,000 -- $28,218 1991 $225,000 $50,000 -- N/A LeRoy T. Carlson, Jr. 1993 $316,000 $56,250 -- $15,461 President 1992 $290,000 $75,000 -- $12,072 (chief executive officer) 1991 $265,000 $60,000 -- N/A Murray L. Swanson 1993 $207,000 $42,750 -- $28,553 Executive Vice President-Finance 1992 $207,000 $45,600 -- $21,967 (chief financial officer) 1991 $191,000 $57,000 -- N/A James Barr III (6) 1993 $227,500 $42,656 -- $24,704 President of TDS 1992 $202,500 $55,200 -- $17,804 Telecommunications Corporation 1991 $180,000 $49,500 -- N/A H. Donald Nelson (7) 1993 $206,375 $35,360 600 $4,714 President of United States 1992 $191,375 $62,500 600 $3,072 Cellular Corporation 1991 $176,167 $58,000 7,624 N/A (1) Does not include the discount amount under any dividend reinvestment plan or any employee stock purchase plan since such plans are generally available to all eligible shareholders or salaried employees, respectively. Does not include the value of any perquisites, which are less than $50,000 and less than 10% of the aggregate of the salary and bonus for each named executive officer. (2) Represents the dollar value of base salary (cash and non-cash) earned by the named executive officer during the fiscal year identified, except for Murray L. Swanson, whose 1993 annual salary has not yet been determined. When it is determined, it will be retroactive to the beginning of 1993. (3) Represents the dollar value of bonus (cash and non-cash) earned by the named executive officer for 1992 and 1991. The bonuses for 1993 have not yet been determined. However, an advance payment was authorized to all named executive officers of up to 75% of the actual bonus for 1992 (or the actual bonus for 1991 in the case of Murray L. Swanson, since his 1992 actual bonus had not yet been finally determined). See "Executive Officer Compensation Report." (4) Represents the number of TDS Common Shares subject to stock options ("Options") and/or stock appreciation rights ("SARs") awarded during the fiscal year identified, except for H. Donald Nelson, in which case the amount represents the number of USM shares subject to Options and/or SARs awarded during the fiscal year identified. Unless otherwise indicated by footnote, the awards represent Options without tandem SARs. (5) Pursuant to transition rules, only 1993 and 1992 amounts are reported in this column. Includes contributions by the Company for the benefit of the named executive officer under the Employees' Pension Trust ("EPT"), including earnings accrued under a related supplemental benefit agreement, the TDS Tax-Deferred Savings Plan ("TDSP"), the dollar value of any insurance premiums paid during the covered fiscal year with respect to term life insurance for the benefit of the named executive ("Life Insurance"), and all other compensation, as indicated below:
LeRoy T. Carlson LeRoy T. Carlson, Jr. Murray L. Swanson James Barr III H. Donald Nelson EPT $ 8,071 $ 13,320 $ 24,535 $ 22,577 $ -- TDSP 532 977 899 600 1,542 Life Insurance 15,272 1,164 3,119 1,527 3,172 -------- --------- --------- ---------- -------- $ 23,875 $ 15,461 $ 28,553 $ 24,704 $ 4,714 -------- --------- --------- ---------- -------- -------- --------- --------- ---------- --------
-5- (6) The Summary Compensation Table does not include the reimbursement of moving expenses incurred by James Barr III, at the request of the Company, in the amount of $30,290 in 1991. (7) All of Mr. Nelson's compensation is paid by USM and is approved by the Chairman of the Board of Directors of USM. GENERAL INFORMATION REGARDING OPTIONS AND SARS The following tables show, as to the executive officers who are named in the Summary Compensation Table, information regarding Options and/or SARs. The number of shares subject to the Options and/or SARs and the exercise prices have been adjusted for stock splits in 1988. INDIVIDUAL OPTION/SAR GRANTS IN 1993
Potential Realizable Value at Number of Assumed Annual Rates Securities of Stock Price Underlying % of Total Appreciation for Options/ Options/SARs Option Term(5) SARs Granted to Exercise Market Expiration ------------------------ Name Granted(1) Employees(2) Price(3) Price(4) Date 0% 5% 10% ---- ---------- ------------ -------- -------- ----------- ------- ------- ------- H. Donald Nelson...... 600 9.3% $15.67 $21.25 11/1/97 $ 3,350 $ 6,675 $10,650 - ------------ (1) Represents number of USM shares underlying Options/SARs which were awarded for H. Donald Nelson during the fiscal year. No Options or SARs were awarded in 1993 to any of the other executive officers named in the Summary Compensation Table. On February 1, 1991, H. Donald Nelson received an award of Options for USM shares which could vary, based on performance, between 80% and 120% of the targeted amount of 9,000 shares. Therefore, options for 7,200 shares or 80% of the targeted amount were deemed to be awarded on the grant date. The minimum amount scheduled to become exercisable is 1,200 USM shares in each year on February 1, 1992 through February 1, 1997. Each year during such period an additional number of USM shares, up to an additional 600 shares, may be awarded based on performance for the prior year. The amount over 1,200 shares per year which is awarded based on performance is shown above as a grant in that year. Since the maximum of options for 1,800 shares was awarded in 1993, 600 shares are shown as a grant in that year. (2) Represents the percent of total USM shares underlying Options/SARS awarded to all USM employees during the fiscal year. (3) Represents the exercise price of the Options which is equal to the average market price of Common Shares for the 20 consecutive trading days ending on the grant date of February 1, 1991. (4) Represents the fair market value of USM Common Shares on the award date, based on the closing price on the American Stock Exchange. (5) Represents the potential realizable value of each grant of Options, assuming that the market price of USM Common Shares appreciates in value from the award date to the end of the Option term at the indicated annualized rates.
AGGREGATED OPTION/SAR EXERCISES IN 1993, AND DECEMBER 31, 1993 OPTION/SAR VALUE
1993 As of December 31, 1993 ---------------------------- ------------------------------------------------------------ NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN- UNEXERCISED OPTIONS/SARS (3) THE-MONEY OPTIONS/SARS(4) SHARES ACQUIRED VALUE ------------------------------- --------------------------- NAME ON EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- ----------- ------------- ------------- ----------- ------------- LeRoy T. Carlson Options 13,500(5) $310,703 -0- -0- $-0- $-0- LeRoy T. Carlson, Jr. Options 38,250(6) $1,337,730 25,500 63,750 $939,101 $2,347,753 Murray L. Swanson Options 3,375(7) $107,587 -0- 13,500 $-0- $582,221 James Barr III Options -- -- 6,000 14,000 $68,625 $160,125 H. Donald Nelson Options -- -- 3,424 5,400 $64,688 $102,020 SARs -- -- 12,000 24,000 234,750 469,500 ------ ------ ----------- ----------- Total for H. Donald Nelson -- -- 15,424 29,400 $ 299,438 $ 571,520 ------ ------ ----------- ----------- ------ ------ ----------- ----------- (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.
-6- (2) Represents the aggregate dollar value realized upon exercise, based on the difference between the exercise price and the average of the high and low price of the shares on the date of exercise as reported in the American Stock Exchange ("AMEX") Composite Transactions by THE WALL STREET JOURNAL. (3) Represents number of TDS Common Shares subject to Options and/or SARs, except for H. Donald Nelson, in which case the information is presented with respect to USM shares. (4) Represents the aggregate dollar value of in-the-money, unexercised Options and SARs held at the end of the fiscal year, based on the difference between the exercise price and $51.4375, the average of the high and low price of TDS Common Shares or, with respect to H. Donald Nelson, $34.5625, the average of the high and low price of USM Common Shares, on December 31, 1993, as reported in the AMEX Composite Transactions by THE WALL STREET JOURNAL. (5) Options for a total of 13,500 Common Shares were exercised. A total of 5,387 Common Shares received upon exercise were used to pay the exercise price and 2,801 Common Shares were used to pay withholding taxes. (6) Options for a total of 38,250 Common Shares were exercised. A total of 11,727 Common Shares received upon exercise were used to pay the exercise price and 9,040 Common Shares were used to pay withholding taxes. (7) Options for a total of 3,375 Common Shares were exercised. A total of 724 Common Shares received upon exercise were used to pay the exercise price and 651 Common Shares were used to pay withholding taxes. SUPPLEMENTAL BENEFIT AGREEMENTS The Telephone and Data Systems, Inc. Employees' Pension Trust (the "Pension Plan") is a defined contribution plan designed to provide retirement benefits for eligible employees of the Company and certain of its affiliates which adopt the Pension Plan. Annual employer contributions based upon actuarial assumptions are made under a formula designed to fund a target pension benefit for each participant commencing generally upon the participant's attainment of retirement age. The amounts of the annual contributions are included above in the Summary Compensation Table under "All Other Compensation." In 1980, TDS entered into a nonqualified supplemental benefit agreement with LeRoy T. Carlson which, as amended, requires TDS to pay a supplemental retirement benefit to Mr. Carlson, in the amount of $47,567 plus interest at a rate equal to 1/4% under the prime rate for the period from May 15, 1981 (the date of Mr. Carlson's 65th birthday) to May 31, 1991, in five annual installments beginning June 1, 2001, plus interest at 9 1/2% compounded semi-annually from June 1, 1991. The agreement was entered into because certain amendments made to the Pension Plan in 1974 had the effect of reducing the amount of retirement benefits which Mr. Carlson would receive under the Pension Plan. The payments to be made under the agreement, together with the retirement benefits under the Pension Plan, were designed to permit Mr. Carlson to receive approximately the same retirement benefits he would have received if the Pension Plan had not been amended. All of the interest accrued under this agreement is included above in the Summary Compensation Table under "All Other Compensation" and identified in footnote 5 thereto as contributions under the Employees' Pension Trust (EPT). In 1988, USM entered into a nonqualified supplemental benefit agreement with H. Donald Nelson which requires USM to pay a supplemental retirement benefit to Mr. Nelson. The agreement was entered into because Mr. Nelson's employment with TDS was terminated upon the completion of the initial public offering of USM Common Shares in May 1988 and, as a result, he was no longer eligible to participate in the Pension Plan. Under the supplemental benefit agreement, USM is obligated to pay Mr. Nelson an amount equal to the difference between the retirement benefit he will receive from the Pension Plan and that which he would have received had he continued to work for TDS. USM will pay any such benefit at the same time as Mr. Nelson receives payments from the Pension Plan. At the time of Mr. Nelson's withdrawal from the TDS Pension Plan, he had 5 years of credited service. If he had continued as an active participant, he would have received credit for 16 years of service upon retirement at age 65. If Mr. Nelson had continued to be employed by TDS, and had remained employed through age 65, he would have been eligible to receive an estimated annual benefit upon retirement of approximately $50,000 under the TDS Pension Plan. Currently, Mr. Nelson's annual benefit under the TDS Pension Plan is expected to be approximately $15,000. Accordingly, Mr. Nelson -7- is expected to receive an estimated annual benefit of approximately $35,000 under the supplemental benefit agreement. Such estimates are based on Mr. Nelson's base salary, which is included in the cash compensation table above, and calculations of certain projections to age 65. The actual benefits payable to Mr. Nelson upon retirement will be based upon the facts that exist at the time and will be determined actuarially pursuant to the TDS Pension Plan. Since the nature of this agreement is a defined benefit arrangement, no amounts related thereto are included above in the Summary Compensation Table. SALARY CONTINUATION AGREEMENT The Company has entered into an agreement with LeRoy T. Carlson whereby it will employ Mr. Carlson until he elects to retire. Mr. Carlson is to be paid at least $60,000 per annum until his retirement. The agreement also provides that upon his retirement, Mr. Carlson will be retained by the Company as a part-time consultant (for not more than 60 hours in any month) until his death or disability. Upon his retirement, Mr. Carlson will receive $75,000 per annum as a consultant, plus increments beginning in 1985 equal to the greater of three percent of his consulting fee or two-thirds of the percentage increase in the consumer price index for the Chicago metropolitan area. If Mr. Carlson becomes disabled before retiring, the Company can elect to discontinue his employment and retain him in accordance with the consulting arrangement described above. Upon Mr. Carlson's death (unless his death follows his voluntary termination of his employment or the consulting arrangement), his widow will receive until her death an amount equal to that which Mr. Carlson would have received as a consultant. The Company may terminate payments under the agreement if Mr. Carlson becomes the owner of more than 21% of the stock, or becomes an officer, director, employee or paid agent of any competitor of the Company within the continental United States. No amounts were accrued or payable under this agreement in 1993, 1992 or 1991, and no amounts related thereto are included above in the Summary Compensation Table. COMPENSATION OF DIRECTORS In 1993, each of Walter C.D. Carlson, Lester O. Johnson, Donald C. Nebergall and Herbert S. Wander earned $18,000 as director's fees and $1,500 for services on the audit committee, and Lester O. Johnson was reimbursed $959 for expenses incurred in attending meetings. In addition to the life insurance reported for the named executive officers reported in the Summary Compensation Table above, the Company paid directors' life insurance premiums in 1993 on behalf of each of the following directors in the indicated amounts: Donald R. Brown ($1,888); Walter C.D. Carlson ($159); Robert J. Collins ($483); Rudolph E. Hornacek ($2,198); Lester O. Johnson ($10,640); Donald C. Nebergall ($869); and Herbert S. Wander ($801). Donald C. Nebergall also received $149,323 in reimbursement of certain expenses and for consulting services provided to the Company in 1993. DIRECTOR INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS LeRoy T. Carlson, Chairman of TDS, and LeRoy T. Carlson, Jr., President (chief executive officer) of TDS, are members of the Board of Directors of TDS and of USM, and LeRoy T. Carlson, Jr., is a member of the Board of Directors of APP. LeRoy T. Carlson, Jr., Chairman of USM and APP, makes the executive officer compensation decisions for USM and APP. LeRoy T. Carlson and LeRoy T. Carlson, Jr. also serve as directors and officers of numerous direct or indirect subsidiaries of the Company and USM. ISSUANCE OF TDS SHARES ON BEHALF OF USM. The Company issues TDS securities in connection with the acquisition of cellular interests on behalf of USM. At the time such acquisitions are closed, the acquired cellular interests are generally transferred to USM, which reimburses TDS by issuing USM securities to TDS or by increasing the balance due to TDS under a revolving credit agreement between TDS and USM (the "Revolving Credit Agreement"). The fair market value of the USM securities issued to TDS in -8- connection with these transactions is calculated in the same manner and over the same time period as the fair market value of the TDS securities issued to the sellers in such acquisitions. During 1993, USM issued 5.5 million USM Common Shares to TDS and became indebted to TDS for an additional $101.5 million under the Revolving Credit Agreement, to reimburse TDS for 6.1 million TDS Common Shares issued in such transactions. In addition to the shares described in the preceding paragraph, additional securities of TDS and USM were authorized for issuance in connection with acquisitions of cellular interests that were pending at December 31, 1993. In connection with these acquisitions, TDS expects to issue in 1994 or later years approximately 2.4 million TDS Common Shares, for which USM will reimburse TDS by issuing approximately 3.7 million USM Common Shares and increasing the amount of debt under the Revolving Credit Agreement in an amount estimated to be approximately $400,000. OTHER RELATIONSHIPS AND RELATED TRANSACTIONS. Walter C.D. Carlson, a director of the Company, and Michael G. Hron, Secretary of the Company, are partners of Sidley & Austin, the principal law firm of the Company. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, at March 7, 1994, the number of Common Shares and Series A Common Shares beneficially owned, and the percentage of the outstanding shares of each such class so owned by each director and nominee for director of the Company, and by all directors and executive officers as a group.
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 6,238,555 90.7% 54.3% LeRoy T. Carlson, Jr., C. Theodore Herbert, Ronald D. Webster and Michael G. Hron(3) Common Shares 945 * * Series A Common Shares 146,576 2.1% 1.3% LeRoy T. Carlson, Jr., C. Theodore Herbert, Ronald D. Webster and Michael G. Hron(4) Common Shares 22,252 * * LeRoy T. Carlson(5) Common Shares 38,610 * * Series A Common Shares 50,398 * * LeRoy T. Carlson, Jr.(6)(12) Common Shares 42,332 * * Murray L. Swanson(7)(12) Common Shares 23,293 * * Series A Common Shares 2,427 * * James Barr III(12) Common Shares 9,645 * * H. Donald Nelson(7) Common Shares 4,888 * * Series A Common Shares 5,101 * *
-9-
Rudolph E. Hornacek(8) Common Shares 12,156 * * Series A Common Shares 2,348 * * Lester O. Johnson(9) Common Shares 2,391 * * Series A Common Shares 90,262 1.3 * Donald C. Nebergall(10) Common Shares 7,684 * * Walter C.D. Carlson(11) Common Shares 66 * * Donald R. Brown(12) Common Shares 15,061 * * Series A Common Shares 4,551 * * Robert J. Collins(12) Common Shares 6,619 * * Series A Common Shares 498 * * Other executive officers Common Shares 80,531 * * (6 persons)(12) Series A Common Shares 702 * * All directors and executive officers Common Shares 266,473 * * as a group (18 persons)(12) Series A Common Shares 6,541,418 95.1% 56.9% ________________ * Less than 1%. 1. The nature of beneficial ownership for shares in this column is sole voting and investment power, except as otherwise set forth in these footnotes. 2. The shares listed are held by the persons named as trustees under a voting trust which expires June 30, 2009, created to facilitate long-standing relationships among the trustees' certificate holders. Under the terms of the voting trust, the trustees hold and vote the Series A Common Shares held in the trust. If the voting trust were terminated, the following persons would each be deemed to own beneficially more than 5% of the outstanding Series A Common Shares: Margaret D. Carlson (wife of LeRoy T. Carlson), LeRoy T. Carlson, Jr., Walter C.D. Carlson, Prudence E. Carlson, Letitia G. Carlson (children of LeRoy T. Carlson and Margaret D. Carlson) and Donald C. Nebergall, as trustee under certain trusts for the benefit of the heirs of LeRoy T. and Margaret D. Carlson and an educational institution. In addition, Margaret D. Carlson owns 50,398 Series A Common Shares directly and Prudence E. Carlson owns 194,148 Series A Common Shares directly. 3. Voting and investment control is shared by the persons named as trustees of the Telephone and Data Systems, Inc. Employees' Pension Trust I. 4. Voting and investment control is shared by the persons named as trustees of the Telephone and Data Systems, Inc. Tax-Deferred Savings Trust. Does not include 165,245 shares as to which the voting and investment power is passed through to plan participants. 5. Does not include 278,647 Series A Common Shares (4.0% of class) held for the benefit of LeRoy T. Carlson in the voting trust described in footnote (2). Beneficial ownership is disclaimed as to 635,767 Series A Common Shares held for the benefit of his wife in such voting trust and as to 50,398 Series A Common Shares shown in the table which are held directly by his wife (an aggregate of 10.0% of class). 6. Does not include 1,064,593 Series A Common Shares (15.5% of class) held in the voting trust described in footnote (2), of which 1,038,214 shares are held for the benefit of LeRoy T. Carlson, Jr. Beneficial ownership is disclaimed with respect to an aggregate of 26,379 Series A Common Shares held for the benefit of his wife, his children and others in such voting trust. 7. Includes shares held by and/or in joint tenancy with spouse or children. 8. Includes 675 Series A Common Shares held as custodian for his children.
-10- 9. Does not include 244,622 Series A Common Shares (3.6% of class) held for the benefit of Lester O. Johnson and his wife in the voting trust described in footnote (2). 10. Includes 7,379 Common Shares held as trustee under a trust for the benefit of an educational institution and the heirs of LeRoy T. and Margaret D. Carlson. Does not include 998,805 Series A Common Shares (14.5% of class) held as trustee under trusts for the benefit of the heirs of LeRoy T. and Margaret D. Carlson and an educational institution, or 30 Series A Common Shares held for the benefit of Donald C. Nebergall, which are included in the voting trust described in footnote (2). 11. Does not include 1,064,430 Series A Common Shares (15.5% of class) held in the voting trust described in footnote (2), of which 1,039,774 shares are held for the benefit of Walter C.D. Carlson. Beneficial ownership is disclaimed with respect to an aggregate of 24,656 Series A Common Shares held for the benefit of his wife and children in such voting trust. 12. Includes the following number of Common Shares that may be purchased pursuant to stock options and/or stock appreciation rights which are currently exercisable or exercisable within 60 days: Mr. Swanson, 3,375 shares; Mr. LeRoy T. Carlson, Jr., 38,250 shares; Mr. Barr, 8,000 shares; Mr. Hornacek, 8,000 shares; Mr. Brown, 7,827 shares; Mr. Collins, 1,310 shares; and all other executive officers, 48,287 shares.
PRINCIPAL SHAREHOLDERS In addition to persons listed in the preceding table and the footnotes thereto, the following table sets forth, as of March 7, 1994, information regarding each person who beneficially owns more than 5% of any class of voting securities of TDS. The nature of beneficial ownership in this table is sole voting and investment power except as otherwise set forth in footnotes thereto.
Shares of Percent Percent Shareholder's TDS Class of TDS of Voting Name and Address Title of Class Owned Class Power ---------------- -------------- --------- -------- --------- Eagle Asset Management Inc. Common Shares 3,255,980(1) 7.1% 2.8% 880 Carillon Parkway St. Petersburg, Florida 33733 Putnam Investments, Inc., ET AL. Common Shares 2,478,405(2) 5.4% 2.2% One Post Office Square Boston, Massachusetts 02109 Goldman Sachs & Co. Preferred Shares 50,860 11.7% * 85 Broad Street New York, New York 10004 Roland G. and Bette B. Nehring Preferred Shares 23,030 5.3% * 5253 North Dromedary Road Phoenix, Arizona 85018 Regional Operations Group Inc. Preferred Shares 24,297 5.6% * 312 South 3rd Street Minneapolis, Minnesota 55440 _______________________ * Less than 1%. (1) Based on the most recent Schedule 13G (Amendment No. 3) filed with the Securities and Exchange Commission ("SEC"). In such Schedule 13G filing, Eagle Asset Management, Inc. has reported sole investment power and sole voting power with respect to all such shares.
-11- (2) Based on a Schedule 13G filed with the SEC. The Schedule 13G reports that Putnam Investments, Inc. and The Putnam Advisory Company, Inc. share voting power with respect to 241,257 Common Shares, that Putnam Investments, Inc. and Putnam Investment Management, Inc. share dispositive power with respect to 2,128,285 Common Shares, and that Putnam Investments, Inc. and The Putnam Advisory Company, Inc. share dispositive power with respect to 350,120 Common Shares. The Schedule 13G reports that Marsh & McLennon Companies, Inc. is the direct or indirect parent corporation of each of such entities.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Executive Compensation - Director Interlocks and Insider Participation in Compensation Decisions." -12- EX-99.2 11 EXHIBIT 99.2 EXHIBIT 99.2 TELEPHONE AND DATA SYSTEMS, INC. PRO FORMA FINANCIAL INFORMATION Telephone and Data Systems, Inc. ("TDS"), together with its majority-owned subsidiaries, TDS Telecommunications Corporation, United States Cellular Corporation (AMEX symbol "USM") and American Paging, Inc. (AMEX Symbol "APP") are referred to in this report as the "Company." From January 1 through December 31, 1993, the Company acquired controlling interests in four telephone companies, one paging company and 25 cellular markets and several minority cellular interests representing a total of approximately 3.8 million population equivalents. The total consideration paid for these acquisitions was approximately $354.0 million, consisting of 6.8 million TDS Common Shares, 30,000 TDS Preferred Shares, 157,000 USM Common Shares, 29,000 shares of subsidiary preferred stock (which are exchangeable into approximately 73,000 TDS Common Shares), the obligation to deliver 140,000 USM Common Shares in the future, and $58.8 million in cash. As of December 31, 1993, the Company had pending agreements to acquire two telephone companies and controlling interests in nine cellular markets and a minority interest in one market representing a total of approximately 1.2 million population equivalents. The total consideration to be paid for the acquisitions described in this paragraph, valued at the time such agreements were entered into, is approximately $181.6 million. If these acquisitions are completed as planned, the Company and/or USM will issue approximately 3.5 million TDS Common Shares, 49,000 USM Common Shares and will pay approximately $6.2 million in cash. 1 Pursuant to Rule 3-05 and Rule 11-01 of Regulation S-X, the completed and pending acquisitions of businesses described in the foregoing paragraphs are not individually significant. The following pro forma financial information is included pursuant to Article 11 of Regulation S-X: Item Page - ---- ---- Telephone and Data Systems, Inc. Unaudited Condensed Pro Forma Consolidated Financial Statements: Unaudited Condensed Pro Forma Consolidated Balance Sheet as of December 31, 1993 Unaudited Condensed Pro Forma Consolidated Statement of Income for the Year Ended December 31, 1993 Notes to Unaudited Condensed Pro Forma Consolidated Financial Statements 2
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993 UNAUDITED --------- (IN THOUSANDS) ASSETS COMBINED PRO FORMA COMPLETED ADJUSTMENTS PRO FORMA TDS AND PENDING INCREASE TDS CONSOLIDATED (a) ACQUISITIONS (DECREASE) CONSOLIDATED ---------------- ------------ ----------- ------------ CURRENT ASSETS $ 179,556 $ 15,628 $ (71)(1) $ 195,113 -------------- ------------ ---------- ------------ INVESTMENTS Cellular limited partnership interests 101,210 -- (1,465)(1) 99,745 Cellular license acquisition costs, net 92,277 619 69,016 (1) 161,912 Marketable equity securities 19,368 -- -- 19,368 Other 115,532 3,515 -- 119,047 -------------- ------------ ---------- ------------ 328,387 4,134 67,551 400,072 -------------- ------------ ---------- ------------ PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 638,848 32,424 34,512 (1) 705,784 Cellular telephone plant and license costs, net 1,014,103 6,435 60,869 (1) 1,081,407 Radio paging, net 52,945 -- -- 52,945 Other, net 32,402 -- -- 32,402 -------------- ------------ ---------- ------------ 1,738,298 38,859 95,381 1,872,538 -------------- ------------ ---------- ------------ OTHER ASSETS AND DEFERRED CHARGES 12,941 3,371 -- 16,312 -------------- ------------ ---------- ------------ $ 2,259,182 $ 61,992 $ 162,861 $ 2,484,035 -------------- ------------ ---------- ------------ -------------- ------------ ---------- ------------
The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement. 3
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993 UNAUDITED (IN THOUSANDS) STOCKHOLDERS' EQUITY AND LIABILITIES COMBINED PRO FORMA COMPLETED ADJUSTMENTS PRO FORMA TDS AND PENDING INCREASE TDS CONSOLIDATED (a) ACQUISITIONS (DECREASE) CONSOLIDATED ---------------- ------------ ----------- ------------ CURRENT LIABILITIES $ 163,531 $ 10,068 $ 5,588 (1) $ 179,187 ---------------- ------------ ----------- ------------ DEFERRED LIABILITIES AND CREDITS 90,979 5,602 -- 96,581 ---------------- ------------ ----------- ------------ LONG-TERM DEBT, excluding current portion 514,442 28,126 -- 542,568 ---------------- ------------ ----------- ------------ REDEEMABLE PREFERRED STOCK, excluding current portion 25,632 -- -- 25,632 ---------------- ------------ ----------- ------------ MINORITY INTEREST in subsidiaries 223,480 -- 984 (1) 224,464 ---------------- ------------ ----------- ------------ NONREDEEMABLE PREFERRED STOCK 16,833 -- -- 16,833 ---------------- ------------ ----------- ------------ COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 43,504 124 3,416 (1) 47,044 Series A Common Shares, par value $1 per share 6,881 -- -- 6,881 Capital in excess of par value 1,084,211 2,536 168,409 (1) 1,255,156 Retained earnings 89,689 15,536 (15,536)(1) 89,689 ---------------- ------------ ----------- ------------ 1,224,285 18,196 156,289 1,398,770 ---------------- ------------ ----------- ------------ $ 2,259,182 $ 61,992 $ 162,861 $ 2,484,035 ---------------- ------------ ----------- ------------ ---------------- ------------ ----------- ------------
The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement. 4
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1993 UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) COMBINED PRO FORMA COMPLETED ADJUSTMENTS PRO FORMA TDS AND PENDING INCREASE TDS CONSOLIDATED ACQUISITIONS (b) (DECREASE) CONSOLIDATED ---------------- ---------------- ----------- ------------ OPERATING REVENUES Telephone $ 268,122 $ 41,764 $ -- $ 309,886 Cellular telephone 247,259 18,494 -- 265,753 Radio paging 75,363 485 -- 75,848 ---------------- ------------ ----------- ------------ Total operating revenues 590,744 60,743 -- 651,487 ---------------- ------------ ----------- ------------ OPERATING EXPENSES Telephone 189,012 34,993 1,105 (3) 225,110 Cellular telephone 255,915 23,183 4,252 (3) 283,350 Radio paging 76,084 331 214 (3) 76,629 ---------------- ------------ ----------- ------------ Total operating expenses 521,011 58,507 5,571 585,089 ---------------- ------------ ----------- ------------ OPERATING INCOME 69,733 2,236 (5,571) 66,398 ---------------- ------------ ----------- ------------ INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 8,082 156 (351) (5) 7,887 Minority share of income (475) -- (452) (2) 588 1,515 (6) Cellular investment income, net of license cost amortization 15,704 -- (204) (3) 16,396 896 (4) Gain on sale of cellular properties and investments 4,970 -- -- 4,970 Other, net (155) 4,810 -- 4,655 ---------------- ------------ ----------- ------------ 28,126 4,966 1,404 34,496 ---------------- ------------ ----------- ------------ INCOME BEFORE INTEREST AND INCOME TAXES 97,859 7,202 (4,167) 100,894 Interest expense 37,466 3,723 (351) (5) 42,088 1,250 (7) ---------------- ------------ ----------- ------------ INCOME BEFORE INCOME TAXES 60,393 3,479 (5,066) 58,806 Income tax expense 26,497 2,285 (5,778) (8) 23,004 ---------------- ------------ ----------- ------------ NET INCOME 33,896 1,194 712 35,802 Preferred Dividend Requirement (2,386) -- -- (2,386) ---------------- ------------ ----------- ------------ NET INCOME AVAILABLE TO COMMON $ 31,510 $ 1,194 $ 712 $ 33,416 ---------------- ------------ ----------- ------------ ---------------- ------------ ----------- ------------ WEIGHTED AVERAGE COMMON SHARES (000s) 47,266 5,680 52,946 ---------------- ----------- ------------ ---------------- ----------- ------------ EARNINGS PER COMMON SHARE $ .67 $ .63 ---------------- ------------ ---------------- ------------
The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement. 5 TELEPHONE AND DATA SYSTEMS, INC. NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (a) Includes the balance sheets of the entities discussed in the second paragraph of Item 5 of this report. (b) Includes the income statements of the entities discussed in the second paragraph of Item 5 of this report prior to the date of acquisition by the Company, as well as each of the income statements of the entities for which acquisition by the Company was completed subsequent to December 31, 1993, or is pending as of the date of this Form 10-K. (c) The pro forma adjustments are described in the following paragraphs: 1) Reflects TDS's acquisition of the telephone and cellular telephone interests described in the third paragraph of Item 5 of this report. Also reflects the elimination of the equity of these interests in purchase transactions and the allocation of the purchase price in excess of book value (in thousands). Purchase price (aggregate) $ 181,653 Less: TDS's proportionate share of acquired companies' equity at December 31, 1993 (17,256) ---------- Purchase price to be allocated $ 164,397 ---------- ---------- Purchase price in excess of book value-- Cellular operations--consolidated $ 60,869 Cellular operations--equity method 69,016 Telephone operations 34,512 ---------- $ 164,397 ---------- ----------
The pro forma allocations of the purchase prices to the acquired entities' assets as set forth above are based upon preliminary estimates of the values of those assets. 2) Reflects the minority shareholders' portion of acquired companies' net income. 3) Reflects the amortization of assumed costs in excess of book value. Excess cost amounts are primarily assumed to be amortized over 40 years. 4) Reflects the elimination of the equity-method losses of acquired entities which are consolidated in the Pro Forma Consolidated Statements of Income. 5) Reflects the elimination of intercompany interest income and interest expense between the Company and an acquired entity. The acquired entity was previously accounted for by the equity method of accounting (see Note 4). 6 TELEPHONE AND DATA SYSTEMS, INC. NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6) Reflects the minority shareholders' portion of USM's net income due to the addition of the cellular entities and the related pro forma adjustments in (2)-(4) above. 7) Reflects the estimated interest expense incurred as a result of increases in Notes Payable in connection with the acquisitions included in the Condensed Pro Forma Consolidated Statements of Income. 8) Reflects the estimated income tax effects of the pro forma adjustments in (2)-(4) and (7) above. 7 -----END PRIVACY-ENHANCED MESSAGE-----