-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DtBnbNSUe0tC3tAfbUh7kMEUZT5BzjN8JgUoh+wEuzYUMqOzp5Vtv2d4+mJWkkqu UqMtTTHliPYpHE2RuAWuoQ== 0000912057-96-004925.txt : 19960325 0000912057-96-004925.hdr.sgml : 19960325 ACCESSION NUMBER: 0000912057-96-004925 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC CENTRAL INDEX KEY: 0000096966 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 362669023 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08251 FILM NUMBER: 96537216 BUSINESS ADDRESS: STREET 1: 30 NORTH LASALLE STREET SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 6088288324 MAIL ADDRESS: STREET 1: 30 NORTH LASALLE STREE SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60602 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-K405 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, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-8251 - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. (Exact name of Registrant as specified in its charter) - -------------------------------------------------------------------------------- IOWA 36-2669023 - -------------------------------- -------------------------------- (State or other jurisdiction (IRS Employer Identification of incorporation or No.) organization)
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER: (312) 630-1900 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ----------------------------- ----------------------------- Common Shares, $1 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.___X___ As of February 29, 1996, the aggregate market values of the registrant's Common Shares, Series A Common Shares and Preferred Shares held by nonaffiliates were approximately $2.4 billion, $14.5 million and $48.1 million, respectively. The closing price of the Common Shares on February 29, 1996, was $46.125 , as reported by the American Stock Exchange. Because no market exists for the Series A Common Shares and Preferred Shares, the registrant has assumed for purposes hereof that (i) each Series A Common Share has a market value equal to one Common Share because the Series A Common Shares were initially issued by the registrant in exchange for Common Shares on a one-for-one basis and are convertible on a share-for-share basis into Common Shares, (ii) each nonconvertible Preferred Share has a market value of $100 because each of such shares had a stated value of $100 when issued, and (iii) each convertible Preferred Share has a value of $46.125 times the number of Common Shares into which it was convertible on February 29, 1996. The number of shares outstanding of each of the registrant's classes of common stock, as of February 29, 1996, is 52,576,779 Common Shares, $1 par value, and 6,893,101 Series A Common Shares, $1 par value. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1995 Annual Report to Shareholders, and of the registrant's Notice of Annual Meeting and Proxy Statement for its Annual Meeting of Shareholders to be held May 17, 1996, described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Part II of this report. - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS - --------------------------------------------------------------------------------
PAGE NUMBER OR REFERENCE(1) --------------- Item 1. Business............................................. 3 Item 2. Properties........................................... 40 Item 3. Legal Proceedings.................................... 40 Item 4. Submission of Matters to a Vote of Security Holders............................................ 40 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 41 (2) Item 6. Selected Financial Data.............................. 41 (3) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 41 (4) Item 8. Financial Statements and Supplementary Data.......... 41 (5) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 41 Item 10. Directors and Executive Officers of the Registrant... 42 (6) Item 11. Executive Compensation............................... 42 (7) Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 42 (8) Item 13. Certain Relationships and Related Transactions....... 42 (9) Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 43 - --------- (1) Parenthetical references are to information incorporated by reference from the registrant's Exhibit 13, which includes portions of its Annual Report to Shareholders for the year ended December 31, 1995 ("Annual Report"), and from the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders, to be held on May 17, 1996 (the "Proxy Statement"). (2) Annual Report sections entitled "TDS Stock and Dividend Information" and "Market Price per Common Share by Quarter." (3) Annual Report section entitled "Selected Consolidated Financial Data." (4) Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Annual Report sections entitled "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)" and "Report of Independent Public Accountants." (6) Proxy Statement sections entitled "Election of Directors" and "Executive Officers." (7) Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. (8) Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." (9) Proxy Statement section entitled "Certain Relationships and Related Transactions."
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. 30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602 [LOGO] TELEPHONE (312) 630-1900 - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS Telephone and Data Systems, Inc. (the "Company" or "TDS"), is a diversified telecommunications service company with cellular telephone, local telephone and radio paging operations and developing personal communications services operations. At December 31, 1995, the Company served approximately 1.9 million customer units in 37 states, including 710,000 cellular telephones, 425,900 telephone access lines and 784,500 pagers. For the year ended December 31, 1995, cellular operations provided 52% of the Company's consolidated revenues; telephone operations provided 37%; and paging operations provided 11%. The Company's business development strategy is to expand its existing operations through internal growth and acquisitions and to explore and develop other telecommunications businesses that management believes will utilize the Company's expertise in customer-based telecommunications services. The Company conducts substantially all of its cellular operations through its 80.8%-owned subsidiary, United States Cellular Corporation [AMEX: "USM"]. USM provides cellular telephone service to 710,000 customers through 137 majority-owned and managed ("consolidated") cellular systems serving approximately 17% of the geography and approximately 8% of the population of the United States. Since 1985, when the Company began providing cellular service in Knoxville, Tennessee, the Company has expanded its cellular networks and customer service operations to cover 147 markets in 29 states as of December 31, 1995. In total, the Company now operates nine market clusters, of which five have a total population of more than two million, and each of which has a total population of more than one million, plus other unclustered markets. Overall, 83% of the Company's 24.5 million population equivalents are in markets which are or will be consolidated, 1% are in managed but not consolidated markets and 16% are in markets in which the Company holds an investment interest. The Company conducts substantially all of its telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). TDS Telecom currently operates 100 telephone companies serving 425,900 access lines in 28 states. TDS Telecom is expanding by offering additional lines of telecommunications products and services to existing customers and through the selective acquisition of local exchange telephone companies serving rural and suburban areas. TDS Telecom has acquired 24 telephone companies and divested one telephone company since the beginning of 1991. These net acquisitions added 73,100 access lines during this five-year period, while internal growth added 74,100 lines. The Company conducts substantially all of its radio paging operations through its 82.3%-owned subsidiary, American Paging, Inc. [AMEX: "APP"]. APP offers radio paging and related services through its subsidiaries. Since the beginning of 1991, the number of pagers in service increased from 201,200 to 784,500 at December 31, 1995, primarily from internal growth. APP provides service through 38 sales and service operating centers in 14 states and the District of Columbia. APP's service areas cover a total population of approximately 75 million. The Company conducts substantially all of its broadband personal communications services operations through its wholly owned subsidiary, American Portable Telecom, Inc. ("APT"). In March 1995, APT was the successful bidder for eight broadband PCS licenses. The six primary 30 megahertz PCS licenses that are being developed cover the Major Trading Areas of Minneapolis, 3 Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus, and account for 27.3 million population equivalents. APT has entered into a definitive agreement to sell its license covering the Guam MTA, subject to FCC approval, and is pursuing a sale of its license for the Alaska MTA with several interested parties. On February 20, 1996, APT filed a registration statement for an initial public offering of 11.0 million of its Common Shares. If the initial public offering is completed as currently planned, TDS will own approximately 84% of the equity of APT upon completion of the offering (assuming the Underwriters' over-allotment option to purchase 1,650,000 additional common shares is not exercised). The Company was incorporated in Iowa in 1968. The Company's executive offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its telephone number is 312-630-1900. Unless the context indicates otherwise: (i) references to "TDS" or the "Company" refer to Telephone and Data Systems, Inc., and its subsidiaries; (ii) references to "USM" refer to United States Cellular Corporation and its subsidiaries; (iii) references to "TDS Telecom" refer to TDS Telecommunications Corporation and its subsidiaries; (iv) references to "APP" refer to American Paging, Inc. and its subsidiaries; (v) references to "APT" refer to American Portable Telecom, Inc. and its subsidiaries; (vi) references to "MSA" or to a particular city refer to the Metropolitan Statistical Area, as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission ("FCC") in designating metropolitan cellular market areas; (vii) references to "RSA" refer to the Rural Service Area, as used by the FCC in designating non-MSA cellular market areas; (viii) references to cellular "markets" or "systems" refer to MSAs, RSAs or both; (ix) references to "MTA" refer to Major Trading Areas, as used by the FCC in designating Personal Communications Services ("PCS") markets; (x) references to "population equivalents" mean the population of a market, based on 1995 Donnelley Marketing Service Estimates, multiplied by the percentage interests that the Company owns or has the right to acquire in an entity licensed, designated to receive a license or expected to receive a construction permit ("licensee") by the FCC to construct or operate a cellular or a PCS system in such market; and (xi) references to "1996 Act" refer to the Telecommunications Act of 1996. CELLULAR TELEPHONE OPERATIONS THE CELLULAR TELEPHONE INDUSTRY Cellular telephone technology provides high-quality, high-capacity communications services to in-vehicle and hand-held portable cellular telephones. Cellular technology is a major improvement over earlier mobile telephone technologies. Cellular telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Cellular telephone systems also offer a full range of ancillary services such as conference calling, call-waiting, call-forwarding, voice mail, facsimile and data transmission. Cellular telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers operating on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO") which is connected to the conventional ("landline") telephone network and potentially other MTSOs. Each conversation on a cellular phone involves a transmission over a specific set of radio frequencies from the cellular phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSO and from there may be forwarded to the landline telephone network to complete the call. As the cellular telephone moves from one cell to another, the MTSO determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call. The FCC currently grants only two licenses to provide cellular telephone service in each market. However, competition for customers includes competing communications technologies such as conventional landline and mobile telephone, Specialized Mobile Radio ("SMR") systems and radio paging. PCS is expected to be competitive with cellular service in the future in some or all of USM's markets, and emerging technologies such as Enhanced Specialized Mobile Radio ("ESMR") and mobile satellite communication systems may prove to be competitive with cellular service in the future in some or all of the markets where USM has operations. 4 The services available to cellular customers and the sources of revenue available to cellular system operators are similar to those provided by conventional landline telephone companies. Customers are charged a separate fee for system access, airtime, long-distance calls, and ancillary services. Cellular system operators often provide service to customers of other operators' cellular systems while the customers are temporarily located within the operators' service areas. Customers using service away from their home system are called "roamers." Roaming is available because technical standards require that analog cellular telephones be compatible in all market areas in the United States. The system that provides the service to these roamers will generate usage revenue. Many operators, including USM, charge premium rates for this roaming service. There are a number of recent technical developments in the cellular industry. Currently, while most of the MTSOs process information digitally, most of the radio transmission is done on an analog basis. During 1992, a new transmission technique was approved for implementation by the cellular industry. Time Division Multiple Access ("TDMA") technology was selected as one industry standard by the cellular industry and has been deployed in several markets, including USM's operations in Tulsa, Oklahoma. Another digital technology, Code Division Multiple Access ("CDMA"), is expected to be deployed by USM in a commercial trial during 1996. The Company also expects to deploy some CDMA digital radio channels in other markets on a trial basis in the near future. Digital radio technology offers several advantages including greater privacy, less transmission noise, greater system capacity and potentially lower incremental costs for additional customers. The conversion from analog to digital radio technology is expected to be an industry-wide process that will take a number of years. The cellular telephone industry is characterized by high initial fixed costs. Accordingly, if and when revenues less variable costs exceed fixed costs, incremental revenues should yield an operating profit. The amount of profit, if any, under such circumstances is dependent on, among other things, prices and variable marketing costs which in turn are affected by the amount and extent of competition. Until technological limitations on total capacity are approached, additional cellular system capacity can normally be added in increments that closely match demand and at less than the proportionate cost of the initial capacity. CELLULAR OPERATIONS A significant portion of the aggregate market value of TDS's Common Shares is represented by the market value of TDS's interest in USM. From its inception in 1983 until the last two years, USM has principally been in a start-up phase. Until that time, USM's activities had been concentrated significantly on the acquisition of interests in entities licensed or designated to receive a license ("licensees") from the FCC to provide cellular service and on the construction and initial operation of cellular systems. The development of a cellular system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. USM experienced operating losses and net losses from its inception until the past two years. During the past two years, USM generated operations-driven net income and has significantly increased its operating cash flows during that time. Management anticipates increasing growth in cellular units in service and revenues as USM continues its vigorous expansion and development programs. Marketing and system operations expenses associated with this expansion may reduce the rate of growth in operating cash flow and operating income during the period of accelerated growth. In addition, USM anticipates that the seasonality of revenue streams and operating expenses may affect USM's operating and net results over the next several quarters. While USM produced operating income and net income during 1994 and 1995, changes in any of several factors may reduce USM's growth in operating income and net income over the next few years. These factors include: (i) the growth rate in USM's customer base; (ii) the usage and pricing of cellular services; (iii) the churn rate; (iv) the cost of providing cellular services, including the cost of attracting new customers; (v) the introduction of competition from PCS and other emerging technologies; and (vi) continuing technological advances which may provide competitive alternatives to cellular service. USM is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage cellular telephone systems. Its cellular interests include operating clusters of markets in the following areas: Iowa, Wisconsin/Illinois, Missouri, Eastern North Carolina/South Carolina, Virginia, West Virginia/Pennsylvania/Maryland, Oregon/California, Washington/Oregon/Idaho, Indiana/Kentucky, Eastern Tennessee/Western North Carolina, Oklahoma/ 5 Missouri/Kansas, Texas/Oklahoma, Maine/New Hampshire/Vermont, Florida/Georgia and Southwestern Texas. See "USM's Cellular Interests." USM has acquired its cellular interests through the wireline application process (22%), including settlements and exchanges with other applicants, and through acquisitions (78%), including acquisitions from TDS and third parties. CELLULAR SYSTEMS DEVELOPMENT ACQUISITIONS. During the last five years, USM has expanded its size, particularly in contiguous or adjacent markets, through an ongoing acquisition program aimed at strengthening USM's position in the cellular industry. This growth has resulted primarily from acquisitions of interests in mid-sized and rural markets and has been based on obtaining interests with rights to manage the underlying market. The Company has increased its population equivalents by 63% from approximately 15.0 million at December 31, 1990, to approximately 24.5 million at December 31, 1995. Markets managed or to be managed by USM have increased from 88 markets at December 31, 1990, to 140 markets at December 31, 1995. As of December 31, 1995, 84% of the Company's population equivalents represented interests in markets USM manages or expects to manage compared to 77% at December 31, 1990. Recently, the pace of acquisitions has slowed as industry-wide consolidation has reduced the number of markets available for acquisition. USM's population equivalents grew at a compound annual rate of over 10% over the last five years, but decreased by 4% from 1994 to 1995 due to the increased number of completed and pending divestitures. USM plans to acquire additional cellular interests through acquisitions or exchanges in markets that further strengthen its market clusters and in other attractive markets. USM also seeks to acquire minority interests in markets where it already owns (or has the right to acquire) the majority interest. While USM believes that it will be successful in making additional acquisitions or exchanges, there can be no assurance that USM, or TDS for the benefit of USM, will be able to negotiate additional acquisitions or exchanges on terms acceptable to it or that regulatory approvals, where required, will be received. USM plans to retain minority interests in certain cellular markets which it believes will earn a favorable return on investment. Other minority interests may be exchanged for interests in markets which enhance USM's market clusters or may be sold for cash or other consideration. USM also continues to evaluate the disposition of certain managed interests which are not essential to its corporate development strategy. USM, or TDS for the benefit of USM, has historically negotiated acquisitions of cellular interests from third parties primarily in consideration for USM's or TDS's equity securities. Cellular interests acquired by TDS in these transactions have been assigned to USM. At that time, USM reimbursed TDS for the value of TDS securities issued in such transactions, generally by issuing Common Shares to TDS or by increasing the balance due TDS under USM's Revolving Credit Agreement in amounts equal to the value of TDS securities delivered at the time the acquisitions were completed. The fair market value of the USM securities issued to TDS in connection with these transactions was equal to the fair market value of the TDS securities delivered in the transactions and was determined at the time the transactions were completed. In the past two years, USM, or TDS for the benefit of USM, has also negotiated divestitures and exchanges of cellular interests with third parties. The consideration received from these divestitures of non-strategic markets has primarily been cash, which has been used to reduce debt or for general corporate purposes. The exchanges have included the divestiture of controlling interests in non-strategic markets in exchange for controlling interests in markets which further enhance USM's clusters. COMPLETED ACQUISITIONS. During 1995, USM, or TDS for the benefit of USM, completed the acquisition of controlling interests in ten markets and several minority interests representing approximately 1.5 million population equivalents for an aggregate consideration of $136.4 million. The consideration consisted of 1.9 million TDS Common Shares, 422,000 USM Common Shares and $ 41.9 million in cash. USM reimbursed TDS for TDS securities issued and cash paid in the acquisitions through an increase of $14.6 million in the debt to TDS under the Revolving Credit Agreement, the issuance to TDS of 2.7 million USM Common Shares and 456,000 USM Common Shares to be issued to TDS in the future. 6 COMPLETED DIVESTITURES AND EXCHANGES. During 1995, USM completed the divestiture of controlling interests in six markets and minority interests in six other markets representing approximately 1.1 million population equivalents for an aggregate consideration of $129.3 million, primarily cash. Also during 1995, USM completed six separate exchange transactions which resulted in the acquisition of controlling interests in twelve markets, representing 2.0 million population equivalents, and the divestiture of ten markets plus three market partitions, representing 2.1 million population equivalents. PENDING ACQUISITIONS, DIVESTITURES, AND EXCHANGES. At December 31, 1995, USM, or TDS for the benefit of USM, had entered into agreements to purchase a controlling interest in one market and several minority interests in another market, to exchange a controlling interest in one market for a controlling interest in another market, to sell controlling interests in seven markets, one minority interest and one market partition and to settle litigation related to an investment interest which was sold in 1995 for aggregate consideration estimated to be approximately $150 million in cash and $20 million of notes receivable due in three years. All of these pending transactions are expected to be completed during 1996. TDS and USM maintain shelf registration of their respective Common Shares and Preferred Shares under the Securities Act of 1933 for issuance specifically in connection with acquisitions. The Company has had voting control of USM since USM's incorporation. TDS owned an aggregate of 67,052,931 shares of common stock of USM at December 31, 1995, representing over 80% of the combined total of USM's outstanding Common and Series A Common Shares and over 95% of their combined voting power. Assuming USM's Common Shares are issued in all instances in which USM has the choice to issue its Common Shares or other consideration and assuming all other issuances of USM's common stock to TDS and third parties for completed and pending acquisitions and redemptions of USM Preferred Stock and TDS Preferred Shares had been completed at December 31, 1995, TDS would have owned over 80% of the total outstanding common stock of USM and controlled over 95% of the combined voting power of both classes of its common stock. CELLULAR INTERESTS AND CLUSTERS USM operates clusters of adjacent cellular systems in nearly all of its markets, enabling its customers to benefit from larger service areas than otherwise possible. Where USM offers wide-area coverage, its customers enjoy uninterrupted service within the designated area. Customers may also make outgoing calls and receive incoming calls within this area without special roaming arrangements. In addition to benefits to customers, clustering also has provided to USM certain economies in its capital and operating costs. These economies are made possible through increased sharing of facilities, personnel and other costs and have resulted in a reduction of USM's per customer cost of service. The extent to which USM benefits from these revenue enhancements and economies of operation is dependent on market conditions, population size of each cluster and engineering considerations. USM anticipates that it will continue to pursue strategic acquisitions and exchanges which will complement its established market clusters. From time to time, USM may also consider exchanging or selling its interests in markets which do not fit well with its long-term strategies. 7 USM owned or had the right to acquire interests in cellular telephone systems in 201 markets at December 31, 1995, representing 24.5 million population equivalents. The following table summarizes the growth in USM's population equivalents in recent years and the development status of these population equivalents.
DECEMBER 31, ------------------------------------------- 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- (THOUSANDS OF POPULATION EQUIVALENTS) (1) Operational Markets: Majority-Owned and Managed................................ 19,755 18,365 18,619 14,597 10,651 Minority-Owned and Managed (2)............................ 511 1,195 1,166 2,049 1,788 Markets to be Managed, Net of Markets to be Divested: (3) Majority-Owned............................................ 269 2,200 1,015 1,847 3,046 Minority-Owned (2)........................................ -- -- 6 5 124 ------- ------- ------- ------- ------- Total Markets Managed and to be Managed................... 20,535 21,760 20,806 18,498 15,609 Minority Interests in Markets Managed by Others............. 3,916 3,703 3,505 3,606 3,334 ------- ------- ------- ------- ------- Total..................................................... 24,451 25,463 24,311 22,104 18,943 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- --------- (1) Based on 1995 Donnelley Marketing Services estimates for all years. (2) Includes markets where USM has the right to acquire an interest but does not currently own an interest. (3) Includes markets which are operational but which are currently managed by third parties. 8 The following section details USM's cellular interests, including those it owned or had the right to acquire as of December 31, 1995. The table presented therein lists clusters of markets that USM manages or anticipates managing. USM's market clusters show the areas in which USM is currently focusing its development efforts. These clusters have been devised with a long-term goal of allowing delivery of cellular service to areas of economic interest and along corridors of economic activity. USM'S CELLULAR INTERESTS The table below sets forth certain information with respect to the interests in cellular markets which USM and TDS owned or had the right to acquire pursuant to definitive agreements as of December 31, 1995. The number of population equivalents represented by USM's cellular interests may have no direct relationship to the number of potential cellular customers or the revenues that may be realized from the operation of the related cellular systems.
PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1995 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- MARKETS MANAGED BY THE COMPANY: MIDWEST REGIONAL MARKET CLUSTER: IOWA: Des Moines, IA.......................... 422,000 100.00% 100.00% 422,000 Davenport, IA-IL........................ 359,000 97.37 97.37 350,000 Humboldt (IA 10)........................ 183,000 100.00 100.00 183,000 Cedar Rapids, IA........................ 178,000 95.66 95.66 171,000 Muscatine (IA 4)........................ 155,000 100.00 100.00 155,000 Iowa (IA 6)............................. 154,000 100.00 100.00 154,000 Waterloo-Cedar Falls, IA................ 148,000 90.31 90.31 133,000 Hardin (IA 11).......................... 111,000 100.00 100.00 111,000 Jackson (IA 5).......................... 109,000 100.00 100.00 109,000 Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000 Lyon (IA 16)............................ 104,000 100.00 100.00 104,000 Iowa City, IA........................... 101,000 100.00 100.00 101,000 Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000 Dubuque, IA............................. 88,000 72.96 72.96 64,000 Mills (IA 1)............................ 61,000 100.00 100.00 61,000 Audubon (IA 7).......................... 55,000 100.00 100.00 55,000 Union (IA 2)............................ 50,000 100.00 100.00 50,000 Monroe (IA 3)........................... 91,000 49.00 49.00 45,000 Winneshiek (IA 12) *.................... 116,000 24.50 24.50 28,000 Ida (IA 9) *............................ 64,000 16.67 16.67 11,000 ----------- ----------- 2,724,000 2,482,000 ----------- ----------- WISCONSIN/ILLINOIS: Peoria, IL.............................. 345,000 100.00 100.00 345,000 Jo Daviess (IL 1)....................... 317,000 100.00 100.00 317,000 Wood (WI 7)#............................ 286,000 0.00 100.00% 100.00 286,000 Adams (IL 4) *(2)....................... 214,000 100.00 100.00 214,000 Mercer (IL 3)........................... 204,000 100.00 100.00 204,000 Vernon (WI 8) *......................... 233,000 74.00 74.00 172,000 Pierce (WI 5)........................... 94,000 100.00 100.00 94,000 Wausau, WI *............................ 121,000 71.76 71.76 87,000 Trempealeau (WI 6) (2).................. 82,000 100.00 100.00 82,000 LaCrosse, WI............................ 102,000 74.57 74.57 76,000 Rochester, MN * (3)..................... 114,000 100.00 (85.33) 14.67 17,000 ----------- ----------- 2,112,000 1,894,000 ----------- -----------
9
PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1995 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- MISSOURI: Columbia, MO*........................... 124,000 100.00% 100.00% 124,000 Stone (MO 15)........................... 114,000 100.00 100.00 114,000 Laclede (MO 16)......................... 96,000 100.00 100.00 96,000 Washington (MO 13)...................... 91,000 100.00 100.00 91,000 Callaway (MO 6) *....................... 85,000 100.00 100.00 85,000 Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000 Shannon (MO 17) *....................... 55,000 100.00 100.00 55,000 Linn (MO 5) (4)......................... 54,000 100.00 100.00 54,000 Brown (KS 5)............................ (5) 100.00 (100.00)% 0.00 -- DeKalb (MO 4)........................... (5) 100.00 (100.00) 0.00 -- Atchison (MO 1)......................... (5) 100.00 (100.00) 0.00 -- ----------- ----------- 675,000 675,000 ----------- ----------- TOTAL MIDWEST REGIONAL MARKET CLUSTER.............................. 5,511,000 5,051,000 ----------- ----------- MID-ATLANTIC REGIONAL MARKET CLUSTER: EASTERN NORTH CAROLINA/SOUTH CAROLINA: Northampton (NC 8)...................... 286,000 100.00 100.00 286,000 Rockingham (NC 7)....................... 282,000 100.00 100.00 282,000 Harnett (NC 10)......................... 278,000 100.00 100.00 278,000 Greene (NC 13).......................... 239,000 100.00 100.00 239,000 Greenville (NC 14)...................... 238,000 100.00 100.00 238,000 Hoke (NC 11)............................ 221,000 100.00 100.00 221,000 Ashe (NC 3)............................. 159,000 100.00 100.00 159,000 Chesterfield (SC 4)..................... 211,000 100.00 100.00 211,000 Sampson (NC 12)......................... 126,000 100.00 100.00 126,000 Chatham (NC 6).......................... 155,000 81.16 81.16 126,000 Camden (NC 9)........................... 119,000 100.00 100.00 119,000 ----------- ----------- 2,314,000 2,285,000 ----------- ----------- VIRGINIA: Roanoke, VA............................. 234,000 100.00 100.00 234,000 Bedford (VA 4).......................... 175,000 100.00 100.00 175,000 Lynchburg, VA........................... 159,000 100.00 100.00 159,000 Charlottesville, VA..................... 142,000 82.41 11.11 93.52 133,000 Buckingham (VA 7)....................... 89,000 100.00 100.00 89,000 Tazewell (VA 2) (2)..................... 83,000 100.00 100.00 83,000 Bath (VA 5)............................. 62,000 100.00 100.00 62,000 ----------- ----------- 944,000 935,000 ----------- ----------- WEST VIRGINIA/PENNSYLVANIA/MARYLAND: Monongalia (WV 3) *..................... 269,000 100.00 100.00 269,000 Raleigh (WV 7) *........................ 255,000 100.00 100.00 255,000 Grant (WV 4) *.......................... 169,000 100.00 100.00 169,000 Tucker (WV 5) *......................... 131,000 100.00 100.00 131,000 Hagerstown, MD *........................ 127,000 100.00 100.00 127,000 Cumberland, MD *........................ 101,000 100.00 100.00 101,000 Bedford (PA 10) (2) *................... 49,000 100.00 100.00 49,000 Garrett (MD 1) *........................ 30,000 100.00 100.00 30,000 Greene (PA 9)........................... (5) 100.00 (100.00) 0.00 -- ----------- ----------- 1,131,000 1,131,000 ----------- ----------- TOTAL MID-ATLANTIC REGIONAL MARKET CLUSTER.............................. 4,389,000 4,351,000 ----------- -----------
10
PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1995 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- NORTHWEST REGIONAL MARKET CLUSTER: OREGON/CALIFORNIA: Coos (OR 5)............................. 255,000 100.00% 100.00% 255,000 Del Norte (CA 1)........................ 208,000 100.00 100.00 208,000 Medford, OR *........................... 166,000 100.00 100.00 166,000 Mendocino (CA 9)........................ 140,000 100.00 100.00 140,000 Crook (OR 6) *.......................... 187,000 62.50 62.50 117,000 Modoc (CA 2)............................ 59,000 100.00 100.00 59,000 ----------- ----------- 1,015,000 945,000 ----------- ----------- WASHINGTON/OREGON/IDAHO: Clark (ID 6)............................ 290,000 100.00 100.00 290,000 Pacific (WA 6) *........................ 179,000 100.00 100.00 179,000 Richland-Kennewick-Pasco, WA *.......... 177,000 100.00 100.00 177,000 Butte (ID 5)............................ 156,000 100.00 100.00 156,000 Yakima, WA *............................ 212,000 54.55 54.55 115,000 Okanogan (WA 4)......................... 115,000 100.00 100.00 115,000 Umatilla (OR 3) *....................... 149,000 60.42 60.42 90,000 Kittitas (WA 5) (2) *................... 69,000 83.50 83.50 58,000 Hood River (OR 2) *..................... 71,000 30.32 30.32 22,000 Skamania (WA 7) *....................... 27,000 30.32 30.32 8,000 ----------- ----------- 1,445,000 1,210,000 ----------- ----------- TOTAL NORTHWEST REGIONAL MARKET CLUSTER.............................. 2,460,000 2,155,000 ----------- ----------- INDIANA/KENTUCKY MARKET CLUSTER: Meade (KY 3)............................ 311,000 100.00 100.00 311,000 Evansville, IN.......................... 321,000 78.13 78.13 251,000 Owen (IN 7)............................. 222,000 100.00 100.00 222,000 Elliott (KY 9).......................... 204,000 100.00 100.00 204,000 Fulton (KY 1)........................... 188,000 100.00 100.00 188,000 Clay (KY 11)............................ 171,000 100.00 100.00 171,000 Powell (KY 10).......................... 153,000 100.00 100.00 153,000 Union (KY 2)............................ 127,000 100.00 100.00 127,000 Ross (OH 9) *........................... 247,000 49.00 49.00 121,000 Owensboro, KY........................... 91,000 81.81 81.81 74,000 Warren (IN 5) *......................... 122,000 33.33 33.33 41,000 Miami (IN 4) *.......................... 180,000 0.00 14.29% 14.29 26,000 Williams (OH 1) *....................... (5) 75.00 (75.00) 0.00 0 ----------- ----------- TOTAL INDIANA/KENTUCKY MARKET CLUSTER.............................. 2,337,000 1,889,000 ----------- ----------- EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER: Knoxville, TN *......................... 546,000 96.03 96.03 524,000 Whitfield (GA 1)........................ 217,000 100.00 100.00 217,000 Asheville, NC *......................... 206,000 100.00 100.00 206,000 Henderson (NC 4) (2) *.................. 189,000 100.00 100.00 189,000 Bledsoe (TN 7) (2) *.................... 146,000 96.03 96.03 140,000 Hamblen (TN 4) (2) *.................... 130,000 100.00 100.00 130,000 Giles (TN 6) *.......................... 156,000 80.00 80.00 125,000 Macon (TN 3) *.......................... 334,000 16.67 16.67 56,000 Yancey (NC 2) (2) *..................... 31,000 100.00 100.00 31,000 ----------- ----------- TOTAL EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER.............. 1,955,000 1,618,000 ----------- ----------- TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER: OKLAHOMA/MISSOURI/KANSAS: Tulsa, OK *............................. 787,000 55.06 55.06 433,000 Elk (KS 15) *........................... 154,000 0.00 99.00 99.00 153,000 Joplin, MO *............................ 143,000 100.00 100.00 143,000 Seminole (OK 6)......................... 218,000 55.06 55.06 120,000 Nowata (OK 4) (2) *..................... 103,000 55.06 55.06 57,000 ----------- ----------- 1,405,000 906,000 ----------- -----------
11
PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1995 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- TEXAS/OKLAHOMA: Garvin (OK 9)........................... 201,000 100.00% 100.00% 201,000 Haskell (OK 10)......................... 83,000 100.00 100.00 83,000 Wichita Falls, TX *..................... 135,000 51.65 51.65 70,000 Lawton, OK *............................ 118,000 51.65 51.65 61,000 Jackson (OK 8) *........................ 96,000 51.65 51.65 50,000 Hardeman (TX 5) (2) *................... 38,000 51.65 51.65 20,000 Briscoe (TX 4) (2) *.................... 11,000 51.65 51.65 6,000 Beckham (OK 7) (2) *.................... 10,000 51.65 51.65 5,000 ----------- ----------- 692,000 496,000 ----------- ----------- TOTAL TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER.............. 2,097,000 1,402,000 ----------- ----------- MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER: Manchester-Nashua, NH................... 349,000 87.95 87.95 307,000 Coos (NH 1) *........................... 222,000 100.00 100.00 222,000 Kennebec (ME 3)......................... 222,000 100.00 100.00 222,000 Somerset (ME 2)......................... 151,000 100.00 100.00 151,000 Bangor, ME.............................. 148,000 91.08 91.08 135,000 Addison (VT 2) (2) *.................... 107,000 100.00 100.00 107,000 Washington (ME 4) *..................... 85,000 100.00 100.00 85,000 Lewiston-Auburn, ME..................... 104,000 82.05 82.05 85,000 Oxford (ME 1)........................... 83,000 100.00 100.00 83,000 ----------- ----------- TOTAL MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER....................... 1,471,000 1,397,000 ----------- ----------- FLORIDA/GEORGIA MARKET CLUSTER: Tallahassee, FL......................... 275,000 100.00 100.00 275,000 Worth (GA 14)........................... 246,000 100.00 100.00 246,000 Gainesville, FL......................... 219,000 100.00 100.00 219,000 Toombs (GA 11).......................... 152,000 100.00 100.00 152,000 Fort Pierce, FL (6)*.................... 285,000 49.00 49.00 140,000 Walton (FL 10).......................... 111,000 100.00 100.00 111,000 Putnam (FL 5)........................... 70,000 100.00 100.00 70,000 Dixie (FL 6)............................ 54,000 100.00 100.00 54,000 Jefferson (FL 8)........................ 53,000 100.00 100.00 53,000 Calhoun (FL 9).......................... 40,000 100.00 100.00 40,000 ----------- ----------- TOTAL FLORIDA/GEORGIA MARKET CLUSTER.............................. 1,505,000 1,360,000 ----------- ----------- SOUTHWESTERN TEXAS MARKET CLUSTER: Corpus Christi, TX...................... 380,000 100.00 100.00 380,000 Atascosa (TX 19)........................ 224,000 100.00 100.00 224,000 Edwards (TX 18)......................... 211,000 100.00 100.00 211,000 Laredo, TX.............................. 169,000 93.74 93.74 158,000 Wilson (TX 20).......................... 137,000 100.00 100.00 137,000 Victoria, TX............................ 81,000 99.22 99.22 80,000 ----------- ----------- TOTAL SOUTHWESTERN TEXAS MARKET CLUSTER.............................. 1,202,000 1,190,000 ----------- ----------- OTHER OPERATIONS: Hawaii (HI 3)........................... 139,000 100.00 100.00 139,000 Poughkeepsie, NY........................ (5) 83.11 (83.11)% 0.00 -- Columbia (NY 6)......................... (5) 100.00 (100.00) 0.00 -- ----------- ----------- 139,000 139,000 ----------- ----------- Total Managed Markets................. 23,066,000 20,552,000 ----------- -----------
12
PERCENTAGE TOTAL CHANGE CURRENT AND CURRENT PURSUANT TO ACQUIRABLE 1995 PERCENTAGE DEFINITIVE POPULATION CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS - -------------------------------------------- ----------- ----------- -------------- ------------- ----------- MARKETS MANAGED BY OTHERS: Los Angeles/Oxnard, CA *................ 15,478,000 5.50% 5.50% 851,000 Nashville/Clarksville-Hopkinsville, TN-KY *................................ 1,282,000 49.00 49.00 627,000 Baton Rouge, LA (7) *................... 565,000 52.00 (2.01)% 49.99 282,000 Seattle-Everett/Tacoma/Bremerton, WA *...................................... 3,019,000 7.01 7.01 212,000 Biloxi/Pascagoula, MS *................. 357,000 49.00 49.00 175,000 Oklahoma City, OK *..................... 989,000 14.60 14.60 144,000 Portland, ME *.......................... 283,000 49.00 49.00 139,000 McAllen, TX............................. 476,000 26.20 26.20 125,000 Portsmouth-Dover-Rochester, NH-ME *..... 277,000 40.00 40.00 111,000 Others (Fewer than 100,000 population equivalents each).................................. 1,233,000 ----------- Total Population Equivalents of Markets Managed by Others............................... 3,899,000 ----------- Total Population Equivalents.......... 24,451,000 ----------- -----------
- ------------ * Designates wireline market. # Designates operational market managed by a third party until USM acquires a controlling interest. (1) Interests under these agreements are expected to be acquired or divested at the various times specified therein following the satisfaction of customary closing conditions. (2) These markets have been or will be partitioned into more than one licensed area. The 1995 population, percentage ownership and number of population equivalents shown are for the licensed areas within the markets in which USM owns or has the right to acquire an interest. (3) USM has an agreement to divest a controlling interest in this market and will retain an investment interest after the divestiture. (4) USM has an agreement to divest a partitioned area in this market. The 1995 population, percentage ownership and number of population equivalents shown is for the licensed area within the market which USM will own upon completion of the divestiture. (5) USM has agreements to divest its controlling interests in these markets. The 1995 populations of these markets are not included in the related cluster or group totals. (6) USM owns 80% of the entity which owns and operates this market but has only a 49% interest in the earnings and profits. (7) USM owns a noncontrolling limited partnership interest in this market. SYSTEM DESIGN AND CONSTRUCTION. USM designs and constructs its systems in a manner it believes will permit it to provide high-quality service to mobile, transportable and portable cellular telephones, generally based on market and engineering studies which relate to specific markets. Engineering studies are performed by USM personnel or independent engineering firms. USM's switching equipment is digital, which reduces noise and crosstalk and is capable of interconnecting in a manner which reduces costs of operation. While digital microwave interconnections are typically made between the MTSO and cell sites, primarily analog radio transmission is used between cell sites and the cellular telephones themselves. In accordance with its strategy of building and strengthening market clusters, USM has selected high capacity digital cellular switching systems that are capable of serving multiple markets through a single MTSO. USM's cellular systems are designed to facilitate the installation of equipment which will permit microwave interconnection between the MTSO and the cell site. USM has implemented such microwave interconnection in most of the cellular systems it manages. In other systems in which USM owns or has an option to purchase a majority interest and where it is believed to be cost-efficient, such microwave technology will also be implemented. Otherwise, such systems will rely upon landline telephone connections or microwave links owned by others to link cell sites with the MTSO. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company, while generally improving system reliability. In addition, microwave facilities can be used to connect separate cellular systems to allow shared switching, which reduces the aggregate cost of the equipment necessary to operate both systems. 13 USM has continued to expand its internal network in 1995 to encompass nearly all of its markets. This network provides automatic call delivery for USM's customers and handoff between adjacent markets. The network has also been extended through links with certain systems operated by several other carriers, including GTE, US West, Ameritech, BellSouth, Centennial Cellular Corp., Southwestern Bell, AT&T Wireless, Vanguard Cellular Systems and others. Additionally, USM has implemented two Signal Transfer Points which will allow it to interconnect efficiently with network providers such as the Independent Telephone Network and the North American Cellular Network. During 1996, USM intends to extend the network for its customers through interconnection with one or more network providers as well as additional "point to point" connections required for hand-off. This expanded network will increase the area in which customers can automatically receive incoming calls, and should also reduce the incidence of "tumbling" electronic serial number fraud due to the pre-call validation feature of networked systems. USM believes that currently available technologies will allow sufficient capacity on USM's networks to meet anticipated demand over the next few years. COSTS OF SYSTEM CONSTRUCTION AND FINANCING Construction of cellular systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, MTSOs, cell site equipment, microwave equipment, engineering and installation. USM, consistent with FCC control requirements, uses primarily its own personnel to engineer and oversee construction of each cellular system where it owns or has the right to acquire a controlling interest. In so doing, USM expects to improve the overall quality of its systems and to reduce the expense and time required to make them operational. The costs (exclusive of license costs) of the operational systems in which USM owns or has the right to acquire an interest are generally financed through capital contributions or intercompany loans to the partnerships or subsidiaries owning the systems, and through certain vendor financing. MARKETING USM's marketing plan is designed to continue rapid penetration of its market clusters and to increase customer awareness of cellular service. The marketing plan stresses the quality of USM's service offerings and incorporates rate plans and cellular telephone equipment which are designed to meet the needs of a variety of customer segments and their usage patterns. USM's distribution channels include direct sales personnel, agents and retail service centers in the vast majority of its markets. These USM-owned and managed locations are designed to market cellular service to the consumer segment in a familiar setting. USM manages each cluster of markets from one administrative office with a local staff, including sales, customer service, engineering and in some cases installation personnel. Direct sales consultants market cellular service to potential business customers throughout each cluster. Retail associates work out of the retail locations and market cellular service to the consumer segment. USM maintains an ongoing training program to improve the effectiveness of sales consultants and retail associates by focusing their efforts on obtaining customers and maximizing the sale of high-user packages. These packages provide for customers to obtain a minimum amount of usage at discounted rates per minute, at fixed prices which are charged, even if usage falls below a defined monthly minimum amount. USM continues to expand its relationships with agents, dealers and non-USM retailers to obtain customers. Agents and dealers are independent business people who obtain customers for USM on a commission basis. USM's agents are generally in the business of selling cellular telephones, cellular service packages and other related products. USM's dealers include car stereo companies and other companies whose customers are also potential cellular customers. The non-USM retailers include car dealers, major appliance dealers, office supply dealers and mass merchants. USM opened its own retail locations in late 1993, expanding to over 170 locations by the end of 1995. These USM-owned and operated businesses utilize rental facilities in high-traffic areas. USM is working toward a uniform appearance of these stores, with all having similar displays and layouts. The retail centers' hours of business match those of the retail trade in the local marketplace, often staying 14 open on weekends and later in the evening than a typical business supplier. Additionally, to fully serve customer needs, these stores sell accessories to complement the phones and services USM has traditionally provided. In addition to its own retail centers, USM actively pursues national retail accounts, as agents for USM, which may potentially yield new customer additions in multiple markets. Agreements have been entered into with such national distributors as Wal-Mart, Chrysler Corporation, Ford Motor Company, General Motors, AT&T, Radio Shack, Best Buy and Sears, Roebuck & Co. in certain of USM's markets. Upon the sale of a cellular telephone by one of these national distributors, USM receives, often exclusively within the territories served, the resulting cellular customer. USM uses a variety of direct mail, billboard, radio, television and newspaper advertising to stimulate interest by prospective customers in purchasing USM's cellular service and to establish familiarity with USM's name. Advertising is directed at gaining customers, increasing usage of existing customers and increasing the public awareness and understanding of the cellular services offered by USM. USM attempts to select the advertising and promotion media that are most appealing to the targeted groups of potential customers in each local market. USM utilizes local advertising media and public relations activities and establishes programs to enhance public awareness of USM, such as providing telephones and service for public events and emergency uses. CUSTOMERS AND SYSTEM USAGE Cellular customers come from a wide range of occupations. They typically include a large proportion of individuals who work outside of their offices such as people in the construction, real estate, wholesale and retail distribution businesses and professionals. Increasingly, USM is providing cellular service to consumers and to customers who use their cellular telephones for security purposes. Although many of USM's customers use in-vehicle cellular telephones, most new customers are selecting portable cellular telephones, as these units have become more compact and fully featured as well as more attractively priced. USM's cellular systems are used most extensively during normal business hours between 7:00 am and 6:00 pm. On average, the local retail customers in USM's majority-owned and managed systems used their cellular systems approximately 95 minutes per unit each month and generated retail revenue of approximately $44 per month during 1995, compared to 95 minutes and $47 per month in 1994. Revenue generated by roamers, together with local, toll and other revenues, brought USM's total average monthly service revenue per customer unit in majority-owned and managed markets to $72 during 1995. Average monthly service revenue per customer unit decreased approximately 9% during 1995, related to the industry-wide trend of newer customers tending to use fewer minutes per month, to per minute pricing decreases, off-peak incentives and to declining contribution of inbound roaming revenue per customer. USM anticipates that average monthly service revenue per customer unit will continue to decline as its distribution channels provide additional customers who generate lower revenue per local minute of use and as roaming revenues grow more slowly. However, this effect is more than offset by USM's increasing number of customers. In addition to revenue from local retail customers, USM generates revenue from roaming customers and other services. USM's roaming service allows a customer to place or receive a call in a cellular service area away from the customer's home market area. USM has entered into "roaming agreements" with operators of other cellular systems covering virtually all systems in the United States and Canada. These agreements offer customers the opportunity to roam in these systems. These reciprocal agreements automatically pre-register the customers of USM's systems in the other carriers' systems. Also, a customer of a participating system roaming (i.e. traveling) in a USM market where this arrangement is in effect is able to make and receive calls on USM's system. The charge for this service is typically at premium rates and is billed by USM to the customer's home system, which then bills the customer. USM has entered into agreements with other cellular carriers to transfer roaming usage at agreed-upon rates. In some instances, based on competitive factors, USM may charge a lower amount to its customers than the amount actually charged to USM by another cellular carrier for roaming. 15 The following table summarizes certain information about customers and market penetration in USM's managed operations.
YEAR ENDED OR AT DECEMBER 31, -------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS) Majority-owned and managed markets: Cellular markets in operation (1).................... 137 130 116 92 67 Total population of markets in service (000s)........ 22,309 21,314 19,383 15,014 11,481 Customer Units: at beginning of period (2)......................... 421,000 261,000 150,800 97,000 57,300 additions during period (2)........................ 426,000 250,000 165,300 88,600 59,800 disconnects during period (2)...................... 137,000 90,000 55,100 34,800 20,100 at end of period (2)............................... 710,000 421,000 261,000 150,800 97,000 Market penetration at end of period (3).............. 3.18% 1.98% 1.35% 1.00% 0.84% Consolidated revenues.................................. $ 492,395 $ 332,404 $ 214,310 $139,929 $ 84,956 Depreciation expense................................... 57,302 39,520 25,665 16,606 8,814 Amortization expense................................... 32,156 25,934 19,362 13,033 10,455 Operating income (loss)................................ 42,755 17,385 (8,656) (12,705) (16,831) Construction expenditures.............................. 218,506 158,453 94,088 58,832 66,037 Identifiable assets.................................... $1,890,621 $1,584,142 $1,275,569 $858,795 $612,981
- --------- (1) Represents the number of markets in which USM owned at least a 50% interest and which it managed, including its reseller operation in 1991-1992. The revenues and expenses of these cellular markets are included in USM's consolidated revenues and expenses. (2) Represents the approximate number of revenue-generating cellular telephones served by the cellular markets referred to in footnote (1). The revenue generated by such cellular telephones is included in consolidated revenues. (3) Computed by dividing the number of customer units at the end of the period by the total population of markets in service as estimated by Donnelley Marketing Service for the respective years. The following table summarizes, by operating cluster, the total population, USM's customer units and penetration for USM's majority-owned and managed markets that were operational as of December 31, 1995.
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION - ----------------------------------------------------------------- ---------- ---------- ------------ Iowa............................................................. 2,453,000 91,000 3.71% Wisconsin/Illinois............................................... 1,826,000 42,000 2.30 Missouri......................................................... 920,000 24,000 2.61 Eastern North Carolina/South Carolina............................ 2,314,000 63,000 2.72 Virginia......................................................... 944,000 26,000 2.75 West Virginia/Pennsylvania/Maryland.............................. 1,319,000 29,000 2.20 Indiana/Kentucky................................................. 1,916,000 57,000 2.97 Oregon/California................................................ 1,015,000 28,000 2.76 Washington/Oregon/Idaho.......................................... 1,347,000 45,000 3.34 Eastern Tennessee/Western North Carolina......................... 1,621,000 63,000 3.89 Oklahoma/Missouri/Kansas......................................... 1,251,000 69,000 5.52 Texas/Oklahoma................................................... 692,000 22,000 3.18 Maine/New Hampshire/Vermont...................................... 1,471,000 46,000 3.13 Florida/Georgia.................................................. 1,505,000 54,000 3.59 Southwestern Texas............................................... 1,202,000 32,000 2.66 Other Operations................................................. 513,000 19,000 3.70 ---------- ---------- --- 22,309,000 710,000 3.18% ---------- ---------- --- ---------- ---------- ---
16 CELLULAR TELEPHONES AND INSTALLATION There are a number of different types of cellular telephones, all of which are currently compatible with cellular systems nationwide. USM offers a full range of vehicle-mounted, transportable and hand-held portable cellular telephones. Features offered in some of the cellular telephones include hands-free calling, repeat dialing, horn alert and others. USM negotiates volume discounts from its cellular telephone suppliers. USM discounts cellular telephones to meet competition or to stimulate sales by reducing the cost of becoming a cellular customer. In these instances, where permitted by law, customers are generally required to sign an extended service contract with USM. USM also cooperates with cellular equipment manufacturers in local advertising and promotion of cellular equipment. USM has established service and/or installation facilities in many of its local markets to ensure quality installation and service of the cellular telephones it sells. These facilities allow USM to improve its service by promptly assisting customers who experience equipment problems. Additionally, USM maintains a repair facility in Tulsa, Oklahoma, which handles more complex service and repair issues. PRODUCTS AND SERVICES USM's customers are able to choose from a variety of packaged pricing plans which are designed to fit different calling patterns. USM's customer bills typically show separate charges for custom-calling features, airtime in excess of the packaged amount, and toll calls. Custom-calling features provided by USM include wide-area call delivery, call forwarding, call waiting, three-way calling and no-answer transfer. USM also offers a voice message service in many of its markets. This service, which functions like a sophisticated answering machine, allows customers to receive messages from callers when they are not available to take calls. REGULATION The operations of USM are subject to FCC and state regulation. The licenses held by the Company are granted by the FCC for the use of radio frequencies and are an important component of the overall value of the assets of USM. The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934 ("Communications Act"). The FCC has promulgated regulations governing construction and operation of cellular systems, and licensing (including renewal of licenses) and technical standards for the provision of cellular telephone service. See "Telephone Operations -- Telecommunications Act of 1996" For licensing purposes, the FCC has divided the United States into separate geographic markets (MSAs and RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the application process, the FCC reserved one block of frequencies for non-wireline applicants and another block for wireline applicants. Subject to FCC approval, a cellular system may be sold to either a wireline or non-wireline entity, but no entity which controls a cellular system may own an interest in another cellular system in the same MSA or RSA. The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny USM's application for approval of the proposed transfer. When the first cell of a cellular system has been constructed, FCC rules authorize the licensee to offer commercial service to the public. The FCC must be notified of the construction of that cell within fifteen days of the completion of construction. The licensee is then said to have "operating authority." Initial operating licenses are granted for ten-year periods. The FCC must be notified each time an additional cell is constructed which enlarges the service area of a given market. The FCC's rules also generally require persons or entities holding cellular construction permits or licenses to coordinate their proposed frequency usage with neighboring cellular licensees in order to avoid electrical interference between adjacent systems. The height and power of base stations in the cellular system are regulated by FCC rules, as are the types of signals emitted by these stations. In 17 addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration regulations with respect to the siting and construction of cellular transmitter towers and antennas. The FCC has established standards for conducting comparative renewal proceedings between a cellular licensee seeking renewal of its license and challengers filing competing applications. The FCC has: (i) established criteria for comparing the renewal applicant to challengers, including the standards under which a "renewal expectancy" will be granted to the applicant seeking license renewal; (ii) established basic qualifications standards for challengers; and (iii) provided procedures for preventing possible abuses in the comparative renewal process. The FCC has concluded that it will award a renewal expectancy if the licensee has (i) provided "substantial" performance, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal," and (ii) complied with FCC rules, policies and the Communications Act. If a renewal expectancy is awarded to an existing licensee, its license is renewed and competing applications are not considered. USM's Tulsa and Knoxville licenses were renewed in 1995. USM's next renewal applications are due to be filed in 1996, for Des Moines, Iowa; Peoria, Illinois and Roanoke, Virginia. USM conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and anticipates being able to qualify for a renewal expectancy in its upcoming renewal filings. Accordingly, USM believes that current regulations will have no significant effect on its operations and financial condition. However, changes in the regulation of cellular operators or their activities and of other mobile service providers could have a material adverse effect on USM's operations. The FCC has also provided that five years after the initial licenses are granted, unserved areas within markets previously granted to licensees may be applied for by both wireline and non-wireline entities and by third parties. Accordingly, many unserved area applications have been filed by USM and others. USM's strategy with respect to system construction in its markets has been and will be to build cells covering areas within such markets that USM considers economically feasible to serve or might conceivably wish to serve and to do so within the five-year period following issuance of the license. In cases where applications for unserved areas are filed which are "mutually exclusive" and would result in overlapping service areas, the FCC will decide between the competing applicants by an auction process. USM is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. In 1993, Congress preempted states from regulating the entry of cellular systems into service and the rates charged by cellular systems to customers. However, certain states still require cellular system operators to go through a state certification process to serve communities within their borders. All such certificates can be revoked for cause. In addition, certain state authorities continue to regulate several aspects of a cellular operator's business, including the resale of intra-state long-distance service to its customers, the technical arrangements and charges for interconnection with the landline network and the transfer of interests in cellular systems, though it is uncertain whether states any longer have the right to regulate transfers under current law. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters are still subject to state or local zoning and land use regulations. In addition, states may still regulate other "terms and conditions" of cellular service. Pursuant to 1993 amendments to the Communications Act, cellular service is classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service offered to the public, for a fee, which is interconnected to the public switched telephone network. The FCC has determined that it will forbear from requiring CMRS carriers to comply with a number of statutory provisions otherwise applicable to common carriers, such as the filing of tariffs. There are two regulatory proceedings currently pending before the FCC which are of particular importance to the cellular industry. In the first proceeding, the FCC has sought comment on whether "enhanced 911" regulations should be imposed on cellular carriers. "Enhanced 911" capabilities would enable cellular systems to determine the precise location of the person making the emergency call. 18 In the second proceeding, the FCC, in 1996, issued a Notice of Proposed Rulemaking regarding the method by which cellular carriers and LECs shall compensate each other for interconnecting cellular and local exchange facilities. The FCC has tentatively proposed a "bill and keep" system, under which cellular and other CMRS carriers and LECs would simply keep all revenues from calls originating on their systems and would not have to pay special "interconnection" charges to each other. Since CMRS carriers now pay more to interconnect with LECs than VICE VERSA, such a rule, if adopted, would be favorable to the cellular industry. The FCC has also sought comment in this proceeding on whether it should pre-empt all state regulations of interconnection. The FCC has also allocated a total of 140 megahertz ("MHz") to broadband PCS, 20 MHz to unlicensed operations and 120 MHz to licensed operations, consisting of two 30 MHz blocks in each of the 51 MTAs and one 30 MHz block and three 10 MHz blocks in each of 493 BTAs. Cellular operators and those entities under common ownership with them are permitted to participate in the ownership of PCS licensees, except for those PCS licenses reserved for small businesses, and licenses for PCS service areas in which the cellular operator owns a 20% or greater interest in a cellular licensee, the service area of which covers 10% or more of the population of the PCS service area. In the latter case, the cellular license is limited to one 10 MHz PCS channel block. The FCC licensed the first two 30 MHz MTA frequency blocks in 1995. The FCC is currently holding an auction for the 30 MHz BTA block which is reserved for small business entities. APT has been licensed in eight MTAs for 30 MHz blocks. APT has entered into a definitive agreement to sell its license covering the Guam MTA, subject to FCC approval, and is pursuing the sale of its license for the Alaska MTA. In compliance with FCC restrictions on common ownership of cellular and broadband PCS interests in overlapping market areas, USM entered into a series of arrangements for the divestiture or restructuring of certain of its cellular interests in market areas where APT was awarded broadband PCS licenses. A number of these proposed arrangements required FCC approval of assignment or transfer of control applications before they could be consummated. All of these applications have been approved by the FCC and are either consummated or awaiting consummation. APT believes that it has taken reasonable steps to comply with the FCC's cross-interest policies. This is no assurance that the FCC might not raise questions regarding these compliance efforts. PCS technology is currently under development and will be similar in some respects to cellular technology. When it becomes commercially available, this technology is expected to offer increased capacity for wireless two-way and one-way voice, data and multimedia communications services and is expected to result in increased competition in USM's operations. The ability of these future PCS licensees to complement or compete with existing cellular licensees will be affected by future FCC rule-makings. These and other future technological developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the services currently offered by USM. There can be no assurance that the company will not be adversely affected by such technological developments. Media reports have suggested that certain radio frequency ("RF") emissions from portable cellular telephones might be linked to cancer. USM has reviewed relevant scientific information and, based on such information, is not aware of any credible evidence linking the usage of portable cellular telephones with cancer. The FCC currently has a rulemaking proceeding pending to update the guidelines and methods it uses for evaluating RF emissions in radio equipment, including cellular telephones. While the proposal would impose more restrictive standards on RF emissions from low-power devices such as portable cellular telephones, it is anticipated that all cellular telephones currently marketed and in use will comply with those standards. COMPETITION USM's principal competitor for cellular telephone service in each market is the licensee of the second cellular system in that market. Competition for customers between the two systems in each market is based on quality of service, price, size of area covered, services offered, and responsiveness of customer service. The competing entities in many of the markets in which USM has an interest have financial resources which are substantially greater than those of USM and its partners in such markets. 19 The FCC's rules require all operational cellular systems to provide, on a nondiscriminatory basis, cellular service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public. In addition to competition from the other cellular licensee in each market, there is also competition from, among other technologies, conventional mobile telephone and SMR systems, both of which are able to connect with the landline telephone network. USM believes that conventional mobile telephone systems and conventional SMR systems are competitively disadvantaged because of technological limitations on the capacity of such systems. The FCC has previously given approval, through waivers of its rules, to ESMR, an enhanced SMR system. ESMR systems may have cells and frequency reuse like cellular. The first ESMR systems were implemented in 1993 in Los Angeles. In 1995, an ESMR provider initiated service in Tulsa, Oklahoma, where USM operates a cellular system. Although less directly a substitute for cellular service, wireless data services and one-way paging service (and in the future, two-way paging services) may be adequate for those who do not need full two-way voice service. The FCC has allocated radio channels to a mobile satellite system in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites, and several consortia to provide such service have been formed. Such a system is designed primarily to serve the communications needs of remote locations and a mobile satellite system could provide viable competition for land-based cellular systems in such areas. It is also possible that the FCC may in the future assign additional frequencies to cellular telephone service to provide for more than two cellular telephone systems per market. PCS is anticipated to be competitive with cellular service in the future. PCS providers are expected to offer digital, wireless communications services. Similar technological advances or regulatory changes in the future may make available other alternatives to cellular service, thereby creating additional sources of competition. The first PCS system was initiated in Washington, D.C. in 1995. USM expects PCS operators to begin deployment of PCS in some of its larger cellular markets like Tulsa, Oklahoma; Knoxville, Tennessee; and Des Moines, Iowa in late 1996 or early 1997. TELEPHONE OPERATIONS The Company's telephone operations are conducted through TDS Telecom and 100 telephone subsidiaries. These telephone companies, ranging in size from less than 500 to more than 40,000 access lines, serve 425,900 access lines in 28 states. The Company provides modern, high-quality local and long-distance telephone service. Local service is provided by the Company's operating telephone subsidiaries. Long-distance or toll service is provided through connections with long-distance carriers, primarily AT&T and the Bell Operating Companies ("BOCs"). The Company anticipates that it will need to make arrangements with AT&T, the BOCs and other large companies in order to offer certain software-intensive services such as information gateway services. There is no assurance that the Company will be able to obtain such arrangements or that such arrangements, if obtained, will be on terms favorable to the Company. Future growth in telephone operations is expected to be derived from the acquisition of additional telephone companies, from providing service to new or presently unserved establishments, from business expansion in the areas served by the Company, from upgrading existing customers to higher grades of service, from increased usage of the network through both local and long-distance calling and from providing additional services made possible by advances in technology. 20 The following table summarizes certain information regarding the Company's telephone operations.
YEAR ENDED OR AT DECEMBER 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Telephone Operations Access lines*..................................... 425,900 392,500 356,200 321,700 304,000 % Residential................................... 80.6 81.3 82.0 83.1 83.8 % Business (nonresidential)..................... 19.4 18.7 18.0 16.9 16.2 Total revenues.................................... $ 354,841 $306,341 $268,122 $238,095 $211,232 % Local service................................. 26.8 26.8 26.9 27.4 29.0 % Network access and long-distance.............. 61.6 60.0 59.3 57.9 57.0 Depreciation and amortization expense............. $ 77,354 $ 68,878 $ 59,562 $ 51,946 $ 43,425 Operating income.................................. 98,240 91,606 79,110 72,217 65,242 Construction expenditures......................... 101,139 117,867 82,233 67,357 67,856 Total identifiable assets......................... $1,058,241 $984,563 $829,489 $723,855 $674,712
- --------- * An "access line" is a single or multi-party circuit between the customer's establishment and the central switching office. TELEPHONE ACQUISITIONS TDS pursues an active program of acquiring operating telephone companies. Since January 1, 1991, TDS has acquired 24 telephone companies serving a total of 74,200 access lines for an aggregate consideration totaling $253.8 million. The consideration consisted of $49.7 million in cash and notes, 155,000 Preferred Shares and 4.8 million Common Shares of the Company. TDS also sold one telephone company serving 1,100 access lines in 1995. At December 31, 1995, the Company had agreements, awaiting regulatory or other approvals, to acquire one telephone company which serves 8,000 access lines. This acquisition is expected to be completed for an aggregate consideration consisting of approximately 658,400 Common Shares of the Company. The Company continually evaluates acquisition opportunities. Telephone holding companies and others actively compete for the acquisition of telephone companies and such acquisitions are subject to the consent or approval of regulatory agencies in most states and, in some cases, to federal waivers that may affect the form of regulation or amount of interstate cost recovery of acquired telephone exchanges. While management believes that it will be successful in making additional acquisitions, there can be no assurance that the Company will be able to negotiate additional acquisitions on terms acceptable to it or that regulatory approvals, where required, will be received. The Company maintains shelf registration of its Common Shares and Preferred Shares under the Securities Act of 1933 for issuance specifically in connection with acquisitions. It is the Company's policy to preserve, insofar as possible, the local management of each telephone company it acquires. The Company provides the telephone subsidiaries with centralized purchasing and general management and other services, at cost plus a reasonable rate of return on invested capital. These services afford the subsidiaries expertise in the following areas: finance, accounting and treasury services; marketing; customer service; traffic; engineering and construction; accounting and customer billing; rate administration; credit and collection; and the development of administrative and procedural practices. CONSTRUCTION AND DEVELOPMENT PROGRAM The Company's 1995 and 1996 capital plan reflects its continuing commitment to a First-To-Market service provisioning strategy. With the deployment of fiber-fed digital serving areas ("DSAs") designed to condition the Company's outside plant facilities for Integrated Services Digital Network ("ISDN") and the upgrading of its switching platforms with Signaling System 7 ("SS7"), Advanced Calling Services ("ACS") and ISDN, the Company intends to remain competitive in its service territories. During 1995, the Company continued to upgrade its exchange distribution network facilities by deploying 165 DSAs and 21 480 route miles of fiber optic cable. In 1996, the Company will update additional outside plant facilities through the implementation of 211 DSAs and 440 route miles of fiber optic cable. By year-end 1996, the Company expects to have 3,500 route miles of fiber cable in place. The Company continued its aggressive role out of flagship switching systems built by AT&T (the "5ESS") and Siemens Stromberg-Carlson (the "EWSD") in accordance with its strategy of bringing advanced calling services to its customers. In 1995, the Company installed 39 switching systems, including 11 host switches and in 1996, plans to install an additional 47 switching systems including 11 more hosts. The 1995 and 1996 installed switches represent 71,260 and 66,908 lines bringing the total AT&T and Siemens Stromberg-Carlson equipped lines installed to 250,541. The Company's switching platform upgrades and replacements result in 77,543 equipped lines of ISDN and 85,251 equipped lines of SS7 and ACS being installed in 1995 with an additional 91,411 and 115,803 equipped lines installed in 1996. At the end of 1996, cumulative totals for the Company's ISDN, SS7 and ACS rollouts are projected to be 281,066, 360,788 and 336,285 lines representing 59%, 75% and 70%, respectively, of all equipped lines. This switch deployment schedule will continue to keep the Company well ahead of its 1993 rollout plan. In 1995, the Company continued its efforts to improve customer service and engage new revenue sources. One such effort was the start-up of the Network Management Center ("NEMAC"). The NEMAC is a centralized switching support group that combines the knowledge and expertise of the Company's most experienced switching personnel to provide switching network performance monitoring 24 hours a day, 7 days a week, as well as providing technical assistance in the performance of switching equipment maintenance, problem resolution and upgrades. As of the end of 1995, six people were dedicated to NEMAC operations and before it is fully operational at the end of 1996, an estimated 28 additional people will be employed. New revenue ventures expanded in 1995 include TDSNET -- the Company's wholly owned internet provider -- which began its operations in late 1994 though the deployment of its first internet access node. In 1995, TDSNET expanded its operations to include 5 additional operating sites and anticipates expanding its operations to include a minimum of 8 additional nodes in 1996. Further, TDSNET has plans to investigate the feasibility of implementing 12 additional operating sites in late 1996 pending the results of associated market feasibility studies. The deployment of voice mail systems will also help supplement revenues through its 1996 deployment of 11 additional systems to bring the cumulative number of systems deployed to 31. A significant service enhancing project that will help to support the TDSNET and NEMAC operations also began in 1995. The TCP/IP Multiprotocal Network that interconnects the operating locations of TDSNET, the NEMAC, operating telcos and regional management centers of the Company was initiated in late 1995. The Multiprotocal Network will allow the Company to effectively provide centralized computing, switch surveillance, maintenance and upgrade support to its operating telephone companies, Internet nodes and management centers. Plans for the network to enable customer service personnel from one operating location to assist customers at a different operating location will also be implemented in 1996. At year-end 1995, 16 operating companies and the 5 management centers were interconnected via the TCP/IP network with an additional 50 operating companies planned for interconnection by the end of 1996. During 1995, the Company initiated a voice dialing trial, which will continue in 1996, at an Indiana subsidiary. If the results of the trial prove positive, further deployment of voice dialing will be planned. The Company also completed plans to deploy 3 Asynchronous Transfer Mode ("ATM") video switching systems in Oklahoma as part of a 1996 county-wide interactive educational system. Both new ventures will enhance the Company's portfolio of telecommunications technology experience. The Company's total 1996 capital budget is $125 million compared to $101.1 in 1995 and $117.9 in 1994. Financing for the 1996 capital additions will be provided primarily by internally generated funds and supplemented by RUS long-term financing. FEDERAL FINANCING AND HIGH COST SUPPORT PROGRAMS TDS Telecom's primary sources of long-term financing for additions to telephone plant and equipment have been the Rural Utilities Service ("RUS"), previously named the Rural Electrification Administration, the Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of the United States of America. The RUS has made primarily 35-year loans to telephone companies since 1949, at interest rates of 2% and 5%, for the purpose of improving telephone service in rural areas. 22 Currently, the RUS is authorized to make hardship loans at a 5% interest rate and other loans at an interest rate approximating the government's rate for instruments of comparable maturity. The previous rate cap of 7% for these loans has been removed for 1996. The RTB, established in 1971, makes loans at interest rates based on its average cost of money (6.88% for its fiscal year ended September 30, 1995), and in some cases makes loans concurrently with RUS loans. In addition, the RUS guarantees loans made to telephone companies by the FFB at the federal cost of money (6.562% for a 35-year note at December 31, 1995). Substantially all of the Company's telephone plant is pledged or is subject to mortgages to secure obligations of the operating telephone companies to the RUS, RTB and FFB. The amount of dividends on common stock that may be paid by the operating telephone companies is limited by certain financial requirements set forth in the mortgages. Of the $390.6 million of underlying retained earnings of the telephone subsidiaries at December 31, 1995, $169.1 million was available for the payment of dividends on the subsidiaries' common stock. At December 31, 1995, the Company's operating telephone companies had unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating approximately $147 million, at a weighted average annual interest rate of 6.31%, to finance specific construction activities in 1996 and future years. These loan commitments are generally issued for five-year periods and may be extended under certain circumstances. The Company's operating telephone companies intend to make further applications for additional loans from the RUS, RTB and FFB as their needs arise. There is no assurance that these applications will be accepted or what the terms or interest rates of any future loan commitments will be. A number of the telephone subsidiaries recover a proportion of their costs via interstate support mechanisms. The 1996 Act requires modification of those mechanisms by early 1997. In the interim, the interstate Universal Service Fund ("USF") has been capped and indexed for years 1994, 1995 and the first half of 1996. The 1996 Act requires an extensive review of support mechanisms, including USF, which could involve the development of new mechanisms and changes in eligibility criteria. There is no assurance that cost recovery through direct and indirect interstate mechanisms will remain at current levels. Some telephone subsidiaries are in states where support and rate structures are under reevaluation or have been changed. The 1996 Act also affects state support programs. There is no assurance that the states will continue to provide for cost recovery from current sources. The Company would expect to seek higher local service rates to recover costs for which current interstate or intrastate recovery may become unavailable. REGULATION LECs, including the Company's local telephone operating subsidiaries, are regulated by state regulatory agencies with respect to such matters as local rates, intrastate toll rates, intrastate access charges billed to intrastate interexchange carriers, service areas, service standards, accounting and related matters. States have traditionally regulated entry to compete with an existing LEC. However, the 1996 Act has almost completely preempted state entry authority. In a number of states, construction plans, borrowing, depreciation rates, affiliated charge transactions and certain other financial transactions are also subject to regulatory approval. The Company has sought and will continue to seek appropriate increases in local and other service rates and changes in rate structure to achieve reasonable rates and earnings. The Company also actively seeks to maintain current revenue streams in light of increasing earnings review activity at the state level and the enactment of the 1996 Act which adopts a national policy favoring local exchange service competition and intrastate long distance competition. Although the TDS LECs still operate largely in a regulated environment, the Company has been taking steps to prepare for competition. For example, with the onset of local competition, the Company will seek pricing and policy directives to make its rate structures more appropriate in a competitive environment. The TDS Telecom operating LECs are also participating in state regulatory and legislative processes seeking appropriate recognition and policy responses for differences encountered in serving rural service areas. The developing changes in market structure and policy might impact the operating 23 LECs' earnings if adequate rate increases are not approved or are unduly delayed. To the extent that state regulatory approval of operating company responses to policy and marketplace changes remain necessary, TDS is not now able to predict the extent of such impact. The FCC regulates interstate toll rates, interstate access charges paid by interexchange carriers to local exchange carriers and other matters relating to interstate telephone service. The FCC also regulates and requires licenses for the use of radio frequencies in telephone operations. The Company's telephone subsidiaries concur in the National Exchange Carrier Association ("NECA") interstate common line and traffic sensitive tariffs pursuant to FCC rules and participate in the access revenue pools administered by NECA for interstate access services. Where applicable, the Company's subsidiaries also participate in intrastate access tariffs and toll-pooling arrangements approved by state regulatory authorities for intrastate long distance services. Such interstate and intrastate arrangements are intended to compensate LECs, such as the Company's operating telephone companies, for the costs, including a fair rate of return, of facilities furnished in originating and terminating interstate and intrastate long distance services. The FCC has stated its intention to conduct a comprehensive review of its interstate access rules. Numerous aspects of federal and state telephone regulation have, in recent years, been subject to reexamination and ongoing modification, often to pursue the goals of increasing competition and reducing regulation. For example, state toll revenue pooling arrangements that are the source of substantial revenues to local exchange companies continue to be replaced with access-charge-based arrangements. In these cases, access charges are typically priced to result in revenue flows similar to those realized in the toll-pooling process. To the extent they are not, the Company may seek adjustments in other rates. The 1996 Act is likely to accelerate the pace of both state and federal regulatory reevaluation. Some of the Company's high cost rural companies now recover a greater portion of their costs from interstate sources than do urban companies. The FCC and a federal-state joint board are conducting a rulemaking proceeding on this subject which could lead to a reduction of this source of revenue. The FCC has limited the growth of such interstate high cost recovery under the existing mechanism pending adoption of new rules. Prior to the 1996 Act, the FCC was seeking to control the level of interstate high cost support by regulating the support available when an underserved rural LEC or a rural portion of a larger LEC is acquired. The new proceeding on universal service support is expected to pursue some of the earlier proceedings' proposals. This might affect the Company's decision or purchase price for further potential acquisitions. Among the many proposals advanced for modifying high-cost support are proposals to base high cost compensation on some "proxy," rather than the current actual cost measurements, and to make competitors eligible for high cost compensation. The impact will depend on which of the many alternatives the FCC and joint board members select. The Company is pursuing a strategy of network modernization and customer service designed to maintain a strong competitive position as national and state policies change. The FCC and many states are placing large LECs under "price caps," rather than rate-of-return regulation. The price cap approach differs from traditional rate-of-return regulation by focusing primarily on the prices of communication services. The intention of price cap regulation is to focus on productivity, and the FCC's plan for telephone operating companies provides for the sharing with customers of profits, achieved by increased productivity, that exceed allowed returns. The Company's telephone subsidiaries have not elected price caps or an alternative FCC plan designed for smaller LECs for 1996 and will, therefore, remain in the NECA pools for this period. Since approximately one-third of the Company's telephone subsidiaries serve high-cost areas, important averaging mechanisms associated with the NECA pooling process would be lost if the Company elected either of the alternatives to traditional rate-of-return regulation. However, the FCC is currently considering whether to initiate a proceeding to prescribe a new rate of return for rate-of-return LECs. In addition, NECA has pending with the FCC a Petition for Rulemaking proposing rule revisions to allow incentive settlement options within the NECA pools. The settlement options are designed to provide companies wishing to remain in the NECA pools with incentives similar to those previously adopted by the FCC but only available to non-NECA participants. Management continues to evaluate opportunities under all forms of regulation. 24 The FCC has been gradually relaxing regulation of AT&T's interstate services as competition develops. The 1996 Act preserves interstate toll rate averaging and endorses a nationwide policy that interstate and intrastate long distance rates should not be higher in rural locations with limited traffic volumes than in high volume urban areas. The reevaluation of telephone company requirements and compensation arrangements which is mandated by the 1996 Act introduces uncertainty as to the future prospects of the Company's local telephone businesses. For example, the FCC has said it will commence a more comprehensive review of LEC access charge rules and policies, but has not yet indicated what changes it will propose or when it will consider changes in access policy. The outcome of such a review may affect the source and nature of the operating companies' recovery of interstate-allocated costs. The FCC has also opened a proceeding to develop new policies for LECs' compensation arrangements with cellular and PCS providers for interconnections between and among LEC and wireless networks. To the extent that resolution of the proceeding may raise the TDS LECs' interconnection costs, the operating companies would expect to adjust their charges to recover such increased costs. The FCC must first resolve questions about how the 1996 Act affects its jurisdiction and regulatory options. In the past, the FCC has frequently adopted transition rules when changing cost recovery mechanisms to prevent abrupt revenue and rate changes. While regulatory issues remain unresolved, the Company cannot predict the cumulative nature or extent of impacts from regulatory reform. TELECOMMUNICATIONS ACT OF 1996 The Telecommunications Act of 1996 (the "1996 Act") was enacted on February 8, 1996. The 1996 Act mandates significant changes in existing telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the nation and to streamline regulation of the telecommunications industry to remove regulatory burdens. The 1996 Act provides that implementing its legislative objectives will be the task of the FCC, the state public utilities commissions and a federal-state joint board. Much of this implementation must be completed in numerous, virtually simultaneous, proceedings with short, 6-18 month, deadlines. These proceedings are expected to address issues (and possibly even proposals) already before the FCC in pending rulemaking proceedings affecting the telephone and wireless industries, as well as additional areas of telecommunications policy and regulation. The proceedings will also replace, modify or terminate existing FCC and state policies and regulations that are inconsistent with the new law. OPEN COMPETITION. The primary purpose and effect of the new law is to open all telecommunications markets to competition -- including local telephone service. The 1996 Act makes virtually all direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries. Only narrow powers over competitive entry are left to state and local authorities. Each state retains the power to impose "competitively neutral" requirements that are consistent with the 1996 Act's universal service provision and necessary for universal services, public safety and welfare, continued service quality and consumer rights. While a state may not impose requirements that effectively function as barriers to entry, it retains limited authority to regulate certain competitive practices in rural telephone company service areas. Some specific provisions of the 1996 Act which are expected to affect local exchange, wireless and interexchange providers are: EXPANDED INTERCONNECTION OBLIGATIONS. The 1996 Act establishes a general duty for all telecommunications carriers, including cellular and PCS providers, to interconnect with other carriers. Congress has also developed a somewhat more specific list of requirements with respect to the interconnection obligations of Local Exchange Carriers ("LECs"). These obligations include resale, number portability, dialing parity, access to rights-of-way and reciprocal compensation. These LEC 25 obligations do not extend to wireless service providers, unless the FCC decides to include them within the definition of a LEC. However, the requirements apply to competitive providers of local exchange or exchange access services, as well as the incumbent LECs, including the TDS Telecom LECs. Unless exempted or granted suspension or modification, LECs designated "incumbents" have additional obligations as follows: to negotiate in good faith; to comply with more detailed interconnection terms, including non-discrimination and unbundling their network and service components so competitors may provide only those elements they choose to provide; to offer their retail services at wholesale rates to facilitate resale by their competitors; and to allow other carriers to place equipment necessary for interconnection or access on their premises. The 1996 Act establishes a framework for state commissions to mediate and arbitrate interconnection negotiations between incumbent LECs and carriers requesting interconnection, services or network elements. The 1996 Act establishes deadlines, standards for state commission approval of interconnection agreements and recourse to the FCC if a state commission fails to act. UNIVERSAL SERVICE. The 1996 Act establishes principles and a process for implementing a strengthened "universal service" policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The 1996 Act also requires universal service to schools, libraries and rural health facilities at discounted rates. Regulators must complete a major overhaul of current support mechanisms to eliminate implicit subsidies. All long distance providers must provide urban and rural long distance services essentially at averaged rates and must average long distance calls from one state to another. To receive universal service support, a carrier must obtain state designation as an "eligible telecommunications carrier" and provide universal service throughout a state-designated service area. The state must designate more than one requesting eligible carrier to receive support in most areas, but can only do so in a rural telephone company's area if it makes a public interest finding. CARRIER SUPPORT OBLIGATIONS. The 1996 Act requires all interstate telecommunications providers, including wireless service providers, to "make an equitable and non-discriminatory contribution," to support the cost of providing universal service, unless their contribution would be DE MINIMIS. BELL OPERATING COMPANY PROVISIONS. The 1996 Act establishes the process for eliminating all remaining line-of-business restrictions placed on the BOCs by the AT&T divestiture consent decree. Subject to specific safeguards, the BOCs may immediately provide long distance service outside the area where that Bell group serves, as well as specified "incidental" long distance services. For in-region long distance relief, the BOCs must obtain an FCC public interest finding and show that they have met a strict list of interconnection requirements and that there is a specified level of competition in each in- region state to be relieved of the long distance ban. PROHIBITION AGAINST CROSS-SUBSIDY. The 1996 Act prohibits a LEC from subsidizing any competitive service (including voice mail, voice storage/retrieval, live operator services and related ancillary services) from its telephone exchange service or exchange access service. TELEPHONE COMPANY PROVISION OF CABLE TELEVISION SERVICES. The 1996 Act eliminates the ban on LEC provision of cable programming service directly to subscribers within its telephone service area. However, most mergers, acquisitions and joint ventures by LECs and cable systems in the same area remain unlawful. INFRASTRUCTURE SHARING. LECs with "eligible telecommunications carrier" status that lack economies of scale may share features and functions of larger neighboring incumbent LECs on non-common carrier terms. USE OF CUSTOMER INFORMATION. The new law restricts the use of customer information for purposes beyond the provision of service except subject to prescribed safeguards, and requires LECs to provide directory listing information to competing telephone directory providers. 26 ELIMINATION OF ALIEN OFFICER/DIRECTOR RESTRICTIONS. The current restrictions on the numbers of alien officers and directors of FCC licensee companies and companies controlling such licenses has been eliminated. BOC COMMERCIAL MOBILE JOINT MARKETING. BOCs are permitted to market jointly and sell wireless services in conjunction with telephone exchange service, exchange access, intraLATA and interLATA telecommunications and information services. WIRELESS FACILITIES SITING. The 1996 Act limits the rights of states and localities to regulate placement of wireless facilities so as to "prohibit" the provision of wireless services or to "discriminate" among providers of such services. It also eliminates environmental effects (provided that the wireless system complies with FCC rules) as a basis for states and localities to regulate the placement, construction or operation of wireless facilities. EQUAL ACCESS. Section 332(c) of the Communications Act is amended to provide that wireless providers are not required to provide equal access to common carriers for toll services. The FCC is authorized to require unblocked access subject to certain conditions. DEREGULATION. The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. COMPETITION The 1996 Act ushers in a new wave of competition in the telecommunications industry. The 1996 Act embraces competition in telecommunications as a national policy and also starts the process of deregulation. The 1996 Act applies expanded interconnection and other requirements to local exchange telephone companies for the purpose of stimulating competition. Initially, TDS Telecom LECs may qualify for an exemption from certain interconnection provisions of the 1996 Act. The Company has no assurance that its LECs will not be adversely affected by the changes mandated by the 1996 Act. The Company believes that there eventually will be open entry into nearly every aspect of the telephone industry, including local service, interstate and intrastate toll, switched and special access services and customer premises equipment. Accordingly, the Company expects competition in the telephone business to be dynamic and intense as a result of the entrance of new competitors and the development of new technologies, products and services. A series of FCC, court and state regulatory agencies' decisions have introduced competition into certain sectors of the telephone industry already. Technological developments in cellular telephone, digital microwave, coaxial cable, fiber optics and other wireless and wired technologies may further encourage the development of alternatives to traditional telephone service. Facilities-based competition for intra-LATA toll markets is growing at the state level (and this trend is expected to continue). Although states have generally acknowledged differences in urban and rural markets, the competitive nature of individual markets will be determined by FCC rules and state commission implementation efforts. Certain providers and users of toll service may seek to bypass the LEC's switching services and local distribution facilities, particularly if services are not strategically priced. There are three primary ways by which users of toll service may bypass the Company's switching services today. First, users may construct and operate or lease facilities to transmit their traffic to an interexchange carrier. Second, certain interexchange carriers provide services which allow users to divert their traffic from the LEC's usage-sensitive services to their flat-rate services. Third, users may choose to use cellular telephone service to bypass the LEC's switching services. The Company's telephone subsidiaries have experienced only a small loss of traffic to such bypass. The Company and the exchange carrier industry are seeking to address bypass by advocating strong public policy which ensures adequate interstate and intrastate cost recovery mechanisms for high cost rural telephone service and flexible pricing, including reduced pricing of access and toll services, where appropriate. The 1996 Act may provide the Company with increased communications opportunities in video and voice communications. The 1996 Act allows telephone companies to provide video programming in the 27 service areas, but places restrictions on cable system buyouts and management arrangements. The Company will actively monitor regulatory proceedings seeking to protect its interests in these areas, and will continue to evaluate new business opportunities that might arise. RADIO PAGING OPERATIONS WIRELESS MESSAGING INDUSTRY Paging is a wireless communications messaging technology which uses an assigned radio frequency, licensed by the FCC, to contact a paging customer within a geographic service area. Pagers are small, lightweight, easy-to-use, battery-operated devices which receive messages by the broadcast of a radio signal. To contact a customer, a message is initiated by placing a telephone call to the customer's pager number. The telephone call is received by a computerized paging switch which generates a signal sent to microprocessor-controlled radio transmitters within the service area. These radio transmitters are connected to the paging terminal either through land-line or satellite. The transmitters broadcast a digital or analog signal that is received by the pager and delivered as a digital display, alphanumeric text, tone or voice message. The paging industry started in 1949 when the FCC allocated certain radio frequencies for exclusive use in providing one-way and two-way types of mobile communications services. The industry grew slowly during its first thirty years as the quality and reliability of equipment was developed and the market began to perceive the benefits of wireless communications. Until the 1980s, the industry was highly fragmented with a large number of small, local operators. During that decade, acquisitions of many firms by regional telephone companies and others greatly consolidated the industry. Several large industry acquisitions occurred during the mid-1990s which resulted in the further consolidation of the paging industry. In April 1995, APP was granted five regional narrowband PCS licenses by the FCC, providing equivalent coverage to that of a nationwide license. Each of the five licenses consists of a 50 kHz outbound channel on frequency 930.625 MHz paired with a 12.5 kHz return channel on frequency 901.80625 MHz. The PCS licenses provide APP with the opportunity to introduce two-way wireless messaging communications services including acknowledgment paging, data and telemetry services and digitized voice messaging throughout the United States. The Company intends to begin deploying these new services in some of its existing markets in early 1997. Manufacturers of pagers and transmission equipment have produced innovative technological advances which are expected to continue to broaden the potential market size for paging services and support the industry's rapid growth rate. Micro circuitry, liquid crystal display technology and digital signal processing all have expanded the capability and capacity of paging services while reducing equipment and air time costs and equipment size. Future technological developments are expected to greatly expand the messaging capacity of the paging infrastructure and provide advanced two-way paging and data services such as acknowledgment paging, which allow customers to confirm a message to the originator. Other developments include digitized voice paging and notebook/palm-top computer wireless data applications connected to the network by a wireless modem encased in a Personal Computer Memory Card International Association ("PCMCIA") card which functions as a pager and wireless modem. APP provides wireless communications messaging services in the United States with operations concentrated in Florida and in the Mid-Atlantic and Midwest regions. APP has experienced strong growth in the number of pagers in service, increasing from 236,800 at the end of 1991 to 784,500 at year-end 1995. 28 The following table summarizes certain information about APP's operations.
YEAR ENDED OR AT DECEMBER 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Pagers in service................................. 784,500 652,800 460,900 322,200 236,800 Total revenues.................................... $107,150 $ 92,065 $ 75,363 $ 54,716 $ 43,972 Depreciation and amortization expense............. 24,692 17,178 13,392 10,412 9,047 Operating (loss).................................. (8,997) (169) (721) (5,447) (7,750) Additions to property and equipment............... 28,994 27,403 24,813 15,501 13,322 Identifiable assets............................... $159,170 $146,107 $ 74,923 $ 57,080 $ 41,726
COMPANY STRATEGY APP's business strategy is to promote above industry average growth in customers, revenue and operating cash flow by providing the highest quality service through one of the industry's most technologically advanced digital transmission systems with a focus on strong customer service and competitive pricing. APP stresses quality in every customer interaction and strives to continuously improve the productivity and efficiency of its employees and its communications systems. EXTENSIVE SPECTRUM ACQUISITIONS. In 1995, APP was granted five regional narrowband PCS licenses at auction by the FCC, providing coverage equivalent to that of a nationwide license. Each license consists of a 50 kHz outbound channel on frequency 930.625 MHz paired with a 12.5 kHz return channel on frequency 901.80625 MHz. The licenses will enable APP to introduce two-way wireless messaging communications services including acknowledgment paging, data and telemetry services, wireless e-mail and digitized voice messaging. During 1996, APP plans to complete three phases of beta-testing of the ReFLEX25-Registered Trademark- protocol and to initiate engineering design and construction in the initial markets by year-end. APP also intends to continue exploring synergies with affiliated companies, such as United States Cellular Corporation and American Portable Telecom, Inc. In 1994, the FCC granted APP exclusive use of a paging channel on 929.3375 MHz throughout the United States subject to construction/buildout requirements. APP notified the FCC, by letter dated January 23, 1995, that these requirements had been met. APP believes this license will enable the Company to offer competitive regional and nationwide messaging services and has built the systems required to utilize and retain an exclusive license. APP's Minnesota, Oklahoma and Washington, D.C. systems utilize this frequency. STRATEGIC ALLIANCES AND AFFILIATES. APP is a joint venture partner with Nexus Telecommunications Systems Ltd. Of Israel ("Nexus") in American Messaging Services, LLC. ("AMS"). AMS was formed to develop multiple applications and distribution channels worldwide for a patented communications network that provides two-way paging, location and telemetry services. In September 1995, American Paging and Nexus introduced the TAG pager, a low-cost two-way pager which will operate on the Nexus network. Samsung Electronics of Korea will manufacture the first version of the TAG pager. American Paging holds the exclusive marketing rights for the Nexus two-way paging technology in the Western Hemisphere. In October, APP announced an agreement with Upper Canada Communication Group, Inc. ("UCCG") of Toronto for the coordinated development and use of narrowband PCS and conventional PCP paging frequencies in North America. Under the terms of the agreement, each company will pursue its own PCS build out plans but will have the added potential to market North American coverage of advanced wireless messaging services. In a related action, both the FCC and Industry Canada have provided conditional authority for both companies to construct and operate transmitters in previously restricted areas. APP RESTRUCTURING During the third quarter of 1995, APP began restructuring three key operating areas: sales and marketing, administration, and customer service. Upon completion, APP expects to improve its customer mix, lower its administrative costs and improve customer service. The restructuring is 29 expected to extend into the second half of 1996. Restructuring-related expenses include severance costs to be paid as APP's operating centers are closed, costs of canceling office leases and incurred consulting fees. The first goal of the restructuring effort is to increase sales productivity. A key element of this strategy is to improve customer mix. American Paging aims to increase the percentage of paging units sold directly to customers by increasing the number of direct sales representatives. Over one-half of APP's employees are anticipated to be involved in sales functions at the completion of restructuring. Another key element of the strategy is to increase sales force productivity through both an improved organization structure designed to clarify responsibilities and streamline communications, and improved sales force training. The second goal of the restructuring effort is to reduce both operating and administrative expense. APP plans to consolidate 17 operating centers into a single facility to be located in Oklahoma City, Oklahoma. The national Customer Service Center ("CSC") office will consolidate APP's customer service, administrative, billing and collections functions. Currently, the administrative centers are co-located with 17 of APP's 38 sales offices. Following the restructuring, field offices will be primarily devoted to sales, and will occupy significantly reduced office space. The third goal of the restructuring effort is to improve customer service, which is critical to adding and retaining customers. Beginning in the second quarter of 1996, American Paging plans to provide full-service customer response 24-hours-per-day, seven-days-per-week through its CSC. PAGING OPERATIONS APP provides local, state-wide, regional and nationwide advanced, one-way digital wireless messaging communications services to customers through its sales and service operation centers. It offers local and regional paging coverage throughout Florida, the Midwest (including all or parts of Illinois, Indiana, Kentucky, Minnesota, Missouri and Wisconsin), the Mid-Atlantic (including all or parts of Maryland, Pennsylvania, Virginia, and Washington, D.C.) regions, and in the states of Oklahoma, Texas, Arizona and Utah. One-way paging services are also offered in Ohio, Iowa, and Southern California, through various transmitter-sharing agreements with nonaffiliated service providers. Nationwide one-way and two-way paging is offered through APP's alliance with nonaffiliated service providers. Generally, a paging system consists of a control center, transmitters, dedicated links (wire, fiber optic, radio, or satellite) between the control center and the transmitters and the pagers themselves. The control center is interconnected with the public switched telephone network ("PSTN") and receives messages from land line telephones. Messages received at the control center are matched to each pager's unique telephone number, or "cap code," translated into digital signals and forwarded over dedicated links to transmitters that broadcast the message over a specified frequency. If the pager to which the message is directed is in the transmitter coverage area, it will recognize its "cap code" and indicate to its wearer that it has received a page. APP currently provides four types of pagers in all of its markets: digital (or numeric) display, alphanumeric text display, tone and voice. A digital display pager permits a caller to transmit to the customer a numeric message that may consist of a telephone number, an account number or coded information. It has the memory to store several numeric messages that can be recalled by the customer when desired. Alphanumeric text display service allows customers to receive, store, and display full text messages of between 80 and 160 characters, which are sent from either a data entry device or an operator. A tone pager notifies the customer that a message has been received by emitting an audible beep, displaying a flashing light or vibrating. In the case of voice service, the notification is followed by a brief voice message. Since 1986, APP has made a limited number of selective acquisitions of paging companies which had been providing service in the same areas as APP, or in areas adjacent to APP's service areas. In 1995, APP obtained approximately 28,400 customers from its acquisition of Dial-Page, Incorporated (of Florida), Page Link (of Minnesota) and the Texas paging assets of Century Telecommunications, Inc. In total, APP has added 87,300 net customers through acquisitions since 1991. As the industry continues to consolidate, APP expects to evaluate attractive acquisition opportunities and continue to make selective acquisitions on an ongoing basis. 30 MARKETING STRATEGY APP directs its marketing efforts at value-oriented customers who appreciate APP's high degree of technical reliability and high level of customer service. APP's marketing strategy is designed to increase market share and operating cash flow by achieving rapid growth at modest cost per net customer unit added. Continuing quality improvements, including new services and products, help stimulate this growth while controlling costs. APP generates its revenues from (i) service usage billed on a flat-rate or measured-service basis, (ii) pager rentals, (iii) pager warranties, maintenance and repair, (iv) loss protection, (v) voice mail usage on a flat rate or measured service basis, (vi) activation fees, (vii) the sale of pager accessories and (viii) service usage of value-added services such as text dispatching, second telephone numbers or group calls. Service to end users is provided directly by APP in most cases. APP markets its services directly through its sales force complemented by customer service representatives, and indirectly through third-party resellers and retailers. APP's sales force and customer service representatives have the responsibility to ensure that all customers and prospects as well as resellers and retailers understand APP's competitive advantages: reliable high-quality wireless networks, wide-area coverage, value-priced selection of pagers and ancillary services, and responsive sales and customer service staff. APP offers its services to third-party resellers under marketing agreements. APP offers paging air time in bulk quantities at wholesale rates to resellers who then "re-sell" APP's air time to end users at a markup. APP's cost of obtaining customer units through resellers is substantially less than the cost of obtaining customer units through direct sales or retail distribution channels. Resellers incur the cost to acquire customers as well as to service, bill and collect revenues from the customer. They also assume the cost of the paging unit for those who rent rather than purchase. APP sells pagers to retailers at a small mark-up or cost. Retail outlets then sell the pagers to the customers who then purchase the services from APP. Resellers and retailers may also sell services of other wireless communications companies which may compete with APP. APP seeks to develop long-term and cooperative relationships with its resellers and retailers. COMPETITION APP faces significant competition in all of its markets. A number of APP's competitors, which include local, regional and national paging companies and certain regional telephone companies, possess greater financial, technical and other resources than APP. Moreover, certain competitors in the paging business offer wider coverage in certain geographic areas than does APP and certain competitors follow a low-price discounting strategy to expand market share. If any of such companies were to devote additional resources to the paging business or increase competitive pressure in APP's markets, APP's results of operations could be adversely affected. A number of wireless communication technologies, including cellular, broadband and narrowband PCS, SMR and others, are competitive forms of technology used in, or projected to be used for, wireless two-way communications. Cellular telephone technology provides an alternative communications system for customers who are frequently away from fixed-wire communications systems (i.e., ordinary telephones). APP believes that paging will remain one of the lowest-cost forms of wireless messaging due to the low-cost infrastructure associated with paging systems, as well as advances in technology that will provide for reduced paging costs. Narrowband PCS differs from cellular and broadband technology and service in that APP expects it to carry primarily high-speed one-way and two-way paging, data transfer and short voice messages. APP envisions applications for narrowband PCS such as convenient two-way paging potentially aimed at business users and the mass consumer market; increased capacity to support more alphanumeric customers; high-speed, two-way data conveyance to highly mobile devices such as lap-top computer and Personal Digital Assistants ("PDA"); and high-speed, one-way digitized voice messaging. APP believes that these services will be complementary to the services and functionality of cellular and broadband PCS. APP intends to begin providing narrowband PCS services in selected markets as the technology becomes commercially available, which is estimated to be early 1997. 31 Broadband PCS technology is currently under development and will be similar in design to cellular technology. When offered commercially, this technology will offer increased capacity for wireless two-way communication and, accordingly, is expected to result in increased competition for APP. Future technological developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the paging services currently offered by APP. There can be no assurance that APP would not be adversely affected by such technology changes. GOVERNMENT REGULATION APP's paging operations are subject to regulation by the FCC and by state regulatory agencies. The FCC exercises broad authority to regulate market entry and rates and shares responsibilities with state regulatory authorities over a broad range of other matters. See "Telephone Operations -- Telecommunications Act of 1996." The FCC is responsible for awarding licenses for the wireless or radio frequencies used by APP and its subsidiaries to provide its one- and two-way messaging and other service offerings. It also establishes and enforces the licensing, technical and operating rules which govern operations on those frequencies, the terms and conditions under which the wireless systems of APP and its subsidiaries are interconnected with and obtain services and facilities from other service providers such as local exchange carriers and others with respect to interstate services and adjudicates any consumer or other complaints filed under the Communications Act with respect to service providers subject to its jurisdiction. The FCC licenses granted to APP are issued for up to ten years at the end of which time renewal applications must be approved by the FCC. Most of APP's current licenses expire between 1997 and 2001. FCC renewals are generally granted as long as APP is in compliance with FCC regulations. Although APP is unaware of any circumstances which would prevent the approval of any pending or future renewal applications, no assurance can be given that APP's licenses will be renewed by the FCC in the future. Moreover, although revocation and involuntary modification of licenses are extraordinary regulatory measures, the FCC has the authority to restrict the operation of licensed facilities or revoke or modify licenses. No license granted to APP has ever been involuntarily revoked or modified. The Communications Act requires licensees, such as APP, to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license, or any rights thereunder. The Communications Act also requires prior approval by the FCC of acquisitions of other paging companies by APP. The FCC has approved all transfers of control for which APP has sought approval. APP also routinely applies for FCC authority to use frequencies, modify the technical parameters of existing licenses, expand its service territory and provide new services. Although there can be no assurance that any future requests for approval or applications filed by APP will be approved or acted upon in a timely manner by the FCC, or that the FCC will grant the relief requested, APP has no reason to believe that any such requests, applications or relief will not be approved or granted. Pursuant to 1993 amendments to the Communications Act, a paging service is classified as a CMRS, to the extent that it is a service offered to the public, for a fee, which is interconnected to the public switched telephone network. The FCC has determined that it will forbear from requiring CMRS carriers to comply with a number of statutory provisions otherwise applicable to common carriers, such as the filing of tariffs. The scope of state regulatory authority while excluding market entry and rate regulation covers such matters as the terms and conditions of interconnection between local exchange carriers and wireless carriers with respect to intrastate services, customer billing information and practices, billing disputes, other consumer protection matters, facilities setup issues, transfers of control, the bundling of services and equipment and requirements relating to the availability of capacity on a wholesale basis. In these areas, particularly the terms and conditions of interconnection between local exchange carriers and wireless providers, the FCC and state regulatory authorities share regulatory responsibilities with respect to interstate and intrastate issues, respectively. 32 The FCC and a number of state regulatory authorities have initiated or indicated their intention to examine the structure of access charge payments, mutual compensation arrangements for interconnected local exchange carriers and wireless providers, the pricing of dedicated and common transport and switching facilities provided by local exchange carriers to wireless providers, implementation of number portability to permit customers to retain their telephone numbers when they change service providers, and alterations in the structure of universal service funding. APP and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and, through its membership in state associations of wireless providers, before state regulatory authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have a significant impact on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. APP is unable to predict the scope, pace, or financial impact of policy changes which could be adopted in these proceedings. BROADBAND PCS OPERATIONS THE WIRELESS TELECOMMUNICATIONS INDUSTRY PCS is a term commonly used in the United States to describe a portion of radio spectrum (1850-1990 MHz) 60MHz of which was auctioned by the FCC in March 1995. This portion of radio spectrum is to be used by PCS licensees to provide wireless communication services. PCS will initially compete directly with existing cellular telephone, paging and mobile radio services. PCS will also include features which are not generally offered by cellular providers, such as: (i) the provision of all services to one untethered, mobile number; (ii) lower-priced service options; and (iii) in the near future, medium-speed data transmissions to and from portable computers, advanced paging services and facsimile services. In addition, PCS providers may be the first to be able to offer mass market wireless local loop applications, in competition with switched and direct access local telecommunications services. OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into multiple regions called "cells," each of which contains a base station consisting of a low-power transmitter, a receiver and signaling equipment. The cells are typically configured on a grid in a honeycomb-like pattern, although terrain factors (including natural and man-made obstructions) and signal coverage patterns may result in irregularly shaped cells and overlaps or gaps in coverage. The base station in each cell is connected by microwave, fiber optic cable or telephone wires to a switching office. The switching office controls the operation of the wireless telephone network for its entire service area, performing inter-base station hand-offs, managing call delivery to handsets, allocating calls among the cells within the network and connecting calls to the local landline telephone system or to a long-distance telephone carrier. Wireless service providers have interconnection agreements with various local exchange carriers and interexchange carriers, thereby integrating the wireless telephone network with landline telecommunications systems. Because two-way wireless networks are fully interconnected with landline telephone networks and long-distance networks, subscribers can receive and originate both local and long distance calls from their wireless telephones. The signal strength of a transmission between a handset and a base station declines as the handset moves away from the base station, so the switching office and the base stations monitor the signal strength of calls in progress. When the signal strength of a call declines to a predetermined level, the switching office may "hand off" the call to another base station that can establish a stronger signal with the handset. If a handset leaves the service area of the wireless service provider, the call is disconnected unless an appropriate technical interface is established to hand off the call to an adjacent system. Operators of wireless networks frequently agree to provide service to subscribers from other compatible networks who are temporarily located in or traveling through the operator's service area. Such subscribers are called roamers. Agreements among network operators allocate revenues received from roamers. With automatic roaming, wireless subscribers are preregistered in certain networks outside their service area and receive service automatically while they are roaming, without having to notify the switching office. Other roaming features permit calls to a subscriber to follow the subscriber into different networks, so that the subscriber will continue to receive calls in a different network just as if the subscriber were within his or her service area. 33 While PCS and cellular networks utilize similar technologies and hardware, they operate on different frequencies and utilize different signaling protocols. As a result, it generally will not be possible for users of one type of network to roam on a different type of network outside of their service area, or to hand off calls from one type of network to another. Digital signal transmission is accomplished through the use of frequency management technologies, or protocols. These protocols manage the radio channel either by dividing it into distinct time slots (a method known as Time Division Multiple Access, or "TDMA") or by assigning specific coding instructions to each packet of digitized data that comprises a signal (a method known as Code Division Multiple Access, or "CDMA"). While the FCC has mandated that licensed cellular networks in the U.S. must utilize compatible analog signaling protocols, the FCC has intentionally avoided mandating a universal digital signaling protocol. Currently, three principal competing, incompatible signaling protocols have been proposed by various vendors for use in PCS networks: GSM (as defined below), CDMA and TDMA. Because these protocols are incompatible, a subscriber of a network that relies on GSM technology, for example, will be unable to use his handset when traveling in an area served only by CDMA or TDMA-based wireless operators, unless he carries a dual-mode handset that permits the subscriber to use the cellular network in that area. For this reason, the success of each protocol will depend both on its ability to offer enhanced wireless service and on the extent to which its users will be able to use their handsets when roaming outside their service area. Wireless subscribers generally are charged separately for monthly access, air time, long-distance calls and custom-calling features (although custom-calling features may be included in monthly access charges in certain pricing plans). Wireless network operators pay fees to local exchange and long- distance telephone companies for access to their networks and toll charges based on standard or negotiated rates. When wireless operators provide service to roamers from other networks, they generally charge roamer air-time usage rates, which usually are higher than standard air-time usage rates for their own subscribers, and additionally may charge daily access fees. Special, discounted rate roaming arrangements, often between neighboring operators who wish to stimulate usage in their respective territories, provide for reduced roaming fees and no daily access fees. PRODUCTS AND SERVICES APT's fundamental customer proposition will be an affordable, reliable, high-quality mobile voice communications service. At the commencement of commercial service, APT intends to offer coverage in those areas of the PCS Markets where most of the population lives and works. Subsequent construction of its PCS networks will provide coverage which approximates that of current cellular operators. APT will also provide roaming capabilities, through agreements with other GSM operators and cellular operators. APT will provide several distinct services and features, certain of which are currently available only on networks employing the GSM standard. These include: THE SMARTCARD. GSM technology employs a credit-card sized smartcard which contains a microchip containing detailed information about a customer's service profile. The smartcard will allow APT to initiate services or change a customer's service package from a remote location. The smartcard also allows customers to roam onto other GSM-based networks by using their cards in handsets compatible with the local network. FEATURE-RICH HANDSETS. As part of its basic service package, APT will provide easy-to-use, interactive menu-driven phones that will enable customers to utilize the features available in a GSM network. These handsets will primarily use words and easy-to-use menus rather than numeric codes to operate handset functions such as call-forwarding, call-waiting and text-messaging. SHORT TEXT MESSAGING. GSM technology allows for the capability to send and receive short text messages, similar to two-way radio paging services. This service allows APT to offer a quicker and less expensive form of wireless communication when a full conversation is not necessary. ENHANCED SECURITY. APT's service will provide greater security from eavesdropping and fraud than existing wireless service. Greater conversation security is provided by the encryption code of the digital GSM signal. Greater fraud protection is provided because GSM handsets require the use of a smartcard with a sophisticated authentication scheme, the replication of which is virtually impossible. In addition to its basic and enhanced wireless service packages, APT plans to bundle wireless services with other telecommunications services through strategic alliances and resale agreements. 34 APT will also seek to provide bundled service options in partnership with local businesses and affinity marketing groups. Examples include bundling wireless service with local telephone and utility services, with banking services or with local information services. Through these arrangements, APT's customers will be able to buy multiple services from a single provider, access account information remotely, and obtain services such as weather and traffic reports as text messages. As the market for wireless telecommunications services continues to develop, APT expects to offer advanced wireless applications such as mobile data services, wireless private branch exchange applications, wireless local loop services and other individually customized wireless products and services. APT plans to construct networks for its PCS markets using Global System for Mobile Communication ("GSM") technology. By implementing GSM technology, currently the most widely utilized PCS technology in the world, APT believes it will be able to launch service early in its markets as well as rapidly complete the initial construction of its networks. APT selected GSM technology for its PCS networks because it believes that GSM has significant advantages compared to other digital technologies. The advantages include (i) established commercial operations currently serving over 12 million customers in over 85 countries; (ii) new and enhanced service features not currently available through other technologies, including call encryption and text messaging; and (iii) an open architecture offering APT the flexibility and cost advantages of a technology supported by multiple equipment vendors offering "off the shelf" equipment. Although APT has chosen GSM for deployment in its PCS markets and believes that GSM offers significant advantages over the other two principal competing technologies for PCS deployment, to the extent most competitors in the PCS industry utilize a competing technology that is not compatible with GSM, APT's business could be adversely affected and APT's GSM network might be rendered obsolete. APT was incorporated in 1991 and has no significant operating history. APT expects to launch commercial service in early 1997. APT believes that its future operating results will be subject to several factors, some of which are outside the control of APT. These factors include the cost of constructing APT's PCS networks (including any unanticipated costs associated therewith), the costs of relocation of microwave licensees, changes in technology, and general and local economic conditions. In addition, the extent of the potential demand for PCS cannot be estimated with any degree of certainty. APT has incurred cumulative net losses from inception to December 31, 1995 of approximately $8.0 million. APT expects to incur significant operating losses and to generate negative cash flow from operating activities during the next several years, while it develops and constructs its PCS networks and builds a PCS customer base. There can be no assurance that APT will achieve or sustain profitability or positive cash flow from operating activities in the future. If APT cannot achieve operating profitability or positive cash flow from operating activities, it may not be able to meet its debt service or working capital requirements. The development, construction and initial start-up phase associated with the construction of APT's PCS networks will require substantial capital. APT estimates that the aggregate funds required through December 31, 1998 will total approximately $830 million. Although APT is seeking financing from various sources, there can be no assurance that financing will be available to APT or, if available, that it can be obtained on terms acceptable to APT and within any limitations that may be contained in the financing arrangements. Failure to obtain such financing could result in the delay or abandonment of some or all of APT's development and expansion plans and could have a material adverse effect on APT's financial condition and results of operations. MARKETING AND DISTRIBUTION APT's marketing objective is to create demand for its PCS service by clearly differentiating its service offerings. APT believes the strength of its marketing efforts will be a key contributor to its success. APT has developed overall marketing strategies as well as certain, specific local marketing strategies for each PCS Market. APT plans to use both mass marketing and specific customer segment marketing. APT's mass marketing efforts will emphasize the value of APT's high-quality, innovative services and will be 35 supported by a heavily promoted brand name. APT also plans to create marketing programs for particular customer segments. For each targeted segment APT will create a specific marketing program including a service package, pricing plan, promotional strategy and distinctive distribution channels. APT believes that by tailoring its service packages and marketing efforts to specific market segments, customers will perceive a higher value in relation to the cost of service, will be more inclined to use PCS services and will have higher levels of customer satisfaction. APT also believes that targeted service offerings generally create increased customer loyalty and satisfaction, lower churn and higher life-cycle margins. APT plans to offer its services and products through traditional cellular sales channels as well as through new, lower cost channels which increase the quality of the typical sale. APT will utilize traditional sales channels which might include mass merchandisers and retail outlets, company retail stores, sales agents and a direct sales force to execute both its mass-market and segment-specific strategies. Based in part upon the remote activation feature of the GSM smartcard, APT also intends to develop distribution innovations such as simplified retail sales processes and lower-cost channels which might include inbound telesales, affinity marketing programs, neighborhood sales and on-line sales. APT'S PCS MARKETS APT has licenses to provide PCS services to the Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus MTAs. APT has entered into a definitive agreement to sell its license covering the Guam MTA, subject to FCC approval, and is pursuing the sale of its license for the Alaska MTA. APT believes its PCS Markets have attractive demographic characteristics including growing populations, high population densities, favorable commuting patterns, high median household incomes and favorable business climates. APT believes the geographic and economic diversity of its PCS Markets insulates it from regional trends and any single competitor. The following table sets forth certain information regarding the PCS Markets and ranks each of the MTAs below in relation to the 51 MTAs in the country with number one as the highest in each category. SUMMARY MARKET DATA (1)
1995 POPS POP SQUARE MTA (MM) RANK MILES - --------------------------------------------- ------- ----- ------- Minneapolis.................................. 6.3 12 216,471 Tampa-St. Petersburg-Orlando................. 5.9 13 16,904 Houston...................................... 5.7 14 39,799 Pittsburgh................................... 4.1 21 22,890 Kansas City.................................. 3.0 34 42,212 Columbus..................................... 2.3 38 13,174 ------- ------- Total........................................ 27.3 351,450 ------- ------- ------- -------
- --------- (1) Source: In the case of POPs, from 1995 Donnelley Information Services Estimates; in the case of square miles, Paul Kagan Associates 1995 PCS Atlas and Data Book. COMPETITION The wireless telecommunications industry is experiencing significant technological change, as evidenced by the increasing pace of digital upgrades to existing analog wireless networks, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products and enhancements, and changes in end-user requirements and preferences. Accordingly, APT expects competition in the wireless telecommunications business to be dynamic and intense as a result of the entrance of new competitors and the development of new technologies, products and services. APT also will face competition from other current or developing technologies, such as paging, ESMR and global satellite networks and expects to compete with cellular and PCS resellers. In the future, cellular service and PCS will also compete more directly with traditional landline telephone 36 service providers and with cable operators who expand into the offering of traditional communications services over their cable systems. In addition, APT may face competition from technologies that may be introduced in the future. APT anticipates that market prices for two-way wireless services generally will decline in the future based upon increased competition. APT will compete to attract and retain customers principally on the basis of services and enhancements, its customer service, the size and location of its service areas and pricing. APT's ability to compete successfully will also depend, in part, on its ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors, which could adversely affect APT's operating margins. APT will compete directly with up to five other PCS providers in each of its PCS Markets. These may include PCS PrimeCo, Sprint Telecommunications Venture ("STV") and AT&T Wireless Services, Inc. In addition, each of the PCS Markets will be served by other two-way wireless service providers, including licensed cellular operators and resellers. Many of APT's competitors have substantially greater financial, technical, marketing, sales and distribution resources than those of APT and have significantly greater experience than APT in testing new or improved telecommunications products and services and obtaining regulatory approvals. Some competitors are expected to market other services, such as cable television access, with their wireless telecommunications service offerings. Several of APT's competitors are operating, or planning to operate, through joint ventures and affiliation arrangements, wireless telecommunications networks that encompass most of the United States. APT also expects that existing cellular providers in the PCS Markets, most of which have an infrastructure in place and have been operational for a number of years, will upgrade their networks to provide comparable services in competition with APT. Principal cellular providers in the PCS Markets are AT&T Wireless Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation, AirTouch Communications, Inc., U S WEST NewVector Group, Inc., Bell Atlantic NYNEX Mobile and Ameritech Cellular. As of February 15, 1996, several major PCS providers, including PCS PrimeCo and STV, have publicly announced that they intend to deploy CDMA-based PCS networks. It is anticipated that CDMA-based PCS providers, including competitors in several of APT's PCS Markets, will cover markets containing at least 89% of the U.S. population. The fact that APT's PCS customers will not be able to roam into regions not served by GSM-based PCS networks, unless the customers use dual-mode telephones that would permit them to use the existing cellular network, and in which APT has entered into a roaming agreement with the cellular operator, may adversely affect APT's ability to establish a PCS customer base and to compete successfully in the PCS business with those PCS operators offering greater roaming capabilities. Handsets used for GSM-based PCS networks will not be automatically compatible with cellular systems, and vice versa. APT expects dual-mode phones to be available in early 1997, which will permit subscribers to roam by using the existing cellular wireless network in other markets. Until then, this lack of interoperability may impede APT's ability to attract current cellular subscribers or potential new wireless communication subscribers that desire the ability to access different service providers in the same market. REGULATION OF WIRELESS TELECOMMUNICATIONS INDUSTRY REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction, operation and acquisition of wireless telecommunications systems in the U.S. pursuant to the Communications Act and the rules, regulations and policies promulgated by the FCC thereunder. Under the Communications Act, the FCC is authorized to allocate, grant and deny licenses for PCS frequencies, establish regulations governing the interconnection of PCS networks with wireline and other wireless carriers, grant or deny license renewals and applications for transfer of control or assignment of PCS licenses, and impose fines and forfeitures for any violations of FCC regulations. PCS LICENSING. The FCC established PCS service areas in the United States and its possessions and territories based upon Rand McNally's market definition of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two BTAs. 37 The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into six individual blocks, each of which is allocated to serve either MTAs or BTAs. The spectrum allocation includes two 30 MHz blocks ("A" and "B" blocks) licensed for each of the 51 MTAs, one 30 MHz block ("C" block) licensed for each of the 493 BTAs, and three 10 MHz blocks ("D," "E" and "F" blocks) licensed for each of the 493 BTAs. A PCS license will be awarded for each MTA and BTA in every block, for a total of more than 2,000 licenses. This means that in any PCS service area as many as six licensees could be operating separate PCS networks. Under the FCC's rules, a broadband PCS licensee may own combinations of licenses (E.G., one MTA (30 MHz) and one BTA (10 MHz)) with total aggregate spectrum coverage of up to 40 MHz in a single geographic area. Cellular licensees are restricted from holding attributable interests in 30 MHz PCS licenses for PCS service areas which significantly overlap their cellular service areas. When mutually exclusive applications are filed for the same MTA or BTA, those licenses will be awarded pursuant to auctions. The FCC has adopted comprehensive rules that outline the bidding process, describe the bidding application and payment process, establish penalties for certain bid withdrawals, default or disqualification and establish regulatory safeguards. On June 23, 1995, the Chief of the Wireless Telecommunications Bureau ("Bureau") of the FCC granted to subsidiaries of APT eight A and B block broadband PCS authorizations in an order in which, at the culmination of the A and B block auction, the FCC issued a total of 99 such initial authorizations. APT has paid its winning bid amount to the United States Treasury. An appeal has been taken to the FCC from the Bureau order by a party alleging that some of the authorizations were granted to parties which had engaged in collusion in the lottery. That party has also sought review of the denial of its motion for a stay of the grant of A and B block authorizations. No allegation of collusion was made against TDS or APT. A late-filed request for recision of the Bureau order was filed by a denied applicant for an authorization for New York City, which is not one of the markets for which APT holds authorizations. APT would defend vigorously any challenges to the authorizations it has been granted. On November 9, 1995, in CINCINNATI BELL TELEPHONE CO. V. FCC (Case No. 94-3701/4113), the United States Court of Appeals for the Sixth Circuit granted two petitions for review of an FCC order that had barred certain common ownership of cellular and PCS interests in the same market, and remanded the case to the FCC for further proceedings. Neither of the two petitioners had been barred by cross interests from applying for any of the authorizations the FCC later granted to APT. APT is watching the FCC proceedings closely. In compliance with FCC restrictions on common ownership of cellular and broadband PCS interests in overlapping market areas, United States Cellular, another subsidiary of TDS, entered into a series of arrangements for the divestiture or restructuring of certain of its cellular interests in market areas where APT was awarded broadband PCS licenses. A number of these proposed arrangements required FCC approval of assignment or transfer of control applications before they could be consummated. Many of these applications have been approved by the FCC and are either consummated or awaiting consummation. Certain applications filed by United States Cellular have been opposed and remain pending. APT believes that it has taken reasonable steps to comply with the FCC's cross-interest policies. There can be no assurance that the FCC will not raise questions regarding these compliance efforts. The grants of licenses to APT are also conditioned upon timely compliance with the FCC's buildout requirements, I.E., coverage of one-third of the population of a PCS market within five years of initial license grant and coverage of two-thirds of that population within ten years. A significant factor affecting the schedule and cost of APT's network implementation will be the relocation of existing private microwave facilities which operate on the same frequencies to be used for APT's broadband PCS operations. Under the FCC's policies, if APT decides that any existing microwave facility must be relocated, it is required to provide substitute facilities at its own expense so that the companies using these existing facilities may continue to have access to the same or equivalent communications capabilities. The FCC has pending proceedings to decide whether permissible relocation costs should be limited, whether the pace of negotiations between broadband PCS licensees and affected private microwave licensees should be accelerated and whether new procedures should be adopted for the 38 sharing of relocation costs where the relocation of private microwave facilities benefits multiple broadband PCS licensees. Regardless of the outcome of the FCC pending proceedings, APT expects to proceed with construction so that these requirements will be met. The FCC licenses granted to APT are issued for a ten-year period expiring June 23, 2005 and may be renewed. In the event challengers file competing applications in response to any of APT's renewal filings, the FCC has rules and policies providing that the application of the licensee seeking renewal will be granted and the application of the challenger will not be considered in the event that the broadband PCS licensee involved has (i) provided "substantial" performance, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal" and (ii) substantially complied with FCC rules, policies and the Communications Act. Although APT is unaware of any circumstances which would prevent the approval of any future renewal applications, there can be no assurance that APT's licenses will be renewed by the FCC in the future. Moreover, although revocation and involuntary modification of licenses are extraordinary regulatory measures, the FCC has the authority to restrict the operation of licensed facilities or revoke or modify licenses. The FCC has proceedings in process which could open up other frequency bands for wireless telecommunications and PCS-like services. There can be no assurance that such proceedings will not result in additional wireless competitors. In addition, the FCC has pending proceedings to address various forms of interconnection obligations which could affect broadband PCS and other wireless service providers. In its mutual compensation proceedings, the FCC is examining its policies regarding the compensation arrangements which apply when wireless providers, including broadband PCS providers, interconnect with LECs. In a different part of the same proceeding, the FCC is considering whether to rely upon private negotiations between wireless providers to determine whether direct interconnections between wireless networks should occur. The FCC is also considering whether private negotiations should be the preferred basis for wireless providers to permit the customers of one such provider to obtain service while roaming in the service area of the other. In related parts of the foregoing proceedings, the FCC is trying to decide whether to require all wireless providers to provide capacity to non-facilities based resellers, whether wireless licensees should be permitted to resell capacity acquired from other wireless providers in the markets where they hold licenses at least during an initial startup period and whether wireless providers should be required to offer unbundled communications capacity to resellers who intend to operate their own switching facilities. The FCC also has proceedings regarding the expansion of the permissible uses of broadband PCS networks to provide wireless local loop and other fixed services in competition with the wireline offerings of the LECs. It is also considering the possible adoption of requirements on broadband PCS and other providers of real-time voice services to implement enhanced 911 capabilities within some number of years after the FCC's decision. In addition, there are citizenship requirements, assignment requirements and other federal regulations and requirements which may affect the business of APT. See also "Telephone Operations -- Telecommunications Act of 1996." STATE AND LOCAL REGULATION. The scope of state regulatory authority covers such matters as the terms and conditions of interconnection between LECs and wireless carriers with respect to intrastate services, customer billing information and practices, billing disputes, other consumer protection matters, facilities construction issues, transfers of control, the bundling of services and equipment and requirements relating to the availability of capacity on a wholesale basis. In these areas, particularly the terms and conditions of interconnection between LECs and wireless providers, the FCC and state regulatory authorities share regulatory responsibilities with respect to interstate and intrastate issues, respectively. APT and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and before state regulatory authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have significant impacts on the competitive market 39 structure among wireless providers and the relationships between wireless providers and other carriers. APT is unable to predict the scope, pace, or financial impact of policy changes which could be adopted in these proceedings. OTHER SUBSIDIARIES Subsidiaries of the Company provide data processing and related services (TDS Computing Services, Inc.); graphic communications services (Suttle Press, Inc.); and telemessaging services (Integrated Communications Services, Inc.). EMPLOYEES The Company enjoys satisfactory employee relations. As of December 31, 1995, 6,363 persons were employed by the Company, 149 of whom are represented by unions. - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES The property of TDS consists principally of switching and cell site equipment related to cellular telephone operations; telephone lines, central office equipment, telephone instruments and related equipment, and land and buildings related to telephone operations; and radio pagers and transmitting equipment related to radio paging operations. As of December 31, 1995, TDS's gross property, plant and equipment of approximately $2.0 billion consisted of the following: Cellular telephone........................... 35.2 Telephone.................................... 55.2 Radio paging................................. 5.2 PCS.......................................... .6 Other........................................ 3.8 ------ 100.0 % ------ ------
The plant and equipment of TDS is maintained in good operating condition and is suitable and adequate for the Company's business operations. The properties of the operating telephone subsidiaries and most of the tangible assets of the cellular subsidiaries are subject to the lien of the mortgages securing the funded debt of such companies. The Company owns substantially all of its central office buildings, local administrative buildings, warehouses, and storage facilities used in its telephone operations and leases most of its offices and transmitter sites used in its cellular and paging businesses. All of the Company's telephone lines and cell and transmitter sites are located either on private or public property. Locations on private land are by virtue of easements or other arrangements. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS The Company is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain landline or cellular telephone systems and other interests. The Company does not believe that any such proceeding should have a material adverse impact on the Company. - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1995. 40 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Exhibit 13, Annual Report sections entitled "TDS Stock and Dividend Information" and "Market Price per Common Share by Quarter." - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from Exhibit 13, Annual Report section entitled "Selected Consolidated Financial Data," except for ratios of earnings to fixed charges, which are incorporated herein by reference from Exhibit 12 to this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from Exhibit 13, Annual Report sections entitled "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)," and "Report of Independent Public Accountants." - -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 41 - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from Proxy Statement sections entitled "Election of Directors" and "Executive Officers." - -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from Proxy Statement section entitled "Executive Compensation" except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. - -------------------------------------------------------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from Proxy Statement sections entitled "Security Ownership of Management" and "Principal Shareholders." - -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from Proxy Statement section entitled "Certain Relationships and Related Transactions." 42 - -------------------------------------------------------------------------------- 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 46 I. Condensed Financial Information of Registrant-Balance Sheets as of December 31, 1995 and 1994 and Statements of Income and Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 1995.............. page 47 II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1995.................................................... page 51 Los Angeles SMSA, Nashville/Clarksville MSA, and Baton Rouge MSA Limited Partnership Combined Financial Statements....................................... page 52 Compilation Report of Independent Public Accountants on Combined Financial Statements..................................................... page 53 Reports of Other Independent Accountants................................... page 54 Combined Statements of Operations (Unaudited).............................. page 60 Combined Balance Sheets (Unaudited)........................................ page 61 Combined Statements of Cash Flows (Unaudited).............................. page 62 Combined Statements of Changes in Partners' Capital (Unaudited)............ page 63 Notes to Unaudited Combined Financial Statements........................... page 64 All other schedules have been omitted because they are not applicable or not required because the required information is shown in the financial statements or notes thereto.
43 (3) Exhibits The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this Report.
EXHIBIT NUMBER DESCRIPTION - ------------------------------------------------------------------------------------------------------------ 10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984 is hereby incorporated by reference to the Company's Registration Statement on Form S-2, No. 2-92307. 10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981 is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-7, No. 2-74615. 10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated May 28, 1991 is hereby incorporated by reference to Exhibit 10.2(b) to the Company's Annual Report Form 10-K for the year ended December 31, 1991. 10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson is hereby incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the Company and LeRoy T. Carlson, Jr., is hereby incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.5 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company and James Barr III, is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.6(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby incorporated by reference to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated March 31, 1988. 10.6(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby incorporated by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.6(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby incorporated by reference to Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.7 1985 Incentive Stock Option Plan of the Company is hereby incorporated by reference to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 24, 1986. 10.8(a) Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.8(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.8(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.8(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.4 to the Company Registration statement on Form S-8 (Registration No. 33-57257).
44
EXHIBIT NUMBER DESCRIPTION - ------------------------------------------------------------------------------------------------------------ 10.8(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.9 Supplemental Executive Retirement Plan of the Company is hereby incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.10 Deferred Compensation Agreement for Rudolph E. Hornacek dated November 30, 1995.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1995. TDS filed a Current Report on Form 8-K on October 3, 1995 dated September 28, 1995, which included a press release that announced that an FCC administrative law judge issued a ruling finding the Company and United States Cellular Corporation fully qualified to be FCC licensees. The decision favorably resolved candor issues raised in the La Star and Wisconsin RSA 8 (Vernon) matters. 45 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Shareholders and Board of Directors of Telephone and Data Systems, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Telephone and Data Systems, Inc. and Subsidiaries Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 6, 1996 (except with respect to the matter discussed in Note 17, as to which the date is February 20, 1996). Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedules listed in Item 14(a)(2) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois February 6, 1996 (except with respect to the matter discussed in Note 17, as to which the date is February 20, 1996) 46 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) BALANCE SHEETS ASSETS - --------------------------------------------------------------------------------
DECEMBER 31, ---------------------- (DOLLARS IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 383 $ 291 Temporary investments 99 184 Notes receivable from affiliates 55,156 189,820 Advances to affiliates 1,816 22,016 Accounts receivable Due from subsidiaries--Income taxes 27,058 7,682 Due from subsidiaries--Other 19,897 8,624 Other 3,163 2,555 Other current assets 518 650 ---------------------- 108,090 231,822 - ------------------------------------------------------------------------------------------- INVESTMENT IN SUBSIDIARIES Underlying book value 2,133,492 1,605,813 Cost in excess of underlying book value at date of acquisition 1,987 1,907 ---------------------- 2,135,479 1,607,720 - ------------------------------------------------------------------------------------------- OTHER INVESTMENTS Minority interests in telephone and cellular companies and other investments 28,103 31,648 - ------------------------------------------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES Debt issuance expenses 2,175 2,027 Development and acquisition expenses 1,703 599 Other 5,884 7,239 ---------------------- 9,762 9,865 - ------------------------------------------------------------------------------------------- $2,281,434 $1,881,055 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 47 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
DECEMBER 31, ---------------------- (DOLLARS IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt and preferred stock $ 13,251 $ 13,053 Notes payable 180,760 97,629 Notes payable to affiliates 30,086 2,852 Advances from affiliates 2,464 345 Accounts payable Due to subsidiaries--Federal income taxes 14,405 5,959 Due to subsidiaries--Other 31,317 1,395 Other 1,549 811 Accrued interest 10,733 9,234 Accrued taxes (6,837) (2,124) Other 3,951 3,427 ---------------------- 281,679 132,581 - ------------------------------------------------------------------------------------------- DEFERRED LIABILITIES AND CREDITS Investment tax credits (1,934) (1,694) Income taxes 20,065 14,368 Postretirement benefits obligation other than pensions 11,216 12,067 Other 7,920 3,903 ---------------------- 37,267 28,644 - ------------------------------------------------------------------------------------------- LONG-TERM DEBT, excluding current portion (Note B) 242,458 203,764 - ------------------------------------------------------------------------------------------- REDEEMABLE PREFERRED SHARES, excluding current portion (Note A) 2,260 13,209 - ------------------------------------------------------------------------------------------- NONREDEEMABLE PREFERRED SHARES 29,710 29,819 - ------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding 51,137,426 and 47,937,570 shares, respectively 51,137 47,938 Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,893,101 and 6,886,684 shares, respectively 6,893 6,887 Common Shares issuable, 31,431 and 41,908 shares, respectively 1,496 1,995 Capital in excess of par value 1,417,513 1,288,453 Retained earnings 211,021 127,765 ---------------------- 1,688,060 1,473,038 - ------------------------------------------------------------------------------------------- $2,281,434 $1,881,055 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 48 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) STATEMENTS OF INCOME - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------- (DOLLARS IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------------------------- Operating service revenues $ 21,863 $ 17,402 $ 17,179 Cost of sales and operating expenses 21,827 18,189 17,109 ------------------------------- Net operations 36 (787) 70 ------------------------------- Other income Interest income received from affiliates 26,179 13,840 27,333 Other, net (4,490) (1,507) (1,128) ------------------------------- 21,689 12,333 26,205 ------------------------------- Income before interest and income taxes 21,725 11,546 26,275 Interest expense 31,371 22,107 18,934 Federal income tax expense (credit) 6,433 1,411 (2,602) ------------------------------- Corporate operations (16,079) (11,972) 9,943 Equity in net income of subsidiaries and other investments 124,852 71,793 23,953 ------------------------------- Net income $ 108,773 $ 59,821 $ 33,896 - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
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 $13.5 million, $1.3 million, $79,000, $79,000 and $78,000 for the years 1996 through 2000, respectively. Note B: The annual requirements for principal payments on long-term debt are $336,000, $394,000, $476,000, $372,000 and $309,000 for the years 1996 through 2000, respectively.
49 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - -------------------------------------------------------------------------------- Telephone and Data Systems, Inc. (Parent) STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------------------- (DOLLARS IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 108,773 $ 59,821 $ 33,896 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,237 1,080 2,547 Gain on sale of investments (408) -- -- Deferred taxes 5,457 8,572 4,563 Equity income (124,852) (71,793) (23,953) Other noncash expense 1,316 691 6 Change in accounts receivable (32,359) 1,859 1,076 Change in accounts payable 39,106 1,769 (4,603) Change in accrued taxes (4,713) (4,587) 2,463 Change in other assets and liabilities 3,459 (1,236) 2,689 ------------------------------------------- (2,984) (3,824) 18,684 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 38,908 (130) 91,601 Repayment of long-term debt (1,349) (1,611) (11,935) Change in notes payable 83,131 91,629 (40,140) Change in notes payable to affiliates 27,235 1,034 (175) Change in advances from affiliates 2,118 (3) -- Common stock issued 8,078 11,185 109,972 Redemption of preferred shares (9,609) (644) (220) Dividends paid (23,971) (20,906) (17,830) ------------------------------------------- 124,541 80,554 131,273 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions Value of assets acquired (129,005) (215,658) (331,225) Common Shares issued 127,836 173,658 281,605 Preferred Shares issued -- 12,500 3,000 ------------------------------------------- Net cash paid for acquisitions (1,169) (29,500) (46,620) Proceeds from sale of investments 4,800 -- -- Investments in subsidiaries (302,722) (527) (126,108) Dividends from subsidiaries 17,690 17,373 16,266 Other investments (198) (3,058) 1,424 Change in notes receivable from affiliates 139,849 (64,850) 28,040 Change in advances to affiliates 20,200 (20,400) 1,073 Change in temporary investments 85 (128) 114 ------------------------------------------- (121,465) (101,090) (125,811) - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 92 (24,360) 24,146 CASH AND CASH EQUIVALENTS-- Beginning of period 291 24,651 505 ------------------------------------------- End of period $ 383 $ 291 $ 24,651 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual Report, are an integral part of these statements. 50 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
COLUMN A DESCRIPTION COLUMN B COLUMN C-1 COLUMN C-2 COLUMN E - ---------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER COLUMN D END OF (DOLLARS IN THOUSANDS) PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ------------ ------------ ------------ ----------- ------------ FOR THE YEAR ENDED DECEMBER 31, 1995 Deducted from deferred state tax asset: For unrealized net operating losses $ (8,962) 3,905 (5,004) -- (10,061) Deducted from accounts receivable: For doubtful accounts (2,785) (16,648) -- 14,329 (5,104) FOR THE YEAR ENDED DECEMBER 31, 1994 Deducted from deferred state tax asset: For unrealized net operating losses (8,704) 327 (585) -- (8,962) Deducted from accounts receivable: For doubtful accounts (2,093) (9,710) -- 9,018 (2,785) Deducted from marketable equity securities: For unrealized loss (626) -- 626 -- -- FOR THE YEAR ENDED DECEMBER 31, 1993 Deducted from deferred state tax asset: For unrealized net operating losses (6,452) -- $ (2,252) -- $ (8,704) Deducted from accounts receivable: For doubtful accounts (1,608) (5,837) -- 5,352 (2,093) Deducted from marketable equity securities: For unrealized loss $ -- $ -- $ (626) $ -- $ (626) - -------------------------------------------------------------------------------------------------------------------------------
51 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED FINANCIAL STATEMENTS The following financial statements are the combined financial statements of the cellular system partnerships listed below which are accounted for by the Company following the equity method. The combined financial statements were compiled from financial statements and other information obtained by the Company as a limited partner of the cellular limited partnerships listed below. The cellular system partnerships included in the combined financial statements, the periods each partnership is included, and the Company's ownership percentage of each cellular system partnership at December 31, 1995 are set forth in the following table.
PERIODS THE INCLUDED COMPANY'S IN LIMITED COMBINED PARTNERSHIP CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST - --------------------------------------------------------- -------- ----------- Los Angeles SMSA Limited Partnership..................... 1993-95 5.5% Nashville/Clarksville MSA Limited Partnership............ 1993-95 49.0% Baton Rouge MSA Limited Partnership...................... 1993-95 52.0%
52 COMPILATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of TELEPHONE AND DATA SYSTEMS, INC.: The accompanying combined balance sheets of the Los Angeles SMSA Limited Partnership, the Nashville/Clarksville MSA Limited Partnership and the Baton Rouge MSA Limited Partnership as of December 31, 1995 and 1994 and the related combined statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1995, have been prepared from the separate financial statements, which are not presented separately herein, of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, as described in Note 1. We have reviewed for compilation only the accompanying combined financial statements, and, in our opinion, those statements have been properly compiled from the amounts and notes of the underlying separate financial statements of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, on the basis described in Note 1. The statements for the Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships were audited by other auditors as set forth in their reports included on pages 54 through 59. We have not been engaged to audit either the separate financial statements of the aforementioned limited partnerships or the related combined financial statements in accordance with generally accepted auditing standards and to render an opinion as to the fair presentation of such financial statements in accordance with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois February 9, 1996 53 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of LOS ANGELES SMSA LIMITED PARTNERSHIP: In our opinion, the balance sheet and the related statements of income, partner's capital and of cash flows and the financial statement schedule II -- valuation and qualifying accounts present fairly, in all material respects, the financial position of Los Angeles SMSA Limited Partnership at December 31, 1995, and the results of its operations and its cash flows for the year in conformity with generally accepted accounting principles. These financial statements, which are not presented separately herein, are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Francisco, California January 25, 1996 54 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of LOS ANGELES SMSA LIMITED PARTNERSHIP: We have audited the balance sheets of Los Angeles SMSA Limited Partnership as of December 31, 1994, and the related statements of operations, partners' capital and cash flows for each of the two years in the period ended December 31, 1994; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Los Angeles SMSA Limited Partnership as of December 31, 1994, and results of its operations and its cash flows for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Newport Beach, California February 17, 1995 55 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1995, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 9, 1996 To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1994, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 10, 1995 56 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Nashville/Clarksville MSA Limited Partnership as of December 31, 1993, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nashville/Clarksville MSA Limited Partnership as of December 31, 1993, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1994 57 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1995, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 9, 1996 To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1994, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 10, 1995 58 REPORTS OF OTHER INDEPENDENT ACCOUNTANTS To The Partners of BATON ROUGE MSA LIMITED PARTNERSHIP: We have audited the balance sheet of Baton Rouge MSA Limited Partnership as of December 31, 1993, and the related statements of income, changes in partners' capital and cash flows for the year then ended; such financial statements are not included separately herein. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baton Rouge MSA Limited Partnership as of December 31, 1993, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND Atlanta, Georgia February 11, 1994 59 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Revenues................................................................... $ 811,933 $ 648,896 $ 515,228 Expenses Selling, general and administrative...................................... 460,048 370,938 296,499 Depreciation and amortization............................................ 71,748 66,234 57,357 ----------- ----------- ----------- Total expenses........................................................... 531,796 437,172 353,856 ----------- ----------- ----------- Operating income........................................................... 280,137 211,724 161,372 Other income............................................................... 985 573 272 ----------- ----------- ----------- Net Income................................................................. $ 281,122 $ 212,297 $ 161,644 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. 60 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED BALANCE SHEETS (UNAUDITED) ASSETS
DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Current Assets Cash.................................................................................. $ 214 $ 38 Accounts receivable--customers, net................................................... 116,966 95,630 Accounts receivable--affiliates....................................................... 14,830 16,016 Notes receivable--affiliates.......................................................... 8,860 402 Other current assets.................................................................. 11,801 18,523 ----------- ----------- 152,671 130,609 Notes Receivable--Other................................................................. 3,184 -- Property, Plant and Equipment, net...................................................... 564,564 380,473 Other................................................................................... 23,715 1,640 ----------- ----------- Total Assets............................................................................ $ 744,134 $ 512,722 ----------- ----------- ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Current Liabilities Accounts payable--other............................................................... $ 53,526 $ 58,210 Accounts payable--affiliates.......................................................... -- 1,431 Notes payable......................................................................... 5,084 692 Customer deposits..................................................................... 3,311 4,060 Other current liabilities............................................................. 50,191 39,323 ----------- ----------- 112,112 103,716 Other Liabilities....................................................................... 5,788 5,539 Partners' Capital....................................................................... 626,234 403,467 ----------- ----------- Total Liabilities and Partners' Capital................................................. $ 744,134 $ 512,722 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. 61 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
DECEMBER 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................ $ 281,122 $ 212,297 $ 161,644 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization....................................... 71,748 66,234 57,357 Deferred revenue and other credits.................................. (966) 1,387 497 Loss on asset dispositions.......................................... 3,021 3,542 3,838 Change in accounts receivable....................................... (19,523) (9) (37,422) Change in accounts payable and accrued expenses..................... (3,587) 25,527 6,119 Change in other assets and liabilities.............................. 15,185 (2,069) 4,286 ------------ ------------ ------------ 347,000 306,909 196,319 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Change in notes payable............................................. 4,392 692 -- Change in notes receivable.......................................... (7,355) 3,354 (5) Capital contribution................................................ 5,096 -- -- Capital distribution................................................ (72,017) (166,300) (111,461) ------------ ------------ ------------ (69,884) (162,254) (111,466) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment, net of retirements...... (254,629) (143,807) (86,011) (Increases) decreases in other assets............................... (21,573) (44) 1,335 Change in deferred charges.......................................... (738) (827) (202) Proceeds from sale of assets........................................ -- 34 26 ------------ ------------ ------------ (276,940) (144,644) (84,852) ------------ ------------ ------------ NET INCREASE IN CASH.................................................... 176 11 1 CASH Beginning of period................................................. 38 27 26 ------------ ------------ ------------ End of period....................................................... $ 214 $ 38 $ 27 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these combined financial statements. 62 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, 1993...................................................... $ 307,287 Distributions................................................................. (111,461) Net Income for the year ended December 31, 1993............................... 161,644 --------- Balance at December 31, 1993.................................................... 357,470 Distributions................................................................. (166,300) Net Income for the year ended December 31, 1994............................... 212,297 --------- Balance at December 31, 1994.................................................... 403,467 Contributions................................................................. 13,662 Distributions................................................................. (72,017) Net Income for year ended December 31, 1995................................... 281,122 --------- Balance at December 31, 1995.................................................... $ 626,234 --------- ---------
The accompanying notes are an integral part of these combined financial statements. 63 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 1. BASIS OF COMBINATION: The combined financial statements and notes thereto were compiled from the individual financial statements of cellular limited partnerships listed below in which United States Cellular Corporation (AMEX symbol "USM") has a non-controlling ownership interest and which it accounts for using the equity method. The cellular partnerships, the period each partnership is included in the combined financial statements and USM's ownership interest in each partnership are set forth in the table below. The combined financial statements and notes thereto present 100% of each partnership whereas USM's ownership interest is shown in the table.
PERIOD INCLUDED LIMITED IN COMBINED PARTNERSHIP STATEMENTS INTEREST --------------- ------------- Los Angeles SMSA Limited Partnership................................................................ 1993-95 5.5% Nashville/Clarksville MSA Limited Partnership....................................................... 1993-95 49.0% Baton Rouge MSA Limited Partnership................................................................. 1993-95 52.0%
Profits, losses and distributable cash are allocated to the partners based upon respective partnership interests. Distributions are made quarterly at the discretion of the General Partner for one of the Partnerships. Of the partnerships included in the combined financial statements, the Los Angeles SMSA Limited Partnership is the most significant, accounting for approximately 86% of the combined total assets at December 31, 1995, and substantially all of the combined net income for the year then ended. USM's investment in and advances to Los Angeles SMSA Limited Partnership totaled $27,784,000 as of December 31, 1995, of which $29,282,000 represents its proportionate share of net assets of the Partnership. USM's investment in and advances to the Nashville/Clarksville MSA Limited Partnership totaled $25,889,000 as of December 31, 1995, of which $29,957,000 represents its proportionate share of net assets. USM's investment in and advances to the Baton Rouge MSA Limited Partnership totaled $19,723,000 as of December 31, 1995, $16,993,000 of which represents its proportionate share of net assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR COMBINED ENTITIES: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated lives: Buildings.............................................. 10-15 years Equipment.............................................. 3-10 years Furniture and Fixtures................................. 5-10 years Leasehold Improvements................................. 10 years
Effective January 1, 1995, one of the Partnerships changed its estimate of the useful lives of certain telecommunications equipment from 7 to 10 years. The change in estimate had the effect of reducing depreciation expense and increasing net income by approximately $14,844,000 for 1995. 64 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, ------------------------ 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Land.................................................................................... $ 3,974 $ 2,987 Buildings and Leasehold Improvements.................................................... 149,644 100,312 Equipment............................................................................... 580,810 432,949 Furniture and Fixtures.................................................................. 58,580 33,602 Under Construction...................................................................... 80,665 55,176 ----------- ----------- 873,673 625,026 Less Accumulated Depreciation........................................................... 309,109 244,553 ----------- ----------- $ 564,564 $ 380,473 ----------- ----------- ----------- -----------
Included in buildings are costs relating to the acquisition of cell site leases; such as legal, consulting, and title fees. Lease acquisition costs are capitalized when incurred and amortized over the period of the lease. Costs related to unsuccessful negotiations are expensed in the period the negotiations are terminated. Gains and losses on disposals are included in income at amounts equal to the difference between net book value and proceeds received upon disposal. On January 10, 1994, one of the Partnerships entered into an agreement with its major supplier to purchase $77 million in equipment. At December 31, 1995, approximately $22 million in equipment had been purchased by the Partnership under the agreement. OTHER CURRENT ASSETS Other current assets includes inventory consisting primarily of cellular phones and accessories held for resale stated at average cost. Consistent with industry practice, losses on sales of cellular phones are recognized in the period in which sales are made as a cost of acquiring subscribers. REVENUE RECOGNITION Revenues from operations primarily consist of charges to customers for monthly access charges, cellular airtime usage, and roamer charges. Revenues are recognized as services are rendered. Unbilled revenues, resulting from cellular service provided from the billing cycle date to the end of each month and from other cellular carriers' customers using the partnership's cellular systems for the last half of each month, are estimated and recorded as receivables. Unearned monthly access charges and bundled service packages relating to the periods after month-end are deferred and netted against accounts receivable and recognized the following month when services are provided. INCOME TAXES No provisions have been made for federal or state income taxes since such taxes, if any, are the responsibility of the individual partners. ADVERTISING Advertising costs are expensed as incurred. The advertising expense for 1995 was $42,046,000. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 65 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Under SFAS 121, the Partnerships are required to evaluate long-lived assets and certain identifiable intangible assets, including fixed assets, for impairment whenever events or changes in circumstances indicate that the book value of an asset may not be recoverable. An impairment loss should be recognized whenever the review demonstrates that the book value of a long-lived asset is not recoverable. The Partnerships do not expect the implementation of SFAS 121, adopted effective January 1, 1996, to have a material impact on its financial condition or results of operations. RECLASSIFICATIONS Certain reclassifications of the 1994 and 1993 financial statements of one of the Partnerships have been made to conform to the 1995 presentation. The reclassifications have not affected previously reported net income or partners' capital. 3. LEASE COMMITMENTS: Future minimum rental payments required under operating leases for real estate that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1995, are as follows: (DOLLARS IN THOUSANDS) 1996............................................................. $ 20,063 1997............................................................. 18,723 1998............................................................. 17,992 1999............................................................. 16,563 2000............................................................. 13,409 Thereafter....................................................... 20,076 --------- $ 106,826 --------- ---------
The initial lease terms generally range from 5 to 25 years with the majority of them having initial terms of 10 years and providing for one renewal option of 5 years and for rental escalation. Included in selling, general and administrative expense are rental costs of $17,455,000, $17,750,000 and $15,119,000 for the years ended December 31, 1995, 1994, and 1993, respectively. One of the Partnerships leases office facilities under a ten-year lease agreement which provides for free rent incentives for six months and rent escalation over the ten-year period. The Partnership recognizes rent expense on a straight-line basis and recorded the related deferred rent as a noncurrent liability to be amortized as an adjustment to rental costs over the life of the lease. 4. SUPPLEMENTAL CASH FLOW INFORMATION On November 1, 1995, one of the Partners of one of the Partnerships contributed a note receivable of $3,152,000 (Note 5) and other assets of $104,000 and the assets and liabilities of other RSA interests totaling $6,018,000. All assets and liabilities were recorded at their historical net book value. The contribution of the note receivable and the combined properties is reflected in the Statement of Changes in Partners' Capital. During 1995, one of the Partnerships replaced and upgraded certain of its cellular equipment with new cellular technology which supports both analog and digital voice transmissions. In connection with this equipment upgrade, the Partnership traded-in cellular equipment with a net book value of $3,704,000 for new cellular equipment with a cost of $6,250,000. The remaining balance was funded through the credit facility with its General Partner. 66 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) 5. RELATED PARTY TRANSACTIONS: Certain affiliates of these cellular limited partnerships provide services for the system operations, legal, financial, management and administration of these entities. These affiliates are reimbursed for both direct and allocated costs (totaling $59.5 million in 1995, $57.6 million in 1994 and $57.1 million in 1993) related to providing these services. In addition, certain affiliates have established a credit facility with certain partnerships to provide working capital to the partnership. One of the partnerships participates in a centralized cash management arrangement with its general partner. At December 31, 1995 and 1994, the interest-bearing balance amounted to $14,830,000 and $16,016,000, respectively. Effective January 1, 1989, the general partner pays or charges the Partnership monthly interest, computed using the general partner's average borrowing rate, on the amounts due to or from the Partnership. Interest earned in 1995, 1994 and 1993 was $785,000, $1,480,000 and $1,294,000, respectively. One of the Partnerships has a note receivable from its General Partner with a balance of $3,152,000 and accrued interest of $32,000 at December 31, 1995. The note bears interest at 12% per annum, compounded quarterly with all principal and interest due at maturity on May 10, 1997. The note was contributed to the Partnership by its General Partner during 1995 (Note 4). 6. ACCOUNTS RECEIVABLE Accounts receivable of one of the partnerships consists of:
DECEMBER 31 ------------------------- 1995 1994 ------------ ----------- Retail......................................................................... $ 83,682 $ 63,626 Wholesale...................................................................... 17,660 14,557 Intercarrier and other......................................................... 9,437 9,280 ------------ ----------- 110,779 87,463 Allowance for doubtful accounts................................................ (8,719) (3,033) ------------ ----------- $ 102,060 $ 84,430 ------------ ----------- ------------ -----------
Accounts receivable are derived from revenues earned from customers located in the Partnership's metropolitan serving area. The Partnership performs ongoing credit evaluations of its customers and in certain circumstances obtains refundable deposits. The Partnership maintains reserves for potential credit losses; historically, such losses have been within management's expectations. The carrying value of accounts receivable approximates fair value. Two of the Partnerships provide cellular service and sell cellular telephones to diversified groups of consumers within concentrated geographical areas. The general partner performs credit evaluations of the Partnerships' customers and generally does not require collateral. Receivables are generally due within 30 days. Credit losses related to customers have been within management's expectations. 7. REGULATORY MATTERS: On December 21, 1993, the California Public Utilities Commission ("CPUC") issued an Order Instituting Investigation into the regulation of mobile telephone service and wireless communications. The investigation proposes a regulatory program which would encompass all forms of mobile telephone services. In 1993, the U.S. Congress passed legislation prohibiting state and local governments from regulating the rates for commercial mobile radio services ("CMRS"), including cellular service. States with rate regulation in place on June 1, 1993, including California, were given the opportunity to petition the Federal Communications Commission ("FCC") for continuation of such authority. The CPUC filed such a petition with the FCC. The FCC denied the CPUC's petition in an interim decision issued in May 1995 and issued a final Order in August 1995 (the "Order"), thereby preempting the CPUC's authority over rates. As a consequence, one of the Partnerships withdrew its rate-related traiffs. 67 LOS ANGELES SMSA LIMITED PARTNERSHIP NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP BATON ROUGE MSA LIMITED PARTNERSHIP NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED) The CPUC is currently considering outstanding issues concerning its remaining jurisdiction over CMRS providers in recognition of the changes in federal law and the Order. Specifically, the CPUC is assessing changes to existing regulation in light of the preemption of rate and entry regulation and the scope of its residual authority to regulate "other terms and conditions" of services. Until the CPUC completes its assessment of its remaining regulatory authority, the effect, if any, of such regulation to the Partnership and its operating activities can not be determined. 8. CONTINGENCIES AND COMMITMENTS: A class action complaint was filed in November 1993 naming a partner of one of the partnerships as general partner of the Partnership. In April 1995, the Partnership was named as a necessary party to the action. The plaintiff alleged the Partnership conspired to fix the price of wholesale and retail cellular service in its metropolitan serving area market. The plaintiff alleged damages for the class "in a sum in excess of $100 million." The Partnership has answered the complaint and intends to defend itself vigorously. This case has been consolidated for purposes of discovery with two other class actions making identical price-fixing allegations. The case has been removed to federal court. The other cases have been stayed pending resolution of a motion to remand the case to state court. In addition, three non-class action antitrust cases brought by cellular agents making similar allegations were settled for immaterial amounts. In April 1995, a Federal class action complaint was dismissed on a motion for summary judgment. The dismissal was upheld on appeal. The Partnership does not believe that these proceedings will have a material adverse effect on the Partnership's financial position. In September 1995, a class action lawsuit was brought on behalf of all subscribers of the general partner of one of the Partnerships, including the Partnership's subscribers, regarding customer notification of the Partnership's practices with respect to billing for fractional minutes of service. No dispositive motions have been filed in the proceeding and discovery has not yet begun. The Partnership believes the lawsuit to be without merit. One of the Partnerships is a party to various other lawsuits arising in the ordinary course of business. Although the ultimate resolution of these proceedings cannot be ascertained, the Partnership's management does not believe they will have a materially adverse effect on the results of operations or financial position of the Partnership. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. By: /S/ LEROY T. CARLSON ------------------------------------------ LeRoy T. Carlson, CHAIRMAN By: /S/ LEROY T. CARLSON, JR. ------------------------------------------ LeRoy T. Carlson, Jr., PRESIDENT (CHIEF EXECUTIVE OFFICER) By: /S/ MURRAY L. SWANSON ------------------------------------------ Murray L. Swanson, EXECUTIVE VICE PRESIDENT-FINANCE (CHIEF FINANCIAL OFFICER) By: /S/ GREGORY J. WILKINSON ------------------------------------------ Gregory J. Wilkinson, VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
Dated March 21, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - -------------------------------------------------------------------- ----------- --------------------- /S/ LEROY T. CARLSON DIRECTOR March 21, 1996 ----------------------------------------------- LeRoy T. Carlson /S/ LEROY T. CARLSON, JR. DIRECTOR March 21, 1996 ----------------------------------------------- LeRoy T. Carlson, Jr. /S/ MURRAY L. SWANSON DIRECTOR March 21, 1996 ----------------------------------------------- Murray L. Swanson /S/ RUDOLPH E. HORNACEK DIRECTOR March 21, 1996 ----------------------------------------------- Rudolph E. Hornacek /S/ JAMES BARR III DIRECTOR March 21, 1996 ----------------------------------------------- James Barr III /S/ LESTER O. JOHNSON DIRECTOR March 21, 1996 ----------------------------------------------- Lester O. Johnson /S/ DONALD C. NEBERGALL DIRECTOR March 21, 1996 ----------------------------------------------- Donald C. Nebergall /S/ HERBERT S. WANDER DIRECTOR March 21, 1996 ----------------------------------------------- Herbert S. Wander /S/ WALTER C.D. CARLSON DIRECTOR March 21, 1996 ----------------------------------------------- Walter C.D. Carlson /S/ DONALD R. BROWN DIRECTOR March 21, 1996 ----------------------------------------------- Donald R. Brown /S/ ROBERT J. COLLINS DIRECTOR March 21, 1996 ----------------------------------------------- Robert J. Collins
- -------------------------------------------------------------------------------- INDEX TO EXHIBITS - --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2 dated December 20, 1994. 3.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2 dated December 20, 1994. 4.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2 dated December 20, 1994. 4.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2 dated December 20, 1994. 4.3 The Indenture and Supplemental Indentures for the Company's Series A, B, C, D, E and F Subordinated Debentures are not being filed as exhibits because the total authorized subordinated debentures do not exceed 10% of the total assets of the Company and its Subsidiaries. The Company agrees to furnish a copy of such Indentures and Supplemental Indentures if so requested by the Commission. 4.4 The Indenture between the Company and Harris Trust and Savings Bank, Trustee, dated February 1, 1991, under which the Company's Medium-Term Notes are issuable, is hereby incorporated by reference to the Company's Current Report on Form 8-K filed on February 19, 1991. 4.5 Revolving Credit Agreement, dated as of May 19, 1995, among TDS and the First National Bank of Boston, as agent, is hereby incorporated by reference to the registrant's Form 8-K dated May 19, 1995. 9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by reference to an exhibit to Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-12943. 9.1(b) Amendment dated as of May 9, 1991 to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is hereby incorporated by reference to Exhibit 9.1(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984 is hereby incorporated by reference to the Company's Registration Statement on Form S-2, No. 2-92307. 10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-7, No. 2-74615. 10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated as of May 28, 1991, is hereby incorporated by reference to Exhibit 10.2(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson, is hereby incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the Company and LeRoy T. Carlson, Jr., is hereby incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.5 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company and James Barr III, is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10.6(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by reference to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated March 31, 1988. 10.6(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.6(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by reference to Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 10.7 1985 Incentive Stock Option Plan of the Company, is hereby incorporated by reference to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 24, 1986. 10.8(a) Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.8(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.8(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.8(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.4 to the Company Registration statement on Form S-8 (Registration No. 33-57257). 10.8(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257). 10.9 Supplemental Executive Retirement Plan of the Company is hereby incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.10 Deferred Compensation Agreement for Rudolph E. Hornacek dated November 30, 1995. 10.11 Securities Loan Agreement, dated June 13, 1995, between TDS and Merrill Lynch & Co. is hereby incorporated by reference to Exhibit 99.1 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation. 10.12 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.2 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation. 10.13 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.3 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation.
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 10.14 LYONs Offering Agreement between TDS and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.4 to the Form 8-K dated June 16, 1995 of United States Cellular Corporation. 11 Statement regarding computation of per share earnings. 12 Statements regarding computation of ratios. 13 Incorporated portions of 1995 Annual Report to Security Holders. 21 List of Subsidiaries of the Company. 23.1 Consent of independent public accountants. 23.2 Consent of independent accountants. 27 Financial Data Schedules
EX-10.10 2 EXHIBIT 10.10 DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT, between TDS and RUDOLPH E. HORNACEK, entered into on November 30, 1995 (to supersede the Agreement dated August 28, 1995), by and between Rudolph E. Hornacek (hereinafter referred to as "Executive") and Telephone and Data Systems, Inc. (hereinafter referred to as "Company"), an Iowa Corporation, located at 30 North LaSalle Street, Suite 4000, Chicago, Illinois, 60602. WITNESSETH: WHEREAS, the Executive is now and will in the future be rendering valuable services to the Company, and the Company desires to assure the continued loyalty, service and counsel of the Executive; WHEREAS, the Executive desires to defer a portion of his monthly salary until retirement, resignation, disability or death; NOW, THEREFORE, in consideration of the covenants and agreements herein set forth, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. DEFERRED COMPENSATION ACCOUNT. The Company agrees to establish and maintain a book reserve (the "Deferred Compensation Account") for the purpose of measuring the amount of deferred compensation payable under this Agreement. Credits shall be made to the Deferred Compensation Account as follows: a) On September 30, 1995, and at the end of each month during the Executive's continued employment with the Company, there shall be deducted from the Executive's payroll check and credited to the Deferred Compensation Account the sum of $3,000.00. b) Commencing on October 31, 1995, and on the last day of each month thereafter during the Executive's continued employment with the Company, there shall be credited to the Deferred Compensation Account (before any amount is credited for the month then ending pursuant to paragraph 1(a)), interest, compounded monthly on the balance in the Deferred Compensation Account multiplied by the average 30-year Treasury Bond rate of interest (as published in the Wall Street Journal for the last day of the preceding month) plus 1.25% times 1/12 (monthly interest). Monthly reports which specify the amount credited to the Executive's Deferred Compensation Account during the previous month (amount deferred plus interest) and the then current balance, shall be provided to the Executive. 2. PAYMENT OF DEFERRED COMPENSATION. a) In the event the Executive terminates his employment for whatever reason ("Termination Event"), the Company will compute the balance in the Deferred Compensation Account as of the last day of the preceding month (the "Ending Balance"). In the event that the Executive becomes disabled, his employment shall for these purposes be deemed to terminate on the first day of the month which he begins to receive long term disability payments provided by the Company's insurance carrier (thus, the Ending Balance shall be computed as of the preceding month). Payment of deferred compensation under these events will be in accordance with the Executive's payment method election in paragraph 2(e). b) The Executive will elect the payment method for receiving his Ending Balance either in a lump sum or in an indicated number of installments. This determination will be made at the time of execution of the agreement in section 2(e). Any amendment changing the payment method to defer income over a longer period of time must be made at least two years prior to a Termination Event to be considered effective. c) In the event the Executive chooses the installment option, he will inform the Company of the number of installment he wishes to receive. The installments will be paid quarterly (not to exceed 20 quarters)commencing with the fifteenth day of the quarter following the quarter in which the Executive's service with the Company terminates. Installments will then be paid on the fifteenth day of each succeeding calendar quarter until the Ending Balance and accrued interest has been paid. d) If the Executive dies prior to the total distribution of the Ending Balance, the Company shall pay an amount equal to the then current balance including accrued interest in the Deferred Compensation Account. Such payment shall be made in a lump sum within 30 days following the Executive's death to the Executive's Designated Beneficiary (as hereinafter defined). However, if the Executive is married at the time of death, the Executive may designate (at the time of entering this agreement) that the payments specified in 2(c) continue to the spouse. If such spouse dies before all payments are made, the procedures in 3(a) and 3(b) shall apply. e) Payment of Deferred Compensation Election (Executive must choose one option): i) Lump sum distribution; or ----- ii) X Installment Method. The amount of each installment shall ----- be equal to one-twentieth (cannot be less than one- twentieth) of the Ending Balance plus accrued interest compounded monthly for the preceding calendar quarter. If the Executive does not fully complete the blanks shown in paragraph 2(e), it will be assumed that he has chosen the lump sum option. 3. DESIGNATION OF BENEFICIARIES. a) The Executive may designate a beneficiary to receive any amount payable pursuant to paragraph 2(c) (the "Designated Beneficiary") by executing or filing with the Company during his lifetime, a Beneficiary Designation in the form attached hereto. The Executive may change or revoke any such designation by executing and filing with the Company during his lifetime a new Beneficiary Designation. b) If any Designated Beneficiary pre-decease's the Executive, or if any corporation, partnership, trust or other entity which is a Designated Beneficiary is terminated or dissolved or becomes insolvent or is adjudicated bankrupt prior to the date of the Executive's death, or if the Executive fails to designate a beneficiary, then the following persons in the order set forth below shall receive the amount specified in paragraph 2(c) above: i) his wife, if she is living; otherwise ii) his then living descendants, per stirpes; and otherwise iii) his estate. 4. MISCELLANEOUS. a) The right of the Executive or any other person to any payment of benefits under this Agreement shall not be assigned, transferred, pledged or encumbered. b) If the Company shall find that any person to whom any amount is payable under this Agreement is unable to care for his/her affairs because of illness or accident, or is under any legal disability, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be made to the spouse, a child, a parent, or a brother or sister of such person, or to any party deemed by the Company to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Company may determine. Any such lump sum payment, as discussed in 2(d), shall be a complete discharge of the liability of the Company under this Agreement for such payment. c) This Agreement shall be construed in accordance with and governed by the laws of the State of Illinois. d) The Executive is considered to be a general unsecured creditor of the Company with regard to the deferred compensation amounts to which this Agreement pertains. e) The deferred amounts under this Agreement are unfunded for tax and ERISA purposes. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. TELEPHONE AND DATA SYSTEMS, INC. ("Company") By: /s/ LeRoy T. Carlson, Jr. ---------------------------------------- LEROY T. CARLSON, JR. RUDOLPH E. HORNACEK ("Executive") By: /s/ Rudolph E. Hornacek ---------------------------------------- EXECUTIVE EX-11 3 EX-11 EXHIBIT 11 TELEPHONE AND DATA SYSTEMS, INC. COMPUTATION OF EARNINGS PER COMMON SHARE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRIMARY EARNINGS Net Income before.............................................................. $ 103,978 Dividends on Preferred Shares.................................................. (1,934) Minority income adjustment assuming issuance of a subsidiary's issuable securities.................................................................... (271) --------- Net Income Available to Common................................................. $ 101,773 --------- --------- PRIMARY SHARES Weighted average number of Common and Series A Common Shares Outstanding....... 57,456 Additional shares assuming issuance of: Options and Stock Appreciation Rights........................................ 158 Convertible Preferred Shares................................................. 709 Common Shares Issuable....................................................... 33 --------- Primary Shares................................................................. 58,356 --------- --------- PRIMARY EARNINGS PER COMMON SHARE Net Income..................................................................... $ 1.74 --------- --------- FULLY DILUTED EARNINGS* Net Income..................................................................... $ 103,978 Dividends on Preferred Shares.................................................. (1,511) Minority income adjustment assuming issuance of a subsidiary's issuable securities.................................................................... -- --------- Net Income Available to Common................................................. $ 102,467 --------- --------- FULLY DILUTED SHARES Weighted average number of Common and Series A Common Shares Outstanding....... 57,456 Additional shares assuming issuance of: Options and Stock Appreciation Rights........................................ 157 Convertible Preferred Shares................................................. 1,109 Common Shares issuable....................................................... 33 --------- Fully Diluted Shares........................................................... 58,755 --------- --------- FULLY DILUTED EARNINGS PER COMMON SHARE Net Income..................................................................... $ 1.74 --------- --------- - --------- * This calculation is submitted in accordance with Securities Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EX-12 4 EX-12 EXHIBIT 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES FOR THE YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT RATIO AMOUNTS) EARNINGS: Income from Continuing Operations before Income Taxes.......................... $ 185,007 Add (Deduct): Minority Share of Losses................................................... (2,955) Earnings on Equity Method.................................................. (43,188) Distributions from Minority Subsidiaries................................... 9,062 Amortization of Non-Telephone Capitalized Interest......................... 11 Minority share of income in majority-owned subsidiaries that have fixed charges................................................................... 20,791 --------- 168,728 Add fixed charges: Consolidated interest expense.............................................. 50,492 Interest Portion (1/3) of Consolidated Rent Expense........................ 6,431 Amortization of debt expense and discount on indebtedness.................. 357 --------- $ 226,008 --------- --------- FIXED CHARGES: Consolidated interest expense.................................................. $ 50,492 Capitalized interest........................................................... 13,249 Interest Portion (1/3) of Consolidated Rent Expense............................ 6,431 Amortization of debt expense and discount on indebtedness...................... 357 --------- $ 70,529 --------- --------- RATIO OF EARNINGS TO FIXED CHARGES............................................... 3.20 --------- --------- Tax-Effected Redeemable Preferred Dividends.................................... $ 1,920 Fixed Charges.................................................................. 70,529 --------- Fixed Charges and Redeemable Preferred Dividends............................. $ 72,449 --------- --------- RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS............ 3.12 --------- --------- Tax-Effected Preferred Dividends............................................... $ 4,464 Fixed Charges.................................................................. 70,529 --------- Fixed Charges and Preferred Dividends........................................ $ 74,993 --------- --------- RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS....................... 3.01 --------- ---------
EX-13 5 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Telephone and Data Systems, Inc. ("TDS" or the "Company") provides high-quality telecommunications services to over 1.9 million consolidated cellular telephone, local telephone and radio paging customer units in 37 states and the District of Columbia. The accompanying financial statements present the results of operations of the Company's three primary businesses: United States Cellular Corporation [AMEX: "USM"], TDS Telecommunications Corporation ("TDS Telecom"), and American Paging, Inc. [AMEX: "APP"], as well as its developing personal communications services business, American Portable Telecom, Inc. ("American Portable") and TDS and its service subsidiaries. TDS's long-term business development strategy is to expand its operations through internal growth and acquisitions, and to explore and develop telecommunications businesses that management believes utilize TDS's expertise in customer-based telecommunications. CONSOLIDATED TDS reported net income available to common of $102.0 million, or $1.74 per share, in 1995, compared to $58.0 million, or $1.07 per share, in 1994 and $31.5 million, or $.67 per share, in 1993. Consolidated operating results for 1995 and 1994 primarily reflect: / / rapid growth in cellular customer units resulting in substantial increases in revenue, operating income and operating cash flows; / / steady growth in telephone access lines and revenues; / / slower growth in pagers served and higher operating costs coupled with a restructuring charge in the paging business unit resulting in a sharp decline in paging operating income for 1995; / / significant gains and cash proceeds from sales and trades of non- strategic cellular interests and other investments in 1995; and / / increased interest expense to finance continuing development of core cellular and telephone operations and expansion into personal communications services. Net income available to common for 1995 was boosted by significant gains from the sales of non-strategic cellular interests and other investments. Excluding these gains, along with the related impact on income taxes and minority interest, net income available to common would have been $61.4 million, or $1.05 per share, in 1995, compared to $52.2 million, or $.96 per share, in 1994 and $29.2 million, or $.62 per share, in 1993.
YEAR ENDED DECEMBER 31, 1995 1994 1993 ----------------------------------------------- (Dollars in millions, except per share amounts) NET INCOME AVAILABLE TO COMMON As Reported $ 102.0 $ 58.0 $ 31.5 Less Effects of Gains 40.6 5.8 2.3 -------------------------------------------- Excluding Gains $ 61.4 $ 52.2 $ 29.2 -------------------------------------------- -------------------------------------------- EARNINGS PER SHARE As Reported $ 1.74 $ 1.06 $ .67 Less Effects of Gains .69 .10 .05 -------------------------------------------- Excluding Gains $ 1.05 $ .96 $ .62 -------------------------------------------- --------------------------------------------
OPERATING REVENUES increased 31% ($223.6 million) during 1995 and 31% ($173.0 million) during 1994 primarily as a result of increases in customer units served. Consolidated cellular telephone, telephone and radio paging customer units increased 31% in 1995 and 36% in 1994 primarily through internal growth. The rate of customer unit growth declined in 1995 due primarily to the slower rate of growth of paging customer units. Cellular telephone revenues increased $160.0 million in 1995 and $118.1 million in 1994 on 69% and 61% increases in customer units and strong increases in inbound roaming revenues. Telephone revenues increased $48.5 million in 1995 and $38.2 million in 1994 as a result of acquisitions, increased network usage, recovery of increased costs of providing long-distance services and internal access line growth of 5% in each year. Radio paging revenues increased $15.1 million in 1995 and $16.7 million in 1994 on 20% and 42% increases in paging units in service. OPERATING EXPENSES rose 32% ($200.4 million) in 1995 and 27% ($133.9 million) in 1994 due primarily to added expenses to serve the growing customer base. Cellular telephone operating expenses increased $134.6 million during 1995 and $92.1 million during 1994 due to the effects of additional marketing and selling expenses incurred to add new customers as well as the costs of providing services to the increased customer base. Telephone operating expenses increased $41.9 million during 1995 and $25.7 million during 1994 due to the effects of acquisitions and growth in internal operations. Paging operating expenses increased $23.9 million in 1995 and $16.1 million in 1994 due to additional costs to serve current customers and to add new customers as well as additional 1995 expenses to restructure certain business processes. OPERATING INCOME increased 21% ($23.2 million) in 1995 and 56% ($39.1 million) in 1994 due to improved cellular and telephone operating results offset somewhat in 1995 by the sharp decline in paging operating results. Cellular telephone operating income increased $25.4 million in 1995 and $26.0 million in 1994. Telephone operating income increased $6.6 million in 1995 and $12.5 million in 1994. Paging operating loss increased $8.8 million in 1995 after declining $600,000 in 1994.
YEAR ENDED DECEMBER 31, 1995 1994 1993 --------------------------------------------- (Dollars in thousands) Operating Income Cellular telephone $ 42,755 $ 17,385 $ (8,656) Telephone 98,240 91,606 79,110 Radio paging (8,997) (169) (721) --------------------------------------------- $ 131,998 $ 108,822 $ 69,733 --------------------------------------------- --------------------------------------------- Operating Margins Cellular telephone* 9.0% 5.5% (4.2%) Telephone** 29.2% 30.8% 29.5%) Radio paging* (9.7%) (.2%) (1.1%) Consolidated 13.8% 14.9% 12.5%) --------------------------------------------- ---------------------------------------------
*Computed on Service Revenues **Local Telephone Operating Margin Management anticipates continued growth in consolidated customer units and revenues as the business units continue their expansion and development programs. The rate of revenue growth is expected to be somewhat slower as cellular and paging revenue per unit continues to decline. Expenses should increase driven by customer growth, although at a slower rate than revenues, yielding continued growth in operating income and operating cash flow. INVESTMENT AND OTHER INCOME totalled $103.9 million in 1995, $33.7 million in 1994 and $28.1 million in 1993. CELLULAR INVESTMENT INCOME, the Company's share of income of cellular markets in which the Company has a minority interest and follows the equity method of accounting, increased 56% ($14.6 million) in 1995 and 66% ($10.3 million) in 1994 as income from the cellular markets increased. Cellular investment income is net of amortization of license costs relating to these minority interests. GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totalled $86.6 million in 1995, $7.5 million in 1994 and $5.0 million in 1993 as the Company has sold or traded non-strategic cellular interests and sold other investments. PCS DEVELOPMENT COSTS totalled $7.8 million in 1995 and $1.7 million in 1994 representing expenses incurred by TDS and American Portable to participate in the Federal Communications Commission ("FCC") auction process, to build American Portable's management and operating teams and to develop American Portable's strategic and operational plans for the future deployment of per- sonal communications services ("PCS"). American Portable spent approximately $289 million on the purchase of the PCS licenses. Amortization of the licenses will begin upon commencement of operations in early 1997. The Company expects to incur significant expenditures for the development of PCS activities during 1996 and 1997. MINORITY SHARE OF INCOME includes (a) minority shareholders' share of USM's net income (1995 and 1994) or loss (1993), (b) minority partners' share of income or loss of majority-owned cellular markets, (c) minority shareholders' share of income of majority-owned telephone companies, and (d) minority shareholders' share of APP's loss in 1995 and 1994.
YEAR ENDED DECEMBER 31, 1995 1994 1993 --------------------------------------------- (Dollars in thousands) Minority Share of (Income) Loss United States Cellular Minority Shareholders' Share $ (19,046) $ (2,740) $ 4,270 Minority Partners Share (7,902) (5,152) (3,496) --------------------------------------------- (26,948) (7,892) 774 Telephone Subsidiaries (1,691) (1,420) (1,249) American Paging 2,781 233 -- --------------------------------------------- $ (25,858) $ (9,079) $ (475) --------------------------------------------- ---------------------------------------------
INTEREST EXPENSE increased 23% ($9.6 million) in 1995 and 10% ($3.8 million) in 1994. USM sold $745 million principal amount at maturity of 6% zero coupon convertible debt in June 1995, realizing approximately $221.5 million. Amortization of the related bond discount, a non-cash item, increased interest expense $7.4 million in 1995. USM has also financed certain equipment purchases and construction costs under a vendor financing agreement. The average amount outstanding under the vendor arrangement increased $54.0 million in 1995, increasing interest expense $5.3 million. TDS Telecom interest expense increased $1.4 million in 1995 and $900,000 in 1994 due primarily to additional interest expense of acquired telephone companies. TDS has used short-term debt supplemented by proceeds from the sale of Medium- Term Notes to fund the acquisition of PCS licenses, to fund paging operations and for general corporate purposes. Corporate interest expense increased $8.6 million in 1995 and $2.9 million in 1994. Average short-term debt increased $89.2 million in 1995 and $18.2 million in 1994. The average interest rate jumped to 6.4% in 1995 from 5.2% in 1994. TDS capitalized a total of $13.2 million of interest related to the development of PCS licenses in 1995. See "Financial Resources and Liquidity" for a further discussion of short and long- term debt. INCOME TAX EXPENSE increased 99% ($40.3 million) in 1995 and 54% ($14.2 million) in 1994, reflecting primarily the 83% and 68% increases in pretax income. The effective income tax rates were 44% in 1995, 40% in 1994, and 44% in 1993. The lower 1994 rate reflects deferred income taxes provided on the book/tax basis difference related to certain telephone acquisitions and certain income excluded due to the dividend exclusion rules. NET INCOME AVAILABLE TO COMMON was $102.0 million in 1995, $58.0 million in 1994 and $31.5 million in 1993. The increase in 1995 from 1994 reflects the increase in gain on the sales of cellular interests and other investments of $34.8 million (after income taxes and minority shareholders' share), and the continued improvement in operating results of the cellular business offset somewhat by increased paging losses and PCS development expenses. The increase in 1994 from 1993 reflects the significant improvement in operating results for the cellular and telephone segments. TDS anticipates that start-up and development of high-quality networks and the marketing of systems in American Portable's major markets will reduce the rate of growth in TDS's operating and net income from levels which would otherwise be achieved during the next few years. EARNINGS PER COMMON SHARE were $1.74 in 1995, $1.06 in 1994 and $.67 in 1993. The increases in earnings per share reflect the 76% and 84% increases in net income available to common, offset somewhat by the 8% and 15% increases in weighted average common shares outstanding in 1995 and 1994, respectively. TELECOMMUNICATIONS ACT OF 1996. On February 8, 1996, the Telecommunications Act of 1996 was signed into law. The new law is deregulatory and pro-competition but also contains special pro-rural provisions which continue such principles as universal service and toll rate averaging. All TDS Telecom companies fit the definition of a rural telephone company. The new law will provide TDS Telecom with some protection from competitors, while also providing opportunities to grow its business. During the next 15 months, the FCC will be initiating and managing various rulemaking proceedings to establish the necessary rules to implement the law. State Commissions will also be involved in the implementation of the law and FCC rules and will monitor the actions and progress of carriers in their respective states. TDS Telecom will be actively participating in this process with the goal that the pro-rural provisions of the law are translated into effective rules. CELLULAR TELEPHONE OPERATIONS TDS provides cellular telephone service through United States Cellular Corporation [AMEX: "USM"], an 80.8%-owned subsidiary. USM owns, operates and invests in cellular markets. Consolidated results of operations include 710,000 customer units in 137 markets at the end of 1995 compared to 421,000 customer units in 130 markets at the end of 1994 and 261,000 customer units in 116 markets at the end of 1993. USM follows the equity method of accounting for its investments in minority-owned and managed markets and the more significant minority-owned markets managed by others. USM follows the cost method of accounting for its investments in minority-owned markets managed by others which are being held for sale or exchange. In the aggregate, USM had rights to interests in 201 cellular telephone markets representing 24.5 million population equivalents at December 31, 1995. Operating results for 1995 and 1994 primarily reflect the rapid customer growth in USM's consolidated markets. Operating revenue increases were driven by the 69% and 61% growth in consolidated customer units in 1995 and 1994, respectively. Operating expenses increased due to increased marketing costs related to the rapid customer growth, increased customer usage and the costs associated with operating an increased number of cell sites. Operating expenses increased at a slower rate than the increase in revenues due to improving economies of scale and continued improvements in business processes. Operating cash flow (operating income plus depreciation and amortization) increased 60% to $132.2 million in 1995 from $82.8 million in 1994 and $36.4 million in 1993. Operating income more than doubled to $42.8 million in 1995 compared to $17.4 million in 1994 and an operating loss of $8.7 million in 1993.
YEAR ENDED OR AT DECEMBER 31, 1995 1994 1993 ----------------------------------------- (Dollars in thousands, except per customer amounts) Operating Revenues Local service $ 289,518 $ 187,978 $ 117,610 Inbound roaming 148,020 104,009 70,109 Long-distance 35,228 22,796 13,965 Other 3,868 3,866 2,116 ----------------------------------------- Service Revenues 476,634 318,649 203,800 Equipment sales 15,761 13,755 10,510 ----------------------------------------- 492,395 332,404 214,310 ----------------------------------------- Operating Expenses System operations 70,442 46,869 34,301 Marketing and selling 102,361 69,072 43,478 Cost of equipment sold 54,948 39,431 25,688 General and administrative 132,431 94,193 74,472 Depreciation 57,302 39,520 25,665 Amortization 32,156 25,934 19,362 ----------------------------------------- 449,640 315,019 222,966 ----------------------------------------- Operating Income (Loss) $ 42,755 $ 17,385 $ (8,656) ----------------------------------------- ----------------------------------------- Cellular telephone revenues as a percent of total revenues 52% 45% 38% Additions to property, plant and equipment $ 218,506 $ 158,453 $ 94,088 Identifiable assets $ 1,890,621 $ 1,584,142 $ 1,275,569 ----------------------------------------- ----------------------------------------- Consolidated Markets: Customers 710,000 421,000 261,000 Market penetration 3.18% 1.98% 1.35% Cell sites in service 1,116 790 522 Average monthly service revenue per customer $ 72.48 $ 79.74 $ 84.83 Churn rate per month 2.1% 2.3% 2.3% Marketing cost per gross customer addition $ 361 $ 408 $ 414 ----------------------------------------- -----------------------------------------
OPERATING REVENUES increased 48% ($160.0 million) in 1995 and 55% ($118.1 million) in 1994. The revenue increases in 1995 and 1994 were primarily attributable to increases in the number of local retail customers, growth in inbound roaming revenues and the effect of acquisitions. Acquisitions increased operating revenues 13% ($44.2 million) in 1995 and 12% ($25.5 million) in 1994. Average monthly revenue per customer was $72 in 1995, $80 in 1994 and $85 in 1993. The decline in average monthly revenue per customer reflects the industry- wide trend of newer customers tending to use fewer minutes per month, per minute price decreases, incentives for using lower-priced off-peak minutes and the declining contribution of inbound roaming revenue per customer. LOCAL SERVICE REVENUE, from local customers' usage of USM's systems, increased 54% ($101.5 million) in 1995 and 60% ($70.4 million) in 1994. The revenue increases were primarily the result of the 69% and 61% customer growth, respectively, in consolidated markets. Local minutes of use averaged 95 per month in 1995 and 1994 and 103 in 1993. Average monthly local retail revenue per customer was $44 in 1995, $47 in 1994 and $49 in 1993. The decline in average local revenue per customer in 1995 was primarily a result of USM's use of incentive programs to increase lower-priced weekend and off-peak usage. The 1994 decline was primarily related to the decrease in average minutes of use per customer. The industry trend of declining average monthly minutes of use and average monthly retail revenue per customer is believed to be related to the tendency of early customers in a market to be the heaviest users during peak business hours. Newer customers are a result of continued penetration of the consumer market, which tends to include fewer peak business hour usage customers. USM believes local retail revenue per customer will continue to decrease due to the usage patterns of incrementally added customers. INBOUND ROAMING REVENUE (charges to customers of other systems who use USM's cellular systems when roaming) increased 42% ($44.0 million) in 1995 and 48% ($33.9 million) in 1994. The increase is attributable to an increase in the number of customers from other systems using USM's systems as well as an increased number of cell sites within those systems offset somewhat by a reduction in the average price per minute. Average monthly inbound roaming revenue per customer was $23, $26 and $29 in 1995, 1994 and 1993, respectively. LONG-DISTANCE AND OTHER REVENUE increased 47% ($12.4 million) in 1995 and 66% ($10.6 million) in 1994 as the volume of long-distance calls billed by USM increased. Average monthly long-distance and other revenue per customer was $5, $7 and $7 in 1995, 1994 and 1993, respectively. EQUIPMENT SALES REVENUE reflects the sale of cellular telephone units. The average revenue per telephone unit sold was $53 in 1995, $90 in 1994 and $127 in 1993. The decline in average revenue per unit reflects USM's decision to reduce sales prices on cellular telephones to increase the number of customers, to maintain its market position and to meet competitive prices, as well as to pass through reduced manufacturers' prices. OPERATING EXPENSES increased 43% ($134.6 million) in 1995 and 41% ($92.1 million) in 1994. The increases were primarily due to increased marketing costs related to increased customer activations, a larger customer base, acquisitions and increased depreciation and amortization expense related to increases in fixed assets and license costs. Acquisitions increased operating expenses 13% ($40.7 million) in 1995 and 14% ($30.9 million) in 1994. SYSTEM OPERATIONS EXPENSES increased 50% ($23.6 million) in 1995 and 37% ($12.6 million) in 1994 as a result of increases in customer usage expenses and costs associated with operating the increased number of cell sites. Customer usage expenses represent charges from other telecommunications service providers for local intercon- nection to the landline network, toll charges and roaming expenses from USM's customers' use of systems other than their local systems, offset somewhat by pass-through roaming revenue. Customer usage expenses grew 62% ($13.4 million) in 1995 and 19% ($3.5 million) in 1994 as minutes used on USM's systems increased, primarily related to the 69% increase in customers and increased inbound roaming usage. Maintenance, utility and cell site expenses grew 40% ($10.2 million) in 1995 and 56% ($9.1 million) in 1994 reflecting the 41% and 51% growth in the number of cell sites, respectively. The number of cell sites operated increased to 1,116 in 1995 from 790 in 1994 and 522 in 1993. MARKETING AND SELLING EXPENSES increased 48% ($33.3 million) in 1995 and 59% ($25.6 million) in 1994. Marketing and selling expenses consist primarily of personnel costs, commissions, retail office expenses, advertising and promotional expenses. These expenses grew in 1995 and 1994 due to the increased number of gross customer activations. COST OF EQUIPMENT SOLD reflects the cost of increased unit sales discussed above, offset somewhat by falling manufacturers' prices per unit. The average cost of a telephone unit sold was $186 in 1995, $258 in 1994 and $309 in 1993. Cost per gross customer addition (marketing and selling expenses and cost of equipment sold less equipment revenues divided by gross customer additions) decreased to $361 in 1995 from $408 in 1994 and $414 in 1993. GENERAL AND ADMINISTRATIVE EXPENSES increased 41% ($38.2 million) in 1995 and 26% ($19.7 million) in 1994. These expenses include the cost of operating USM's local business offices and its corporate expenses. The increases include the effects of an increase in expenses required to serve the growing customer base in existing markets and an expansion of both local administrative office and corporate staff, necessitated by growth in USM's business and the acquisition of additional operations. USM is using an ongoing clustering strategy to combine local operations wherever feasible in order to gain operational efficiencies and reduce its administrative expenses. DEPRECIATION EXPENSE increased 45% ($17.8 million) in 1995 and 54% ($13.9 million) in 1994, reflecting increases in average fixed asset balances of 48% and 54%, respectively. AMORTIZATION EXPENSE, primarily amortization of license costs, increased 24% ($6.2 million) in 1995 and 34% ($6.6 million) in 1994 due to increases in license costs. OPERATING INCOME was $42.8 million in 1995 and $17.4 million in 1994, compared to an operating loss of $8.7 million in 1993. Operating margin on service revenues improved to 9.0% in 1995 from 5.5% in 1994 and (4.2%) in 1993. The improvement in 1995 and 1994 was primarily due to the growth in the customer base and the increase in roaming revenue. The Company expects service revenues to continue to grow in 1996 as customers are added to USM's markets and as it realizes a full year of revenue from customers and additional retail and roaming revenue from cell sites added in 1995. However, management anticipates that average monthly revenue per customer will continue to decrease as local retail revenue per minute of use declines and as the growth rate of the Company's customer base exceeds the growth rate of inbound roaming revenue, diluting the roaming contribution per customer. The Company also expects expenses to continue to increase in 1996 as it incurs a full year of expenses for markets and cell sites added in 1995 and it incurs expenses associated with customer and system growth. Additionally, management believes there exists a seasonality at USM in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth. This seasonality may cause operating income to vary from quarter to quarter. TELEPHONE OPERATIONS TDS manages its local landline telephone service through its wholly owned subsidiary TDS Telecommunications Corporation ("TDS Telecom"). TDS Telecom operates 100 telephone companies which serve 425,900 access lines in 28 states. It also operates a small, long-distance company. TDS Telecom expands its operations through internal access line growth and acquisitions. During the last three years, a total of 50,900 access lines have been added through internal growth and 53,300 access lines through acquisitions. Operating results for 1995 and 1994 primarily reflect increases in access lines of 9% in 1995 and 10% in 1994 due to internal growth and acquisitions. Operating cash flow increased 9% to $175.6 million in 1995 compared to an increase of 16% to $160.5 million in 1994. The rate of growth of operating cash flow slowed in 1995 due to the effects of earnings pressures from regulatory agencies and long-distance providers and increased operating expenses. TDS Telecom continues to provide steadily growing operating cash flow and earnings to support its construction activities.
Year Ended or at December 31, 1995 1994 1993 --------------------------------------------------- (Dollars in thousands, except per customer amounts) Local Telephone Operations Operating Revenues Local service $ 94,964 $ 81,986 $ 72,191 Network access and long-distance 195,575 174,178 159,111 Miscellaneous 41,625 40,399 36,820 --------------------------------------------------- 332,164 296,563 268,122 --------------------------------------------------- Operating Expenses Network operations 54,086 45,033 42,524 Depreciation 69,890 64,060 56,024 Amortization 4,898 3,894 3,538 Customer operations 47,322 42,618 39,416 Corporate and other 59,084 49,706 47,510 --------------------------------------------------- 235,280 205,311 189,012 --------------------------------------------------- Local Telephone Operating Income 96,884 91,252 79,110 --------------------------------------------------- Long-distance Operations Revenues 22,677 9,778 -- Expenses 21,321 9,424 -- --------------------------------------------------- Long-distance Operating Income 1,356 354 -- --------------------------------------------------- Operating Income $ 98,240 $ 91,606 $ 79,110 --------------------------------------------------- --------------------------------------------------- Telephone revenues as a percent of total revenues 37% 42% 48% Additions to property, plant and equipment $ 101,139 $ 117,867 $ 82,233 Identifiable assets 1,058,241 984,563 829,489 Telephone plant in service per access line $ 2,356 $ 2,283 $ 2,205 --------------------------------------------------- --------------------------------------------------- Companies 100 96 94 Access lines 425,900 392,500 356,200 Growth in access lines from prior year-end: Acquisitions 13,500 19,700 20,100 Internal growth 19,900 16,600 14,400 Average monthly revenue per access line $ 66.80 $ 66.60 $ 65.30 --------------------------------------------------- ---------------------------------------------------
OPERATING REVENUES from local telephone operations increased 12% ($35.6 million) in 1995 and 11% ($28.4 million) in 1994. The increases in revenues were due to the effects of acquisitions, increased network usage, internal access line growth and the recovery of increased costs of providing long-distance services. Acquisitions increased local telephone revenues 6% ($16.8 million) in 1995 and 4% ($9.7 million) in 1994. Excluding the effects of acquisitions, local telephone revenues increased 6% ($18.8 million) in 1995 and 7% ($18.8 million) in 1994. LOCAL SERVICE REVENUES increased 10% ($8.4 million) in 1995 and 11% ($8.1 million) in 1994, excluding the effects of acquisitions. Internal growth in access lines and sales of custom-calling and other features increased local ser- vice revenues approximately $5.5 million in 1995 and $4.8 million in 1994. Certain extended community calling ("ECC") revenues previously reported as network access revenues and changes in settlement plans increased local service revenues approximately $3.4 million in 1995 and $1.6 million in 1994. NETWORK ACCESS AND LONG-DISTANCE REVENUES increased 6% ($10.5 million) in 1995 and 5% ($8.5 million) in 1994, excluding the effects of acquisitions. Recovery of increased costs of providing access to long-distance carriers increased revenues $4.5 million in 1995 and $4.1 million in 1994. Settlements received from toll pools relating to prior years' activity increased these revenues by $1.7 million in 1995, while a $3.4 million decrease in these revenues resulted from the reclassification of ECC revenues to local service revenues. Changes in FCC-mandated cost separations rules increased revenues $1.3 million in 1994. The remainder of the revenue increase in 1995 and 1994 was primarily due to increased minutes of use, increases in access lines served and changes in rates of return. MISCELLANEOUS REVENUES, excluding the effects of acquisitions, remained relatively unchanged in 1995 and increased 6% ($2.2 million) in 1994. OPERATING EXPENSES from local telephone operations increased 15% ($30.0 million) in 1995 and 9% ($16.3 million) in 1994. The effects of acquisitions increased expenses 7% ($13.8 million) in 1995 and 4% ($7.2 million) in 1994. NETWORK OPERATIONS EXPENSE INCREASED 14% ($6.3 million) in 1995 and 1% ($500,000) in 1994, net of acquisitions. Network operations expense consists of costs to maintain the high-quality telecommunications networks which provide advanced telecommunications services. The increase in 1995 includes a $2.0 million charge for additional routine maintenance activity and write-offs of equipment. The remaining increase in 1995 and the increase in 1994 were primarily due to salary and work force changes. CUSTOMER OPERATIONS EXPENSE increased 5% ($2.2 million) in 1995 and 5% ($2.0 million) in 1994, net of acquisitions. Customer operations expense includes costs for marketing, sales, product management, as well as expenses for establishing and servicing customer accounts. The increases were due primarily to salary and workforce changes. CORPORATE AND OTHER EXPENSES increased 10% ($5.2 million) in 1995 and 1% ($500,000) in 1994, net of acquisitions. Corporate and other expenses consist of costs incurred for executive administration and management, accounting, human resource management, information management, legal services and property and other non-income taxes. The increase in 1995 relates to increased property and non-income taxes and marketing, advertising and start-up costs for non-regulated activities as well as salary and work force changes. DEPRECIATION AND AMORTIZATION EXPENSE increased 4% ($2.5 million) in 1995 and 10% ($6.0 million) in 1994, excluding the effects of acquisitions. The increase in depreciation expense is primarily due to growth in plant and equipment. Lump- sum depreciation adjustments and increases in certain depreciation rates increased these expenses 4% ($2.4 million) in 1994. The composite depreciation rate was 7.1% in 1995, 7.5% in 1994 and 7.3% in 1993. LONG-DISTANCE OPERATIONS represents revenues and expenses from a small, long- distance operation acquired in August 1994. OPERATING INCOME from telephone operations increased 7% ($6.6 million) in 1995 and 16% ($12.5 million) in 1994. The effects of acquisitions increased operating income 4% ($3.8 million) in 1995 and 4% ($2.8 million) in 1994. The local telephone operating margin, excluding long-distance operations, was 29.2% in 1995, 30.8% in 1994 and 29.5% in 1993. The reduction in operating margin in 1995 was caused by earnings pressures from regulatory agencies and long-distance providers and increased operating expenses. Management expects TDS Telecom's revenues, operating income and operating cash flow to continue to increase modestly in 1996 from steady growth in operations. Continued pressures on revenue sources, however, may cause operating margins to be somewhat reduced in future periods. TDS Telecom is subject to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation." As of December 31, 1995, all seven Bell Companies and a few major independent local exchange carriers have discontinued the application of SFAS 71 for external reporting purposes. Criteria that would give rise to the discontinuance of SFAS No. 71 at TDS Telecom include: 1) increasing competition that would restrict TDS Telecom's ability to establish prices to recover specific costs, and 2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. These criteria are reviewed on a state-by-state basis to determine whether continued application of SFAS No. 71 is appropriate. The Company has no current plans to change its method of accounting. In analyzing the effect of discontinuing the application of SFAS No. 71, management has determined that the useful lives of plant assets used for regulatory and financial reporting purposes are consistent with generally accepted accounting principles and therefore any adjustments to accumulated depreciation would be immaterial. The net effect of a write-off of regulatory assets and liabilities would also be immaterial. RADIO PAGING OPERATIONS TDS manages its radio paging business through American Paging, Inc. [AMEX: "APP"], an 82.3%-owned sub-sidiary. APP provides wireless messaging communications through 38 sales and service operating centers in 14 states and the District of Columbia. At December 31, 1995, APP served 784,500 customers through its digital radio transmission systems covering an area with a total population of approximately 75 million. During the last three years, APP has added 385,600 customers through internal growth and 76,700 customers through acquisitions. During 1995, American Paging announced a plan to restructure key operating areas which began in the third quarter and will extend into 1996. Upon completion of the plan, APP is targeting increased sales through the direct channel, an improved customer mix, a lower level of administrative costs and improved customer service. As a part of the plan, APP is consolidating its 17 service operating centers into a single center. APP recorded restructuring charges of $2.9 million in the last half of 1995. American Paging experienced a slowing of growth in customers during the last half of 1995 as a result of disruptions due to staff reductions, the announcement of the consolidation of administrative offices and the realignment of its sales force which was done to place greater emphasis on the direct distribution channel. As a result, combined with the restructuring charges, operating cash flow decreased 8% to $15.7 million in 1995 compared to an increase of 34% to $17.0 million in 1994. APP expects slower unit and revenue growth through the next several quarters as a result of refocusing the sales force and retraining customer service representatives. The slower revenue growth along with the additional costs of the restructuring activities may result in operating losses for the next several quarters.
Year Ended December 31, 1995 1994 1993 --------------------------------------------------- (Dollars in thousands) Service Operations Revenues $ 93,034 $ 77,520 $ 64,384 --------------------------------------------------- Costs and expenses Cost of services 24,062 19,347 15,837 Selling and advertising 15,988 13,249 11,131 General and administrative 37,308 27,947 24,783 Depreciation 20,659 14,537 11,182 Amortization 4,033 2,641 2,210 --------------------------------------------------- 102,050 77,721 65,143 --------------------------------------------------- Service Operating (Loss) (9,016) (201) (759) --------------------------------------------------- Equipment Sales Revenues 14,116 14,545 10,979 Cost of equip- ment sold 14,097 14,513 10,941 --------------------------------------------------- Equipment Sales Income 19 32 38 --------------------------------------------------- Operating (Loss) $ (8,997) $ (169) $ (721) --------------------------------------------------- ---------------------------------------------------
Year Ended or at December 31, 1995 1994 1993 ---------------------------------------- (Dollars in thousands, except per unit amounts) Radio paging revenues as a percent of total revenues 11% 13% 14% Additions to property and equipment $ 28,994 $ 27,403 $ 24,813 Identifiable assets $ 159,170 $ 146,107 $ 74,923 ---------------------------------------- ---------------------------------------- Pagers in service 784,500 652,800 460,900 Average monthly service revenue per unit $ 10.57 $ 11.92 $ 13.65 Transmitters in service 1,018 943 685 Churn rate per month 2.5% 2.6% 2.9% Marketing cost per gross customer unit addition $ 50 $ 41 $ 42 ---------------------------------------- ----------------------------------------
SERVICE REVENUES increased 20% ($15.5 million) in 1995 and 20% ($13.1 million) in 1994, primarily as a result of growth in the number of pagers in service. Pagers in service increased 20% (131,700, including 28,400 from acquisitions) in 1995 and 42% (191,900, including 37,600 from an acquisition) in 1994. Average monthly service revenue per unit declined 11% to $10.57 in 1995 and 13% to $11.92 in 1994. The decline in average revenue per unit reflects the shift during 1993 to lower revenue producing reseller channels as well as competitive pressures. APP refocused its marketing strategy in mid-1995 to the higher revenue producing direct distribution channel. Reseller units comprised 49% of net unit sales in 1995, 53% in 1994 and 39% in 1993. Average revenue per reseller unit is approximately 30% of the average revenue per direct unit. SERVICE OPERATING EXPENSES increased 31% ($24.3 million) in 1995 and 19% ($12.6 million) in 1994 primarily due to additional costs to serve the expanded customer base, add new customers, increase system capacity and geographic coverage, and the added 1995 restructuring expenses. COST OF SERVICES increased 24% ($4.7 million) in 1995 and 22% ($3.5 million) in 1994 due to additional costs to provide service to the increased customer base, and the costs of maintaining, upgrading and expanding systems to improve system reliability and coverage. SELLING AND ADVERTISING EXPENSE increased 21% ($2.7 million) in 1995 and 19% ($2.1 million) in 1994 due to the increased number of sales personnel and advertising expenses. The cost per gross customer addition, excluding customers added through acquisitions, was $50 in 1995 compared to $41 in 1994 and $42 in 1993. GENERAL AND ADMINISTRATIVE EXPENSE increased 33% ($9.4 million) in 1995 and 13% ($3.2 million) in 1994 due to increases in administrative personnel costs, bad debt expenses and general office expenses to support the growing customer base. Costs related to the restructuring of operations, including costs associated with closing excess office space and employee severance and related costs, increased expenses $2.1 million in 1995. DEPRECIATION AND AMORTIZATION charges increased 44% ($7.5 million) in 1995 and 28% ($3.8 million) in 1994, reflecting increased investment in pagers and related equipment, and the effects of acquisitions. Based on a study of useful lives, APP shortened the estimated useful lives of pagers and transmitters beginning July 1, 1994. This change increased depreciation expense by approximately $1.7 million in 1995 and $1.5 million in 1994. During 1995, an $800,000 charge was incurred to write off certain assets expected to be retired as a result of the restructuring. OPERATING LOSS was $9.0 million in 1995, $200,000 in 1994 and $700,000 in 1993. BROADBAND PERSONAL COMMUNICATIONS SERVICES TDS manages its broadband personal communications services business through American Portable Telecom, Inc. ("American Portable"), a wholly owned subsidiary. American Portable's licenses cover the Major Trading Areas of Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus and account for approximately 27.3 million population equivalents. American Portable filed a registration statement on February 20, 1996 for an initial public offering of approximately 16% of its Common Shares. Management anticipates that the construction of the cell sites will begin in the second quarter of 1996, following the completion of detailed engineering and site acquisition activities. Marketing and selling activities along with commercial operations are anticipated to commence in early 1997. PCS DEVELOPMENT COSTS include expenses incurred by TDS and American Portable to participate in the FCC auction process, to build American Portable's management and operating teams and to develop American Portable's strategic and operational plans for the future deployment of personal communications services. American Portable expects to incur significant expenditures for the development of PCS activities during 1996.
YEAR ENDED OR AT DECEMBER 31, 1995 1994 1993 ---------------------------------------- (Dollars in thousands) Additions to property and equipment $ 12,025 $ -- $ -- Identifiable assets $ 318,265 $ 20,473 $ -- ---------------------------------------- ----------------------------------------
PARENT AND SERVICE COMPANY OPERATIONS OTHER (EXPENSE) INCOME, NET includes the gross income of TDS's computer, printing and other service companies and costs of corporate operations.
YEAR ENDED OR AT DECEMBER 31, 1995 1994 1993 ---------------------------------------- (Dollars in thousands) Additions to property and equipment $ 9,964 $ 7,754 $ 7,386 Identifiable assets $ 42,786 $ 54,841 $ 79,202 ---------------------------------------- ----------------------------------------
INFLATION Management believes that inflation affects TDS's business to no greater extent than the general economy. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS The Financial Accounting Standard Board issued SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March 1995, which became effective in January 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by any entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management is currently analyzing the impact of this statement, but does not anticipate that the effect on results of operations and financial position will be material. FINANCIAL RESOURCES AND LIQUIDITY TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid growth has caused expenditures for construction, expansion and acquisition programs to exceed internally generated cash flow in recent years. Accordingly, TDS has obtained substantial funds from external sources to finance construction of cellular telephone systems and to fund acquisitions during the past three years. Although the steady internal cash flow from TDS Telecom and increasing internal cash flow from USM have reduced the need for external financing, the development and construction activities of American Portable will require substantial additional funds from external sources. CASH FLOWS FROM OPERATING ACTIVITIES TDS is generating substantial internal funds from the rapid growth in customer units and revenues. Operating cash flow (operating income plus depreciation and amortization) increased 24% to $323.5 million in 1995, and 39% to $260.3 million in 1994. The increases represent primarily the 60% ($49.4 million) and 127% ($46.5 million) increases, respectively, from the cellular telephone operations. Cash flows from other operating activities (investment and other income, interest and income tax expense, and changes in working capital and other assets and liabilities) required $111.9 million in 1995, $35.6 million in 1994 and $27.5 million in 1993.
YEAR ENDED DECEMBER 31, 1995 1994 1993 ---------------------------------------- (Dollars in thousands) Operating cash flow Cellular telephone $ 132,213 $ 82,839 $ 36,371 Telephone 175,594 160,484 138,672 Radio paging 15,695 17,009 12,671 ---------------------------------------- 323,502 260,332 187,714 Other operating activities (111,893) (35,646) (27,518) ---------------------------------------- $ 211,609 $ 224,686 $ 160,196 ---------------------------------------- ----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES TDS's long-term strategy is to provide a strong yet flexible financial foundation for each of its principal subsidiaries. TDS targets a consolidated ratio of equity to total capital in the range of 55% to 65%. Consolidated equity capital declined to 55% of total capitalization at December 31, 1995, compared to 62% at the beginning of 1993, primarily as a result of significant increases in debt and minority interest. TDS uses short-term debt to finance its cellular telephone and radio paging operations, for acquisitions and for general corporate purposes. TDS takes advantage of attractive opportunities to retire short-term debt with the proceeds from long-term debt and equity sales and sales of non-strategic assets. In 1995, USM received approximately $221.5 million on the sale of 20-year 6% zero coupon convertible debt. In 1995 and 1993, TDS sold $39.2 million and $92.5 million of Medium-Term Notes, respectively. In 1994, TDS sold Common Shares for cash totalling $4.9 million and APP received $45.6 million in an initial public offering of Common Shares. In 1993, TDS sold Common Shares for cash totalling $65.6 million and USM received $36.8 million from the sale of Common Shares to parties other than TDS pursuant to a rights offering. The sale of non-strategic cellular assets and other investments provided $197.6 million in net proceeds in 1995, $6.0 million in 1994 and $6.8 million in 1993. USM and TDS Telecom have also used long-term debt to finance their construction and development activities. USM financed cellular system equipment and construction costs totalling $52.5 million in 1995 and $18.0 million in 1994 under vendor financing arrangements. Loans under these programs bear interest at 2.25% to 2.3% over the 90-day Commercial Paper Rate (5.58% at December 31, 1995) and have terms of seven to eight years. TDS Telecom telephone subsidiaries borrowed $12.0 million in 1995, $16.8 million in 1994 and $28.2 million in 1993 under the Rural Utility Service and the Rural Telephone Bank long-term federal government loan programs. Financing under these programs comprises 97% of total outstanding telephone subsidiary long-term debt at an average annual interest rate of 5.34%. CASH FLOWS FROM INVESTING ACTIVITIES TDS makes substantial investments each year to acquire, construct, operate and maintain modern high-quality communications networks and facilities that exceed its customers expectations as a basis for creating long-term value for shareowners. In recent years, rapid changes in technology and new opportunities have required substantial investments in revenue enhancing and cost reducing upgrades of the Company's networks. Cash expenditures for property, plant and equipment additions totalled $366.2 million in 1995, $321.4 million in 1994 and $198.7 million in 1993. The acquisition and development of broadband and narrowband PCS licenses required $326.0 million in 1995 and $31.6 million in 1994. Cash used for acquisitions, excluding cash acquired, totalled $53.8 million in 1995, $37.6 million in 1994 and $51.6 million in 1993. PROPERTY, PLANT AND EQUIPMENT The primary purpose of TDS's construction and expansion program is to provide for normal growth, to upgrade service, to expand into new communication areas, and to take advantage of service-enhancing and cost-reducing technological developments. The following table summarizes the Company's investments in its communications networks and related facilities during the past three years.
YEAR ENDED DECEMBER 31, 1995 1994 1993 ------------------------------------------------- (Dollars in thousands) Cellular telephone Cell sites and equipment $ 153,434 $ 127,253 $ 66,037 Switching equipment 19,678 4,533 7,419 Other 43,464 36,428 14,021 ------------------------------------------------- 216,576 168,214 87,477 ------------------------------------------------- Telephone Central office 38,697 46,618 29,584 Outside plant 55,569 52,629 38,877 Other 10,106 16,236 12,357 ------------------------------------------------- 104,372 115,483 80,818 ------------------------------------------------- Radio paging Pagers 15,582 15,641 12,201 Terminals and transmitters 6,353 11,056 6,653 Other 5,134 2,954 3,782 ------------------------------------------------- 27,069 29,651 22,636 ------------------------------------------------- Other 18,219 8,087 7,812 ------------------------------------------------- $ 366,236 $ 321,435 $ 198,743 ------------------------------------------------- -------------------------------------------------
USM constructed 292 cell sites in 1995, 225 in 1994 and 138 in 1993. TDS Telecom installed 39 digital switches in 1995, 32 in 1994 and 54 in 1993, and made substantial improvements in outside plant facilities during each year. In addition to substantial expenditures for pagers in the past three years, APP added 75 net new transmitters in 1995, 258 in 1994 and 153 in 1993 in order to improve signal quality and expand the coverage areas of its paging systems. The Company's expected property, plant and equipment additions reflect the Company's construction and expansion programs and are anticipated to aggregate approximately $434 million for 1996 excluding PCS construction and development expenditures discussed below. / / The cellular capital additions budget totals approximately $240 million for 1996, including about $100 million for new cell sites, $80 million for enhancements to existing systems and about $40 million for various information systems initiatives. / / The telephone capital additions budget totals approximately $125 million in 1996, including about $50 million for new digital switches and other switching facilities and $50 million for improvements to outside plant facilities. / / The radio paging property and equipment additions are anticipated to total about $54 million in 1996, including $14 million for systems and transmitters, $18 million for pagers, $14 million for information systems initiatives and restructuring activities, and $8 million for narrowband PCS activities. / / Other fixed asset expenditures are estimated to total $15 million in 1996. The Company will finance the additions primarily with internally generated cash, supplemented by short-term bank financing, long-term financing obtained under federal government programs at TDS Telecom, and proceeds from the sale of non- strategic cellular interests. PCS DEVELOPMENT American Portable plans to construct networks in its six primary Major Trading Areas. Management anticipates the construction of the cell sites will begin in the second quarter of 1996, following the completion of detailed engineering and site acquisition activities. Marketing and selling activities along with commercial operations are anticipated to commence in early 1997. American Portable anticipates construction, development and introduction of PCS networks and services will require substantial capital and operating expenditures over the next several years. While construction (including microwave relocation), and other start-up activities may be impacted by many factors, American Portable estimates that the aggregate funds required through December 31, 1998 will total approximately $830 million ($420 million in 1996, $340 million in 1997 and $70 million in 1998). This amount includes an estimated $585 million of capital expenditures for construction of the PCS networks ($370 million in 1996, $205 million in 1997 and $10 million in 1998) and $245 million of estimated working capital requirements. TDS expects American Portable's 1996 capital expenditures and expenditures for start-up and development activities to aggregate approximately $420 million. These expenditures will be financed using a variety of resources, including but not limited to, borrowings from TDS's short-term bank lines of credit, vendor financing and equity investors in American Portable. American Portable filed a registration statement on February 20, 1996 for an initial public offering covering 11.0 million, or approximately 16%, of its Common Shares. At the midpoint of the $15-$18 per share preliminary price range, completion of the offering would yield net proceeds of approximately $170 million. TDS anticipates that start-up and development of high-quality networks and the marketing of systems in American Portable's major markets will reduce the rate of growth in TDS's operating and net income from levels which would otherwise be achieved during the next few years. ACQUISITIONS TDS seeks to acquire cellular telephone, telephone and paging companies which add value to the organization. The table below summarizes interests acquired at the respective dates of acquisition during the last three years and the aggregate consideration paid.
YEAR ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------------- Cellular interests acquired Population equivalents (millions) 1.6 1.3 3.8 Units (consolidated) 34,000 18,000 23,600 Telephone interests acquired Companies 5 3 4 Access lines 13,500 19,700 20,100 Paging units acquired 28,400 37,600 10,700 Consideration (millions) Cash $ 47.8 $ 40.4 $ 58.8 TDS Common Shares 127.8 173.7 281.6 TDS Preferred Shares -- 12.5 3.0 USM Common Shares 12.8 1.4 7.7 Subsidiary preferred stock -- -- 2.9 Other -- 1.4 -- -------------------------------------------- Total Consideration $ 188.4 $ 229.4 $ 354.0 -------------------------------------------- --------------------------------------------
TDS has entered into definitive agreements at December 31, 1995, to acquire a controlling interest in one cellular market, a minority interest in one market, and one telephone company for an aggregate consideration of approximately $73 million, primarily TDS Common Shares. The two cellular interests to be acquired by TDS are expected to be assigned to USM, and at that time USM will reimburse TDS for TDS's consideration delivered and costs incurred in such acquisitions in the form of USM Common Shares, notes payable or cash. The Company is currently negotiating agreements for the acquisition of additional cellular, telephone and paging companies. TDS and USM continue to assess the makeup of cellular holdings in order to maximize the benefits derived from clustering USM's markets. As the number of opportunities for acquisitions of cellular interests has decreased and as USM's clusters have grown to realize greater economies of scale, USM's focus has shifted toward exchanges and sales of non-strategic interests. During 1995, USM sold its majority interests in six markets and its minority interests in six markets. These sales, along with sales of various marketable securities and certain other investments by the Company, generated aggregate cash proceeds of $199.6 million. At December 31, 1995, USM had agreements pending to exchange a controlling interest in one market for a controlling interest in another market, to sell controlling interests in certain other markets and to settle litigation related to an investment interest sold in 1995. Pursuant to the agreements, USM will receive $150 million in cash and $20 million of notes receivable due in three years. All of the pending agreements discussed above are expected to be completed during 1996. Certain of these transactions will generate substantial gains for book and tax purposes. LIQUIDITY Management believes TDS has sufficient internal and external resources to finance the anticipated requirements of its business development, construction and acquisition programs. The Company is generating substantial internal funds. Operating cash flow (operating income plus depreciation and amortization) increased to $323.5 million in 1995 from $260.3 million in 1994 and $187.7 million in 1993. Operating cash flow was 88% of property, plant and equipment additions in 1995, 81% in 1994 and 94% in 1993. TDS Telecom plans to continue financing its telephone construction program primarily using internally generated cash supplemented by long-term financing from federal government programs. The TDS Telecom telephone subsidiaries had $147 million in unadvanced loan funds from federal government programs at year-end to finance the telephone construction program. These loan commitments have a weighted average annual interest rate of 6.3%. USM plans to finance its cellular construction program using primarily internally generated cash supplemented by proceeds from the sales of non- strategic cellular interests. American Portable plans to finance its 1996 construction and development expenditures primarily from the proceeds of the initial public offering, vendor financing and borrowings from TDS's short-term line of credit. TDS and its subsidiaries have cash and temporary investments totalling $80.9 million and longer-term investments totalling $25.2 million at December 31, 1995. These investments are primarily the result of telephone operations' internally generated cash. While certain regulated telephone subsidiaries' debt agreements place limits on intercompany dividend payments, these restrictions are not expected to affect the Company's ability to meet its cash obligations. TDS and its subsidiaries also have access to a variety of external capital sources. TDS and its subsidiaries had $468 million of bank lines of credit for general corporate purposes at December 31, 1995, $443 million of which were committed. Unused amounts of such lines totalled $287 million, $262 million of which were committed. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. TDS has a universal shelf registration statement which may be used from time to time to issue debt securities and/or Common Shares for cash. As of December 31, 1995, $238.4 million remained unused on the universal shelf. TDS and USM have shelf registration statements covering the issuance of equity for acquisitions. TDS's shelf registration statement for acquisitions had 2.7 million Common Shares and 249,000 Preferred Shares unissued and unreserved at December 31, 1995. USM's shelf registration statement for acquisitions had 6.4 million Common Shares and 200,000 shares of Preferred Stock unissued and unreserved at December 31, 1995. In addition, the Company has issued Common Shares for acquisitions pursuant to registration statements filed specifically for particular acquisitions. Management believes TDS's internal cash flows and funds available from cash and cash investments provide substantial financial flexibility. TDS also has substantial lines of credit and longer-term financing commitments to help meet its short- and long-term financing needs. Moreover, TDS and its subsidiaries have access to public and private capital markets and anticipate issuing debt and equity securities when capital requirements (including acquisitions), financial market conditions and other factors warrant. SELECTED CONSOLIDATED FINANCIAL DATA - --------------------
YEAR ENDED OR AT DECEMBER 31, 1995 1994 1993 1992 1991 ------------------------------------------------------------- (Dollars in thousands, except per share amounts) Operating Revenues $ 954,386 $ 730,810 $ 557,795 $ 432,740 $ 340,160 Operating Income 131,998 108,822 69,733 54,065 40,661 Net Income Before Extraordinary Item and Cumulative Effect of Accounting Changes 103,978 60,544 33,896 38,520 21,113 Extraordinary Item -- -- -- (769) -- Cumulative Effect of Accounting Changes -- (723) -- (6,866) (5,035) Net Income 103,978 59,821 33,896 30,885 16,078 Net Income Available to Common $ 102,044 $ 58,012 $ 31,510 $ 28,648 $ 14,390 Weighted Average Common Shares (000s) 58,356 54,197 47,266 39,074 33,036 Earnings per Common Share: Before Extraordinary Item and Cumulative Effect of Accounting Changes $ 1.74 $ 1.07 $ .67 $ .91 $ .59 Extraordinary Item -- -- -- (.02) -- Cumulative Effect of Accounting Changes -- (.01) -- (.17) (.15) Net Income $ 1.74 $ 1.06 $ .67 $ .72 $ .44 Pretax Profit on Revenues 19.4% 13.9% 10.8% 15.8% 10.6% Effective Income Tax Rate (Before Extraordinary Item and Cumulative Effect of Accounting Changes) 43.8% 40.2% 43.9% 43.6% 41.4% Dividends per Common and Series A Common Share $ .38 $ .36 $ .34 $ .32 $ .30 Cash and Cash Equivalents and Temporary Investments $ 80,851 $ 44,566 $ 73,385 $ 58,145 $ 53,346 Property, Plant and Equipment (Net) 2,471,835 2,153,575 1,738,298 1,275,516 997,187 Total Assets 3,469,082 2,790,127 2,259,182 1,696,486 1,368,145 Notes Payable 184,320 98,608 6,309 46,816 41,283 Long-term Debt (including current portion) 894,584 562,164 537,566 426,885 395,960 Redeemable Preferred Shares (including current portion) 15,093 25,001 27,367 27,967 28,779 Common Stockholders' Equity 1,684,365 1,473,038 1,224,285 877,419 645,290 Construction Expenditures $ 370,628 $ 311,477 $ 208,520 $ 162,245 $ 154,574 Current Ratio .6 .5 1.1 .9 .9 Common Equity per Share $ 29.01 $ 26.85 $ 24.15 $ 21.27 $ 18.42 ------------------------------------------------------------- -------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME - --------------------
YEAR ENDED DECEMBER 31, 1995 1994 1993 ------------------------------------------------ (Dollars in thousands, except per share amounts) OPERATING REVENUES Cellular telephone $492,395 $332,404 $214,310 Telephone 354,841 306,341 268,122 Radio paging 107,150 92,065 75,363 -------------------------------------- 954,386 730,810 557,795 -------------------------------------- OPERATING EXPENSES Cellular telephone 449,640 315,019 222,966 Telephone 256,601 214,735 189,012 Radio paging 116,147 92,234 76,084 -------------------------------------- 822,388 621,988 488,062 -------------------------------------- OPERATING INCOME 131,998 108,822 69,733 -------------------------------------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 13,024 10,612 8,082 Cellular investment income, net of license cost amortization 40,666 26,018 15,704 Gain on sale of cellular interests and other investments 86,625 7,457 4,970 PCS development costs (7,829) (1,709) (65) Other (expense) income, net (2,771) 387 (90) Minority share of income (25,858) (9,079) (475) -------------------------------------- 103,857 33,686 28,126 -------------------------------------- INCOME BEFORE INTEREST AND INCOME TAXES 235,855 142,508 97,859 Interest expense 50,848 41,251 37,466 -------------------------------------- INCOME BEFORE INCOME TAXES 185,007 101,257 60,393 Income Tax Expense 81,029 40,713 26,497 -------------------------------------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 103,978 60,544 33,896 Cumulative effect of Accounting Change --- (723) --- -------------------------------------- NET INCOME 103,978 59,821 33,896 Preferred Dividend Requirement (1,934) (1,809) (2,386) -------------------------------------- NET INCOME AVAILABLE TO COMMON $102,044 $ 58,012 $ 31,510 -------------------------------------- -------------------------------------- WEIGHTED AVERAGE COMMON SHARES (000S) 58,356 54,197 47,266 EARNINGS PER COMMON SHARE: Before Cumulative Effect of Accounting Change $ 1.74 $ 1.07 .67 Cumulative Effect of Accounting Change --- (.01) --- -------------------------------------- Net Income $ 1.74 $ 1.06 $ .67 -------------------------------------- DIVIDENDS PER COMMON -------------------------------------- AND SERIES A COMMON SHARE $ .38 $ .36 $ .34 -------------------------------------- --------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------
YEAR ENDED DECEMBER 31, 1995 1994 1993 --------------------------------------------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $103,978 $59,821 $33,896 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting changes -- 723 -- Depreciation and amortization 201,063 161,796 127,509 Deferred taxes 19,603 14,529 5,846 Investment income (43,188) (30,083) (20,015) Minority share of income 25,858 9,079 475 Gain on sale of cellular interests and other investments (86,625) (7,457) (4,970) Noncash interest expense 12,761 26 1,061 Other noncash expense 7,388 5,384 4,275 Change in accounts receivable (33,346) (22,401) (11,262) Change in accounts payable (3,188) 31,714 11,308 Change in accrued taxes (2,638) (4,638) 4,661 Change in other assets and liabilities 9,943 6,193 7,412 ---------------------------------------------- 211,609 224,686 $ 160,196 ---------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 334,323 36,916 122,275 Repayment of long-term debt (30,734) (33,710) (37,969) Change in notes payable 80,351 92,318 (40,533) Common stock issued 6,921 11,185 69,644 Minority partner capital contributions (distributions) 1,411 12,504 (1,528) Redemption of preferred shares (638) (9) (220) Dividends paid (23,972) (20,906) (17,830) Sale of stock by subsidiaries 1,812 45,714 37,154 ---------------------------------------------- 369,474 144,012 130,993 ---------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (366,236) (321,435) (198,743) Investments in PCS licenses (326,035) (31,604) --- Investments in and advances to cellular minority partnerships (20,509) (24,444) (14,595) Distributions from partnerships 9,062 17,375 11,943 Proceeds from investment sales 197,558 6,000 6,750 Other investments 2,503 (18,370) (43,211) Acquisitions, excluding cash acquired (53,770) (37,552) (51,579) Change in temporary investments 6,727 10,399 13,102 ---------------------------------------------- (550,700) (399,631) (276,333) ---------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,383 (30,933) 14,856 CASH AND CASH EQUIVALENTS Beginning of period 24,733 55,666 40,810 ---------------------------------------------- End of period $55,116 $24,733 $55,666 ---------------------------------------------- ----------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED BALANCE SHEETS--ASSETS - --------------------
DECEMBER 31, 1995 1994 ------------------------------ (DOLLARS IN THOUSANDS) CURRENT ASSETS Cash and cash equivalents $ 55,116 $ 24,733 Temporary investments 25,735 19,833 Construction funds 1,588 1,309 Accounts receivable Due from customers, less allowance of $5,104 and $2,785, respectively 77,148 52,897 Other, principally connecting companies 68,196 57,369 Materials and supplies, at average cost 20,738 17,106 Other 12,689 12,671 ------------------------------ 261,210 185,918 ------------------------------ INVESTMENTS Cellular limited partnership interests 158,559 111,733 Cellular license acquisition costs, net of amortization 110,091 94,470 Broadband PCS license acquisition costs 301,196 20,400 Narrowband PCS license acquisition costs 55,365 54,101 Marketable equity securities 346 25,604 Marketable non-equity securities 24,871 71,314 Other 62,537 60,806 ------------------------------ 712,965 438,428 ------------------------------ PROPERTY, PLANT AND EQUIPMENT Cellular Telephone In service and under construction 701,083 479,457 License acquisition costs 1,058,316 979,492 ------------------------------ 1,759,399 1,458,949 Less accumulated depreciation and amortization 240,237 169,112 ------------------------------ 1,519,162 1,289,837 ------------------------------ Telephone In service and under construction, substantially at original cost 1,099,714 995,601 Less accumulated depreciation 442,699 386,487 ------------------------------ 657,015 609,114 Franchise and other costs in excess of the underlying book value of subsidiaries, net of amortization 168,607 151,107 ------------------------------ 825,622 760,221 ------------------------------ Radio Paging In service 136,801 110,779 Less accumulated depreciation and amortization 56,667 39,962 ------------------------------ 80,134 70,817 ------------------------------ Other In service and under construction 87,935 66,832 Less accumulated depreciation and amortization 41,018 34,132 ------------------------------ 46,917 32,700 ------------------------------ 2,471,835 2,153,575 ------------------------------ OTHER ASSETS AND DEFERRED CHARGES 23,072 12,206 ------------------------------ $3,469,082 $2,790,127 ------------------------------ ------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------
DECEMBER 31, 1995 1994 ------------------------------ (DOLLARS IN THOUSANDS) CURRENT LIABILITIES Current portion of long-term debt and preferred shares $ 49,233 $ 37,447 Notes payable 184,320 98,608 Accounts payable 122,886 112,967 Due to FCC - PCS licenses -- 42,897 Advance billings and customer deposits 27,706 20,898 Accrued interest 11,573 10,054 Accrued taxes 2,525 3,894 Other 29,481 19,419 ------------------------------ 427,724 346,184 ------------------------------ DEFERRED LIABILITIES AND CREDITS Net deferred income tax liability 103,206 80,274 Postretirement benefits obligation other than pensions 12,146 14,379 Other 22,943 24,423 ------------------------------ 138,295 119,076 ------------------------------ LONG-TERM DEBT, excluding current portion 858,857 536,509 ------------------------------ REDEEMABLE PREFERRED SHARES, excluding current portion 1,587 13,209 ------------------------------ MINORITY INTEREST in subsidiaries 328,544 272,292 ------------------------------ NONREDEEMABLE PREFERRED SHARES 29,710 29,819 ------------------------------ COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding 51,137,426 and 47,937,570 shares, respectively 51,137 47,938 Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,893,101 and 6,886,684 shares, respectively 6,893 6,887 Common Shares issuable, 31,431 and 41,908 shares, respectively 1,496 1,995 Capital in excess of par value 1,417,513 1,288,453 Retained earnings 207,326 127,765 ------------------------------ 1,684,365 1,473,038 ------------------------------ $3,469,082 $2,790,127 ------------------------------ ------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY - --------------------
YEAR ENDED DECEMBER 31, 1995 1994 1993 --------------------------------------------------- (DOLLARS IN THOUSANDS) COMMON SHARES Balance beginning of period $ 47,938 $ 43,504 $ 34,383 Add Acquisitions 2,960 4,041 7,477 Employee stock ownership plans 81 89 158 Dividend reinvestment plan 105 86 26 Sales of Common Shares -- 100 1,320 Conversion of Preferred Shares 41 116 140 Conversion of Series A Common Shares 12 2 -- -------------------------------------------------- Balance end of period $ 51,137 $ 47,938 $ 43,504 -------------------------------------------------- -------------------------------------------------- SERIES A COMMON SHARES Balance beginning of period $ 6,887 $ 6,881 $ 6,864 Add (Deduct) Dividend reinvestment plan 18 8 17 Conversion to Common Shares (12) (2) -- -------------------------------------------------- Balance end of period $ 6,893 $ 6,887 $ 6,881 -------------------------------------------------- -------------------------------------------------- COMMON SHARES ISSUABLE Balance beginning of period $ 1,995 $ 15,189 $ -- Add (Deduct) Acquisitions -- 1,995 15,189 Shares issued pursuant to acquisition agreements (499) (15,189) -- -------------------------------------------------- Balance at end of period $ 1,496 $ 1,995 $ 15,189 -------------------------------------------------- -------------------------------------------------- CAPITAL IN EXCESS OF PAR VALUE Balance beginning of period $1,288,453 $1,069,022 $ 761,706 Add (Deduct) Acquisitions 125,886 182,812 299,146 Employee stock ownership plans 2,294 2,848 2,578 Dividend reinvestment plans 4,700 3,819 1,835 Sales of Common Shares -- 4,924 64,271 Capital stock expense (124) (53) (333) Conversion of Preferred Shares (3,127) 1,324 1,972 Gain (loss) on sale of subsidiary stock 714 21,184 (62,153) Net unrealized (loss) gain on marketable equity securities (2,090) 2,100 -- Income tax effects of capital stock transactions 807 473 -- -------------------------------------------------- Balance at end of period $1,417,513 $1,288,453 $1,069,022 -------------------------------------------------- -------------------------------------------------- RETAINED EARNINGS Balance beginning of period $ 127,765 $ 89,689 $ 74,466 Add net income 103,978 59,821 33,896 Deduct Dividends Common and Series A Common Shares 21,910 19,287 16,287 Preferred Shares 2,507 2,458 2,386 -------------------------------------------------- Balance at end of period $ 207,326 $ 127,765 $ 89,689 -------------------------------------------------- --------------------------------------------------
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. NATURE OF OPERATIONS TDS is a diversified telecommunications company which, at December 31, 1995, provided high-quality telecommunications services to 1,920,400 consolidated cellular telephone, telephone and radio paging customers in 37 states and the District of Columbia. The Company conducts substantially all of its cellular operations through its 80.8%-owned subsidiary, United States Cellular Corporation [AMEX:USM], its telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"), and its radio paging operations through its 82.3%-owned subsidiary, American Paging, Inc. [AMEX:APP]. The Company is developing its Personal Communications Services ("PCS") operations through its wholly owned subsidiary American Portable Telecom, Inc. ("American Portable"). (See Note 17 - American Portable Initial Public Offering.) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of TDS, its majority- owned subsidiaries since acquisition and the cellular telephone partnerships in which TDS has a majority general partnership interest. All material intercompany items have been eliminated. Certain amounts reported in prior years have been reclassified to conform to current period presentation. TDS includes as investments in subsidiaries the value of the consideration given and all direct and incremental costs relating to acquisitions accounted for as purchases. All costs relating to unsuccessful negotiations for acquisitions are expensed. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS Cash and cash equivalents include cash and those short-term, highly-liquid investments with original maturities of three months or less. Those investments with original maturities of more than three months to 12 months are classified as temporary investments. Temporary investments are stated at cost, which approximates market. Cash and cash equivalents and temporary investments consist of the following:
DECEMBER 31, 1995 1994 -------------------------- (Dollars in thousands) General funds $ 55,116 $ 21,544 Government agency securities 12,021 11,475 Certificates of deposit 13,714 11,547 -------------------------- $ 80,851 $ 44,566 -------------------------- --------------------------
INVESTMENTS Investments in cellular limited partnership interests consist of amounts invested in cellular entities in which TDS holds a minority interest. The Company follows the equity method of accounting, which recognizes TDS's proportionate share of the income and losses accruing to it under the terms of its partnership or shareholder agreements, for its long-term investments ($146.1 million and $97.9 million at December 31, 1995 and 1994, respectively). Income and losses from these entities are reflected in the consolidated income statements on a pretax basis. At December 31, 1995, the cumulative share of income from minority cellular investments accounted for under the equity method was $127.4 million, of which $64.3 million was undistributed. The cost method of accounting is followed for those minority interests which TDS is holding for sale or exchange ($12.5 million and $13.8 million at December 31, 1995 and 1994, respectively). Cellular license acquisition costs consist of costs incurred in acquiring Federal Communications Commission ("FCC") licenses or minority interests which have been awarded FCC licenses to provide cellular service. These costs include amounts paid to license applicants and owners of interests in cellular entities awarded licenses; amounts paid for legal, engineering, and consulting services; amounts incurred by TDS in acquiring these interests; and goodwill. These costs are capitalized and amortized through charges to expense over 40 years upon commencement of operations. Amortization amounted to $2.0 million, $2.0 million and $1.6 million in 1995, 1994 and 1993, respectively. Accumulated amortization of cellular license costs was $7.0 million and $7.2 million at December 31, 1995 and 1994, respectively. Included in cellular license costs is approximately $3.1 million of goodwill which resulted from various acquisitions structured to be tax-free. Broadband and Narrowband PCS license acquisition costs consist of costs incurred in acquiring PCS licenses and capitalized interest. These costs will be amortized through charges to expense upon commencement of operations. At December 31, 1995, investment in Broadband and Narrowband PCS licenses consist of the following:
Broadband Narrowband PCS Licenses PCS Licenses -------------------------------- (Dollars in thousands) License acquisition costs $ 289,194 $ 53,622 Professional services -- 531 Capitalized interest 12,002 1,212 ------------------------------- $ 301,196 $ 55,365 ------------------------------- -------------------------------
Other investments consist of the following:
DECEMBER 31, 1995 1994 -------------------------- (Dollars in thousands) Minority telephone and paging interests $ 30,422 $ 31,012 Long-term notes receivable 16,419 14,589 Rural Telephone Bank Stock, at cost 6,350 5,951 Other 9,346 9,254 ---------------------------- $ 62,537 $ 60,806 ---------------------------- ----------------------------
The equity method of accounting is followed for minority telephone and paging interests in which TDS holds common stock ownership of at least 20% or can influence the policies of the affiliated company. At December 31, 1995, the cumulative share of income from minority telephone and paging investments accounted for under the equity method was $7.4 million, of which $5.9 was undistributed. Amortization of excess cost relating to minority telephone interests totalled $407,000, $532,000 and $545,000 in 1995, 1994 and 1993, respectively. REVENUE RECOGNITION TDS's revenues are recognized when earned. Telephone network access and long- distance services are furnished jointly with other companies, primarily AT&T and the Bell Operating Companies. Compensation for interstate access services is based on tariffed access charges to interstate long-distance carriers as filed by the National Exchange Carrier Association with the FCC on behalf of TDS. Such compensation amounted to 33%, 31% and 31% of telephone revenues in 1995, 1994 and 1993, respectively. Compensation for intrastate toll and access services is based on tariffed access charges, cost separation studies, nationwide average schedules or special settlement arrangements with intrastate long-distance carriers. Network access and long-distance revenues based on cost separation studies represent estimates pending completion and acceptance of final cost studies. Management believes that recorded amounts represent reasonable estimates of the final amounts. EARNINGS PER COMMON SHARE Earnings per Common Share were computed by dividing Net Income Available to Common, less a minority income adjustment, by the weighted average number of Common Shares, Series A Common Shares and dilutive common equivalent shares outstanding during the year. The minority income adjustment, $271,000 and $411,000 in 1995 and 1994, respectively, reflects the additional minority share of USM's income computed as if all of USM's issuable securities were outstanding. Dilutive common stock equivalents consist of Common Shares issuable upon conversion of dilutive series of Preferred Shares and Common Share options. The calculation of Earnings per Common Share assuming full dilution had no effect. Preferred dividend requirements include all dividends paid on Preferred Shares which are not dilutive common stock equivalents. For the year ended December 31, 1995, the preferred dividend requirement on all outstanding Preferred Shares was $1.9 million. SUPPLEMENTAL CASH FLOW DISCLOSURES Following are supplemental cash flow disclosures for interest and income taxes paid, acquisitions and other noncash transactions. TDS paid interest of $49.4 million, $39.9 million and $34.4 million, and income taxes of $60.5 million, $27.6 million and $17.3 million, during 1995, 1994 and 1993, respectively. TDS has acquired operating telephone and paging companies, certain cellular licenses and operating companies and certain other assets since January 1, 1993. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed, and Common Shares and Preferred Shares issued:
YEAR ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------------- (Dollars in thousands) Property, plant and equipment $ 81,789 $ 89,092 $ 78,252 Cellular licenses 129,510 169,845 312,656 Minority interest (1,941) (259) (14,115) Increase (decrease) in equity method investment in cellular interests 977 (15,586) (4,690) Long-term debt (9,254) (21,571) (23,930) Deferred credits (538) (6,225) (5,300) Other assets and liabilities, excluding cash and cash equivalents (6,143) 9,808 3,821 Common Shares issued and issuable (127,836) (173,658) (281,553) Preferred Shares issued (12,500) (3,000) USM Common Shares issued and issuable (12,794) (1,394) (7,653) Subsidiary preferred stock issued -- -- (2,909) ------------------------------------------- Decrease in cash due to acquisitions $ 53,770 $ 37,552 $ 51,579 ------------------------------------------ ------------------------------------------
TDS issued Common Shares aggregating $940,000, $1.4 million and $2.1 million in 1995, 1994 and 1993, respectively, for TDS Preferred Shares converted into Common Shares. TDS issued Common Shares in 1993 aggregating $40.3 million for certain cellular acquisitions completed in prior years. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS The Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March 1995, which became effective in January 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by any entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Management is currently analyzing the impact of this statement, but does not anticipate that the effect on results of operations and financial position will be material. NOTE 2 INCOME TAXES TDS files a consolidated federal income tax return. Income tax provisions charged to net income before the cumulative effect of an accounting change are summarized as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993 --------------------------- (Dollars in thousands) Current: Federal $44,690 $20,921 $15,562 State 16,736 4,873 4,521 Deferred: Federal 19,253 13,440 6,696 State 2,386 2,963 1,510 Amortization of deferred investment tax credits (2,036) (1,484) (1,792) --------------------------- Total income tax expense $81,029 $40,713 $26,497 --------------------------- ---------------------------
Investment tax credits resulting from investments in telephone plant and equipment have been deferred and are being amortized over the service lives of the related property. The statutory federal income tax rate is reconciled to TDS's effective income tax rate before the cumulative effect of an accounting change below.
YEAR ENDED DECEMBER 31, 1995 1994 1993 ---------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 6.9 5.1 6.2 Amortization of license acquisition costs and costs in excess of book value 2.4 3.5 4.8 Acquisition-related tax basis adjustment -- (2.7) (.3) Dividend exclusion (.1) (1.8) -- Amortization of deferred investment tax credits (1.0) (1.5) (3.0) Effects of corporations not included in consolidated federal tax return 2.1 1.4 1.9 Deferred tax rate differential -- -- (.7) Other differences, net (1.5) 1.2 -- ----------------------------------- Effective income tax rate 43.8% 40.2% 43.9% ----------------------------------- -----------------------------------
The total income tax expense for the year ended December 31, 1994, including the cumulative effect of an accounting change was $40.3 million. The effective income tax rate including the cumulative effect of an accounting change was 40.3% in 1994. Deferred income taxes are provided for the temporary differences between the amount of the Company's assets and liabilities for financial reporting purposes and their tax bases. The Company's current net deferred tax assets totalled $3.2 million and $3.5 million as of December 31, 1995 and 1994, respectively. The net current deferred tax asset primarily represents the deferred tax effects of unearned revenues. The temporary differences that gave rise to the noncurrent deferred tax assets and liabilities as of December 31, 1995 and 1994, are as follows:
DECEMBER 31, 1995 1994 ------------------------------- (Dollars in thousands) Deferred Tax Asset: Alternative minimum tax credit carryforward $ 10,316 $ 22,834 State operating loss carryforwards 10,537 9,956 Postretirement benefits 4,502 4,940 Other 9,075 10,799 -------------------------- 34,430 48,529 Less valuation allowance (10,061) (8,962) -------------------------- Net Deferred Tax Asset 24,369 39,567 -------------------------- Deferred Tax Liability: Property, plant and equipment 83,131 76,173 Partnership investments 20,047 12,830 Marketable equity securities 2,572 8,217 Minority share of USM income (1,500) 4,916 Effects of corporations not included in consolidated federal tax return 3,642 4,172 Licenses 16,001 12,329 Other 3,682 1,204 -------------------------- Total Deferred Tax Liability 127,575 119,841 -------------------------- Net Deferred Income Tax Liability $ 103,206 $80,274 ------------------------------- -------------------------------
At December 31, 1995, TDS had $10.3 million of federal alternative minimum tax credit carryforward available to offset regular income tax payable in future years. In addition, TDS had $173.5 million of state net operating loss carryforward at December 31, 1995, expiring between 1996 and 2010, which generated a $10.5 million deferred tax asset. A valuation allowance was established for the state operating loss carryforwards since it is more likely than not that a portion will expire before such carryforwards can be utilized. TDS's telephone subsidiaries have recorded additional deferred income tax liabilities related primarily to temporary differences not deferred under rate- making policy. A corresponding regulatory asset or liability has been established to offset these deferred income tax adjustments. The unamortized regulated asset and liability balances as of December 31, 1995, are $5.0 million and $5.8 million, respectively. These amounts are being amortized over the lives of the related temporary differences. NOTE 3 INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company implemented Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective January 1, 1994. Information regarding the Company's securities is summarized below.
DECEMBER 31, 1995 1994 ------------------------- (Dollars in thousands) Available-for-sale Equity Securities Aggregate Fair Value $ 346 $25,604 Amortized Cost Basis 336 22,229 Gross Unrealized Holding Gains 10 3,379 Gross Unrealized Holding Losses -- 4 Held-to-maturity U.S. Treasury and other U.S. government corporations and agencies Aggregate Fair Value Current 12,293 10,981 Noncurrent 25,200 67,120 Amortized Cost Basis Current 12,337 11,061 Noncurrent 24,871 71,314 Gross Unrealized Holding Gains 343 -- Gross Unrealized Holding Losses $ 58 $4,274 -------------------------- --------------------------
The Company's debt securities classified as held-to-maturity have contractual maturities at December 31, 1995 as follows:
Aggregate Amortized Fair Value Cost Basis -------------------------- (Dollars in thousands) Within one year $ 12,293 $ 12,337 Over one year through five years $ 25,200 $ 24,871 ------------------------------- -------------------------------
The Company's net unrealized holding gain on available-for-sale securities, $10,000 in 1995 and $2.1 million (net of income taxes of $1.3 million) in 1994, has been included as an increase to Common Stockholders' Equity. Realized gains and losses are determined on the basis of specific identification. For 1995, proceeds from the sale of available-for-sale securities totalled $57.6 million and gross realized gains totalled $3.9 million. For 1994, proceeds from the sale of available-for-sale securities totalled $835,000 and gross realized losses totalled $165,000. On December 21, 1995, as a result of the one-time reassessment allowed by the FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued in November 1995, the Company reclassified securities classified as held to maturity with an amortized cost basis of $31.5 million to available-for-sale. These securities were subsequently sold with no realized gain or loss. No sales or transfers of securities classified as held-to-maturity occurred during 1994. NOTE 4 BUSINESS SEGMENT INFORMATION TDS's operations are classified into four principal segments: Cellular Telephone, Telephone, Radio Paging and PCS operations. See Management's Discussion and Analysis of Results of Operations and Financial Condition, specifically "Results of Operations" for certain required financial information regarding TDS's business segments. NOTE 5 PROPERTY, PLANT AND EQUIPMENT CELLULAR TELEPHONE property and equipment is stated at cost. Costs incurred in acquiring FCC licenses or interests in entities which have filed for or have been awarded FCC licenses to provide cellular service have been capitalized. These costs include amounts paid for legal, engineering, and consulting services; amounts paid to license applicants and owners of interests in cellular entities awarded licenses; amounts incurred by TDS in acquiring these interests; and goodwill. These costs are amortized on a straight-line basis over 40 years upon commencement of operations. Amortization amounted to $25.8 million, $22.2 million and $17.3 million in 1995, 1994 and 1993, respectively. Accumulated amortization of these cellular license costs was $83.6 million and $65.5 million at December 31, 1995 and 1994, respectively. Included in cellular license costs is approximately $359.7 million of goodwill which resulted from various acquisitions structured to be tax-free. TELEPHONE plant in service and under construction is stated at the original cost of construction including the capitalized costs of certain taxes, payroll- related expenses, and an allowance for funds used during construction ("AFUDC"). AFUDC, a noncash item of nonoperating income, totalled $682,000, $1.7 million and $698,000 in 1995, 1994 and 1993, respectively. The composite weighted average rates were 9.3%, 10.4%, and 9.2% in 1995, 1994 and 1993, respectively. The amount of such allowance has varied principally as a result of changes in the level of construction work in progress and in the cost of capital. Renewals and betterments of units of property are added to telephone plant in service. The original cost of depreciable property retired is removed from plant in service and, together with removal cost less any salvage realized, is charged to accumulated depreciation. Repairs and renewals of minor items of property are included in plant operations expense. No gain or loss is recognized on ordinary retirements of depreciable telephone property. Telephone franchise and other costs include the costs in excess of the underlying book value of acquired telephone companies. Costs in excess of the underlying book value relating to acquisitions initiated before November 1, 1970, aggregating $6.5 million, are not being amortized. Costs aggregating $186.9 million at December 31, 1995, relating to acquisitions since November 1, 1970, are being amortized on a straight-line basis over a 40-year period. Amortization amounted to $4.4 million, $3.3 million and $3.0 million in 1995, 1994 and 1993, respectively. Accumulated amortization of excess cost was $24.7 million and $20.3 million at December 31, 1995 and 1994, respectively. Included in excess cost is approximately $142 million of goodwill which resulted from various acquisitions structured to be tax-free. RADIO PAGING property and equipment is stated at cost. Costs relating to the acquisition and development of radio paging licenses have been capitalized and are being amortized over five to 25 years upon commencement of operations. OTHER property and equipment is stated at cost. Certain costs relating to the development of computer software for internal use are capitalized and are amortized over the estimated five-year life of the software. DEPRECIATION is provided for book purposes using the straight-line method. Composite depreciation rates, as applied to the average cost of depreciable property, are as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993 ---------------------------------- Cellular Telephone 10.0% 10.5% 10.5% Telephone 7.1 7.5 7.3 Radio Paging 22.1 23.1 18.0 ---------------------------------- Other 9.7 12.8 12.9 ---------------------------------- ----------------------------------
NOTE 6 ACQUISITIONS AND SALES During 1995, 1994 and 1993, TDS and its subsidiaries completed the following business combinations.
Consideration ---------------------------------- TDS and USM Common Stock, Cash, TDS Notes and Preferred Shares, Long-term and Subsidiary Debt Preferred Stock --------------------------------- (Dollars in thousands) Acquisitions During 1995 Cellular interests $ 41,885 $ 94,542 Majority interests in five telephone companies 250 46,087 Paging interests 5,656 -- Acquisitions During 1994 Cellular interests $ 29,599 $ 110,732 Majority interests in three telephone companies 7,386 71,945 Paging interests 4,875 4,875 Acquisitions During 1993 Cellular interests $ 19,538 $ 262,346 Majority interests in four telephone companies 34,396 32,281 Paging interest 4,896 -- -------------------------------- --------------------------------
Assuming that these acquisitions had taken place on January 1, 1994, unaudited pro forma results of operations from continuing operations would have been as follows:
YEAR ENDED DECEMBER 31, 1995 1994 --------------------------------- (Dollars in thousands, except per share amounts) Operating revenues $ 979,694 $ 836,560 Net income before cumulative effect of an accounting change 90,604 38,048 Earnings per share before cumulative effect of an accounting change $ 1.50 $ .61 -------------------------------- --------------------------------
SALES OF CELLULAR AND OTHER INVESTMENTS The $86.6 million gain in 1995 reflects the sales and exchanges of non-strategic and other investments. USM sold its majority interests in six markets and its minority interests in six markets during 1995. These sales, along with the sales of marketable equity securities and certain other investments by TDS, generated cash proceeds of $199.6 million. The $7.5 million gain in 1994 reflects the sale and exchange of minority-owned cellular and telephone interests. The cellular gain represents the excess of the fair market value of the cellular interests traded over the book value of such interests. The Company also sold its minority interest in a telephone company for preferred shares of the telephone company having a face value of $5.9 million and $6.0 million in cash. The $5.0 million gain in 1993 reflects primarily the sales of two minority cellular interests. USM received $6.8 million cash consideration on the sales. NOTE 7 FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of Cash and Cash Equivalents, Temporary Investments and Short-term Debt approximate fair value due to the short-term nature of these instruments. The carrying value and estimated fair value of the Company's long-term debt was $894.6 million and $932.6 million, respectively, at December 31, 1995, and $562.2 million and $497.7 million, respectively, at December 31, 1994. The fair value was estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 1995 and 1994, the carrying value of the Company's Redeemable Preferred Shares, $15.1 million, and $25.0 million, respectively, was approximately equal to its fair value. The fair value was estimated using discounted cash flow analysis based on the Company's current dividend yield on issues of its non-convertible preferred shares and, for convertible series, the net present value of the common stock to be issued upon conversion (valued at quoted market prices). It was not practicable to estimate the fair value of the Company's cost method investments in other companies because of the lack of quoted market prices. The carrying amounts at December 31, 1995 and 1994 represent the original cost of the investments, which management believes is not impaired. NOTE 8 NOTES PAYABLE TDS has used short-term debt to finance its investments in cellular telephone and radio paging operations, for acquisitions, and for general corporate purposes. Long-term debt and equity financing from time to time have retired such short-term debt. Proceeds from a USM convertible debt offering reduced $131.4 million of short-term debt in 1995. Proceeds from an APP initial public offering (see Note 10-Sale of Stock by Subsidiaries) and TDS's sales of Common Shares retired $21.2 million of short-term debt in 1994. TDS and its subsidiaries had $467.9 million of bank lines of credit for general corporate purposes at December 31, 1995, $442.9 million of which were committed. Unused amounts of such lines totalled $287.0 million, $262.0 million of which were committed. These line-of-credit agreements provide for borrowings at negotiated rates up to the prime rate. Information concerning notes payable is shown in the table below.
DECEMBER 31, 1995 1994 1993 ------------------------------------- (Dollars in thousands) Balance at end of period $184,320 $ 98,608 $ 6,309 Weighted average interest rate at end of period 6.3% 6.5% 3.6% Maximum amount outstanding during the period $184,320 $106,077 $ 49,851 Average amount outstanding during the period (1) $139,671 $ 50,499 $ 32,270 Weighted average interest rate during the period (1) 6.4% 5.2% 3.9% ---------------------------------- ----------------------------------
(1) The average was computed based on month-end balances. NOTE 9 LONG-TERM DEBT Long-term debt as of December 31, 1995 and 1994 is as follows:
DECEMBER 31, 1995 1994 ----------------------- (Dollars in thousands) Telephone and Data Systems, Inc. (Parent) Medium-term notes, 8% to 10%, due through 2025 $239,200 $200,000 Purchase contracts, 8% to 14%, due through 2003 2,896 3,116 Subordinated debentures, 8% to 14.5%, due through 2008 780 1,909 ----------------------- 242,876 205,025 Less current portion 418 1,261 ----------------------- Total parent debt 242,458 203,764 ----------------------- Subsidiaries RUS, RTB and FFB Mortgage Notes, due through 2031 0% to 2% 26,350 29,060 4% to 6% 172,231 168,027 6.04% to 9% 84,464 75,546 9.5% to 11% 1,233 1,153 ----------------------- 284,278 273,786 6% zero coupon convertible debentures matures at June 15, 2015 745,000 -- Unamortized discount (509,250) -- ----------------------- 235,750 Vendor financing, approximating 90-day Commercial Paper plus 2.25% or 2.307% due through 2002 119,998 69,265 Other long-term notes, 4.6% to 10.5%, due through 2005 11,682 14,089 ----------------------- 651,708 357,140 Less current portion 35,309 24,395 ----------------------- Total subsidiaries' debt 616,399 332,745 ----------------------- Total long-term debt $858,857 $536,509 ----------------------- -----------------------
The Company sold $39.2 million of senior unsecured debt securities in 1995 under its Medium-Term Note Program. The proceeds were used principally to retire short-term debt, as well as for working capital and general corporate purposes. The mortgage notes issued under certain loan agreements with the Rural Utilities Service ("RUS"), Rural Telephone Bank ("RTB") and Federal Financing Bank ("FFB"), agencies of the United States of America, are to be repaid in equal monthly or quarterly installments covering principal and interest beginning six months to three years after dates of issue and expiring through 2031. Substantially all telephone plant is pledged under RUS and RTB mortgage notes and various other obligations of the subsidiaries. USM sold $745 million principal amount at maturity of zero coupon 6% yield to maturity convertible debt in June 1995 with proceeds to the Company of $221.5 million. This 20-year fixed rate debt, in the form of Liquid Yield Option TM Notes ("LYONsTM") (TMTrademark of Merrill Lynch & Co., Inc.), is subordinated to all senior indebtedness of USM. Each LYON is convertible at the option of the holder at any time at a conversion rate of 9.475 USM Common Shares per LYON. Upon conversion, USM may elect to deliver its Common Shares or cash equal to the market value of the Common Shares. Beginning June 15, 2000, the LYONs may be redeemed at any time for cash at the option of USM at the issue price plus accrued original issue discount through the date of redemption. USM will purchase LYONs, at the option of the holder, as of June 15, 2000, at the issue price plus accrued original issue discount through that date. USM will have the option of purchasing such LYONs with cash, USM Common Shares or TDS common equity securities, or any combination thereof. No LYONs have been converted as of December 31, 1995. USM has financing arrangements with an equipment vendor for cellular system equipment and construction costs. The borrowings are collateralized by a secured interest in some or all of the assets of USM's operating subsidiaries. Borrowings have terms of seven years at interest rates of 2.25% or 2.307% over the 90-day Commercial Paper Rate (5.58% at December 31, 1995). The annual requirements for principal payments on long-term debt are approximately $35.7 million, $36.2 million, $36.4 million, $34.2 million and $28.5 million for the years 1996 through 2000, respectively. NOTE 10 MINORITY INTERESTS IN SUBSIDIARIES The following table summarizes the minority shareholders' and partners' interests in the equity of consolidated subsidiaries.
DECEMBER 31, 1995 1994 ------------------------ (Dollars in thousands) USM USM shareholders' share $259,719 $213,892 USM subsidiaries' partners share 45,303 33,552 ------------------------ 305,022 247,444 TDS Telecom telephone subsidiaries' share 17,108 16,047 APP shareholders' share 6,280 8,928 Other 134 (127) ------------------------- $328,544 $272,292 ------------------------- -------------------------
SALE OF STOCK BY SUBSIDIARIES USM has issued Common Shares during 1995, 1994 and 1993 in connection with acquisitions, employee stock purchase plans, and in 1993 pursuant to a rights offering. APP has issued Common Shares during 1995 in connection with employee stock purchase plans, and in 1994 issued 3.5 million Common Shares in an initial public offering (at a price of $14 per share). The initial public offering reduced TDS's ownership percentage from 100% to 82.5%. The USM and APP Common Share transactions were recorded at fair market values which were either less than or in excess of TDS's book value investment in USM and APP. TDS adjusted its book value investment as a result of these issues and increased or (decreased) capital in excess of par value ($545,000), $22.8 million and ($62.2 million) in 1995, 1994 and 1993, respectively. NOTE 11 PREFERRED SHARES All issued TDS Cumulative Voting Preferred Shares have a stated value of $100 per share. The 5,000,000 authorized Preferred Shares are issuable in series by the Board of Directors who establish the terms of the issue. Those issues which contain mandatory redemption features or which are redeemable at the option of the holder are classified as Redeemable Preferred Shares. Those issues which are not redeemable or which are redeemable at the option of TDS are classified as Nonredeemable Preferred Shares. REDEEMABLE PREFERRED SHARES Redeemable Preferred Shares include outstanding series of TDS Cumulative Voting Preferred Shares with mandatory redemption features or are redeemable at the option of the holder. At December 31, 1995, 150,929 shares of Redeemable Preferred Shares were outstanding. Dividends on certain series are payable in additional shares of that series. All other dividends are payable in cash. The various series of Redeemable Preferred Shares are redeemable 1) at the option of the holder at $100 per share plus accrued and unpaid dividends or 2) at the option of the holder into (at TDS's option) a specified number of USM Common Shares, a number of TDS Common Shares having a market value equal to the specified number of USM Common Shares, or a combination of USM and TDS Common Shares. The annual requirements for redemption of Redeemable Preferred Shares are $13.5 million, $1.3 million, $79,000, $79,000 and $78,000 for the years 1996 through 2000, respectively. The following is a schedule of the Redeemable Preferred Shares' activity.
YEAR ENDED DECEMBER 31, 1995 1994 1993 ---------------------------------- (Dollars in thousands) Balance, beginning of period $25,001 $27,367 $27,967 Add: Stock dividends 546 839 834 Less: Redemption of preferred (9,608) (644) (220) Conversion of preferred -- (1,361) (14) Expiration of redemption feature (839) (1,200) (1,200) Change in redemption feature (7) -- -- --------------------------------- 15,093 25,001 27,367 Less current portion 13,506 11,792 1,735 --------------------------------- Balance, end of period $ 1,587 $13,209 $25,632 --------------------------------- ---------------------------------
NONREDEEMABLE PREFERRED SHARES Nonredeemable Preferred Shares include outstanding series of TDS Cumulative Voting Preferred Shares which have no mandatory redemption features. At December 31, 1995, 297,104 shares of Nonredeemable Preferred Shares were outstanding. Outstanding Nonredeemable Preferred Shares are generally redeemable at the option of TDS at $100 per share, plus accrued and unpaid dividends. At December 31, 1995, certain series of Preferred Shares are convertible into TDS Common Shares. (See Note 12 - Convertible Preferred Shares) The following is a schedule of the Nonredeemable Preferred Shares activity.
YEAR ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------- (Dollars in thousands) Balance, beginning of period $29,819 $16,833 $14,233 Add: Acquisitions -- 12,500 3,000 Reclassification from Redeemable Preferred Shares 839 1,200 1,200 Less: Conversion of preferred (948) (714) (1,600) -------------------------------------- Balance, end of period $29,710 $29,819 $16,833 -------------------------------------- --------------------------------------
NOTE 12 COMMON STOCK ACQUISITIONS During 1995, 1994 and 1993, TDS issued 3.0 million Common Shares, 4.0 million Common Shares and 7.5 million Common Shares, respectively, for the acquisition of cellular and telephone interests. COMMON SHARES ISSUABLE A cellular acquisition agreement requires TDS to deliver 10,477 Common Shares in 1996, 1997 and 1998. EMPLOYEE AND SHAREHOLDER STOCK PLANS The following table summarizes Common and Series A Common Shares issued for the employee stock ownership plans and dividend reinvestment plans described below.
YEAR ENDED DECEMBER 31, 1995 1994 1993 --------------------------------------- Common Shares Employee stock purchase plan 18,010 34,171 31,065 Tax-deferred savings plan 40,624 30,764 29,760 Employee stock options and stock appreciation rights 22,015 25,107 96,877 Dividend reinvestment plan 105,001 85,754 26,070 ------------------------------------- 185,650 175,796 183,772 ------------------------------------- ------------------------------------- Series A Common Shares Dividend reinvestment plan 17,855 7,783 17,182 ------------------------------------- -------------------------------------
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 72,823 Common Shares for sale to the employees of TDS and its subsidiaries at the lower of $44.73 per share or the year-end closing price ($39.50 per share at December 31, 1995) in connection with the 1993 Employee Stock Purchase Plan. TAX-DEFERRED SAVINGS PLAN. TDS has reserved 147,181 Common Shares for issue under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions in TDS Common Shares, USM Common Shares, APP Common Shares or five nonaffiliated funds. Employer matching contributions, equal to 20% of employee contributions up to a certain limit, are made in TDS Common Shares. EMPLOYEE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. TDS has reserved 1,327,221 Common Shares for options granted and to be granted to key employees. TDS has established certain plans that provide for the grant of stock options and stock appreciation rights to officers and employees. The options are exercisable over a specified period not in excess of ten years. The options expire from 1996 to 2004, or the date of the employee's termination of employment, if earlier. The following table summarizes the status of the plans.
Weighted Number Average Stock Options of Shares Option Prices ------------------------------ Outstanding January 1, 1993 (177,001 exercisable) 424,974 $ 13.01 Granted 11,125 $ 35.54 Exercised (133,414) $ 9.62 ------------------------------ Outstanding December 31, 1993 (107,661 exercisable) 302,685 $ 15.35 Granted 221,275 $ 47.59 Exercised (25,876) $ 5.30 Cancelled (12,487) $ 27.47 ------------------------------ Outstanding December 31, 1994 (172,689 exercisable) 485,597 $ 30.25 Granted 49,125 $ 38.28 Exercised (26,101) $ 5.52 Cancelled (3,046) $ 43.32 ------------------------------ Outstanding December 31, 1995 (238,125 exercisable) 505,575 $ 32.30 ------------------------------ ------------------------------
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, 1995 1994 1993 ---------------------------------- Outstanding beginning of period 12,096 9,100 22,076 Granted 8,174 7,796 9,410 Exercised (4,236) (4,800) (22,386) ---------------------------------- Outstanding end of period 16,034 12,096 9,100 ---------------------------------- ----------------------------------
Compensation expense, measured on the difference between the year-end market price of the Common Shares and SAR prices, was $408,000, $218,000 and $664,000 in 1995, 1994 and 1993, respectively. DIVIDEND REINVESTMENT PLANS. TDS has reserved 514,842 Common Shares for issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and 218,699 Series A Common Shares for issue under the Series A Common Share Automatic Dividend Reinvestment Plan. These plans enable holders of TDS's Common Shares and Preferred Shares to reinvest cash dividends in newly issued Common Shares and holders of Series A Common Shares to reinvest cash dividends in newly issued Series A Common Shares. The purchase price of the shares is 95% of the market value, based on the average of the daily high and low sales prices for TDS's Common Shares on the American Stock Exchange for the ten trading days preceding the date on which the purchase is made. CONVERTIBLE PREFERRED SHARES TDS has reserved 2,245,123 Common Shares for the possible conversion of its convertible Preferred Shares (See Note 11 - Nonredeemable Preferred Shares). TDS issued 40,734, 115,542 and 139,689 Common Shares in 1995, 1994 and 1993, respectively, for shares of TDS and subsidiary preferred stock converted. SERIES A COMMON SHARES The holders of Common Shares and the outstanding Preferred Shares are entitled to one vote per share. The holders of Series A Common Shares are entitled to ten votes per share. Series A Common Shares are convertible, on a share-for-share basis, into Common Shares. TDS has reserved 6,893,101 Common Shares for possible issuance upon such conversion. PUBLIC OFFERING TDS issued 100,000 and 1.3 million Common Shares for cash under its shelf registration statements in 1994 and 1993, respectively. Proceeds aggregated $4.9 million and $65.6 million in 1994 and 1993, respectively. NOTE 13 COMMITMENTS AND CONTINGENCIES CONSTRUCTION AND EXPANSION The primary purpose of TDS's construction and expansion program is to provide for normal growth, to upgrade telephone service, to expand into new communication areas, and to take advantage of service-enhancing and cost- reducing technological developments. Property and equipment expenditures for cellular telephone operations are estimated to be approximately $240 million during 1996. Telephone construction expenditures are estimated to be approximately $125 million during 1996. Radio paging fixed asset expenditures are estimated to be approximately $54 million during 1996, including $8 million for narrowband PCS activities. Broadband PCS aggregate capital requirements for 1996-1998 are estimated to total approximately $830 million, with $585 million for capital additions and $245 million for working capital, start- up costs and market development activities. Other fixed asset expenditures are estimated to be approximately $15 million during 1996. PENDING ACQUISITIONS AND SALES The Company has an ongoing acquisition program to acquire cellular telephone interests and telephone companies. At December 31, 1995, TDS has entered into definitive agreements to acquire a controlling interest in one cellular market, a minority interest in one cellular market and one telephone company for an aggregate consideration of approximately $73 million, primarily TDS Common Shares. The two cellular interests to be acquired by TDS are expected to be assigned to USM, and at that time, USM will reimburse TDS for TDS's consideration delivered and costs incurred in such acquisitions in the form of USM Common Shares, notes payable or cash. At December 31, 1995, USM had agreements pending to exchange a controlling interest in one market for a controlling interest in another market, to sell controlling interests in seven other markets and one market partition and to settle litigation related to an investment interest which was sold in 1995. Pursuant to the agreements, USM will receive $150 million in cash and $20 million in notes receivable due in three years. All of the pending agreements are expected to be completed during 1996. Certain of the sales and the litigation settlement will generate substantial gains for book and tax purposes. LEASE COMMITMENTS TDS and its subsidiaries have leases for certain cellular plant facilities, office space and data processing equipment, most of which are classified as operating leases. For the years 1995, 1994 and 1993, rent expense for term leases was $13.6 million, $10.4 million and $7.8 million, respectively, and rent expense under cancelable and short-term leases was $7.5 million, $6.5 million and $5.4 million, respectively. At December 31, 1995, the aggregate minimum rental commitments under noncancelable operating leases were as follows:
Minimum Future Rental Payments ---------------------- (Dollars in thousands) 1996 $11,716 1997 10,280 1998 8,563 1999 7,253 2000 6,066 Thereafter $18,160 ---------------------- ----------------------
LEGAL PROCEEDINGS The Company is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain cellular telephone systems and other interests. Management does not believe that any of such proceedings should have a material adverse impact on the financial position or results of operations of the Company. COLLECTIBILITY OF NOTE RECEIVABLE As of December 31, 1995, USM loaned a total of $5.5 million to another cellular company ("Cellular Co.") under a long-term financing agreement. Under the agreement, USM will provide up to $6 million to finance Cellular Co.'s equipment purchases and construction costs related to the operations in a cellular market. Although interest payments are current, USM has no assurance that Cellular Co. will have sufficient assets at the time the principal payment is due in June 2000 to repay the loans in full. No accrual has been made for this possibility and the note is being carried on the balance sheet at the full loan amount as of December 31, 1995. STANDBY LETTER OF CREDIT The Company has entered into a standby letter of credit agreement effective July 20, 1994 with a financial institution. This standby letter of credit, which will not exceed $10.0 million, provides supplemental security in support of a bank loan to an entity minority-owned by the Company. In the event of default under the minority-owned entity's bank loan agreement, the bank may call upon the Company's standby letter of credit to satisfy any amounts still due under this loan agreement. NOTE 14 RESTRICTION ON COMMON STOCK DIVIDENDS Under TDS's loan agreements at December 31, 1995, all of the consolidated retained earnings were available for the payment of cash dividends on shares of TDS common stock. Certain regulated telephone subsidiaries may not transfer funds to the parent in the form of cash dividends, loans or advances until certain financial requirements of their mortgages have been met. Of the $390.6 million underlying retained earnings of all TDS subsidiaries at December 31, 1995, $169.1 million was available for the payment of dividends on the subsidiaries common stock. Of the $2.4 billion underlying net assets of the TDS subsidiaries at December 31, 1995, $1.8 billion was available for transfer to TDS. NOTE 15 INVESTMENTS IN UNCONSOLIDATED ENTITIES The following summarizes the unaudited combined assets, liabilities and equity, and the unaudited results of operations of the cellular and telephone companies in which TDS's investments are accounted for by the equity method.
DECEMBER 31, 1995 1994 ------------------------------ (Dollars in thousands) Assets Current assets $ 266,967 $ 217,872 Due from affiliates 24,765 20,123 Property and other 937,609 631,222 ------------------------------ $1,229,341 $ 869,217 ------------------------------ ------------------------------ Liabilities and Equity Current liabilities $ 240,480 $ 194,728 Due to affiliates 31,501 32,034 Deferred credits 5,766 5,468 Long-term debt 40,220 38,984 Partners' capital and stockholders' equity 911,374 598,003 ------------------------------ $1,229,341 $ 869,217 ------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, 1995 1994 1993 -------------------------------------- (Dollars in thousands) Results of Operations Revenues $1,173,559 $ 892,530 $ 765,983 Costs and expenses (808,008) (652,918) (568,458) Other income (expense) 8,249 7,952 (8,045) Interest expense (6,414) (5,650) (9,046) Income taxes (4,670) (1,824) (3,596) Cumulative effect of accounting changes -- -- 432 -------------------------------------- Net income $ 362,716 $ 240,090 $ 177,270 -------------------------------------- --------------------------------------
NOTE 16 EMPLOYEE BENEFIT PLANS PENSION PLAN Telephone and Data Systems, Inc. Employees' Pension Trust I (the "TDS Plan"), a qualified noncontributory defined contribution pension plan, provides pension benefits for most of the employees of TDS, Inc., its telephone subsidiaries and its service companies. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Employees of certain of the telephone subsidiaries not covered by the TDS Plan are covered under other pension plans or receive direct pension payments. USM adopted the United States Cellular Corporation Pension Plan (the "USM Plan") effective January 1, 1994. The USM Plan, a qualified noncontributory defined contribution pension plan, provides pension benefits for USM and American Portable employees. Under the USM Plan, pension costs are calculated separately for each participant and are funded currently. TDS established the Telephone and Data Systems, Inc. Supplemental Executive Retirement Plan (the "SERP") in 1994 to supplement the benefits under the TDS Plan and the USM Plan. The SERP was established to offset the reduction of benefits caused by the limitation on annual employee compensation under Internal Revenue Service Code Section 401(a)(17). The SERP is a nonqualified deferred compensation plan and is intended to be unfunded. Total pension costs were $4.6 million, $4.8 million and $3.3 million in 1995, 1994 and 1993, respectively. OTHER POSTRETIREMENT BENEFITS The Company sponsors two defined benefit postretirement plans that cover most of the employees of TDS, Inc., its telephone subsidiaries and its service companies. One plan provides medical benefits and the other plan provides life insurance benefits. Both plans are contributory, with retiree contributions adjusted annually. The accounting for the medical plan anticipates future cost sharing changes to the written plan that are consistent with the Company's intent to increase retiree contributions by the health care cost trend rate. During 1992 the Company established a Medical Benefit Fund (the "Fund") within the TDS Plan, under Internal Revenue Code Section 401(h). The Fund was established to pay for part of the cost of the medical benefits. An amount not to exceed 25% of the total contribution to the TDS Plan will be contributed to the Fund annually. An additional contribution equal to a reasonable amortization of the past service cost may be made without regard to the 25% limitation described above. The Company will limit overall contributions to the aggregate accruals recorded by its subsidiaries. The Company established a Voluntary Employees' Beneficiary Association during 1993 to fund the costs of the life insurance benefits. The Company's postretirement medical and life insurance plans are currently underfunded. The following table sets forth the plans' funded status reconciled with the amount shown in the Company's consolidated balance sheet at December 31, 1995 (dollars in thousands):
Life Health Insurance Care Plan Plan Total -------------------------------------- (Dollars in thousands) Accumulated postretirement benefit obligation: Retiree's $ 1,066 $ 3,292 $ 4,358 Fully eligible active plan participants 597 2,562 3,159 Other active plan participants 1,001 9,950 10,951 -------------------------------------- 2,664 15,804 18,468 Plan assets at fair value 940 5,876 6,816 -------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 1,724 9,928 11,652 Unrecognized prior service cost (42) (357) (399) Unrecognized net gain from past experience different from that assumed and from changes in assumptions 180 713 893 -------------------------------------- Accrued postretirement benefit cost at December 31, 1995 $ 1,862 $10,284 $12,146 -------------------------------------- --------------------------------------
Net postretirement cost for 1995, 1994 and 1993 includes the following components:
DECEMBER 31, 1995 1994 1993 -------------------------------------- (Dollars in thousands) Service cost $ 588 $ 810 $ 806 Interest cost on accumulated postretirement benefit obligation 1,082 1,116 1,378 Actual return on plan assets (656) -- (64) Net amortization and deferral 204 (224) (49) -------------------------------------- Net postretirement cost $ 1,218 $ 1,702 $ 2,071 ------------------------------------- -------------------------------------
For measurement purposes, a 10.9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease over eight years to 6.1% and to remain at 6.1% thereafter. The assumed rates of compensation increases and return on plan assets were 5% and 8%, respectively. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, by $3.5 million and the aggregate of the service and interest cost components of postretirement expense for the year then ended by $502,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0%. ACCOUNTING FOR POSTEMPLOYMENT BENEFITS The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. SFAS No. 112 requires employers to recognize the obligation to provide benefits to former or inactive employees after employment but before retirement. The adoption of SFAS No. 112 had no significant effect on results of operations or financial condition. NOTE 17 SUBSEQUENT EVENTS AMERICAN PORTABLE INITIAL PUBLIC OFFERING American Portable filed a registration statement on February 20, 1996, for an initial public offering of 11.0 million of its Common Shares and is expected to grant the underwriters an over-allotment option for up to 1.65 million Common Shares. If the offering is completed as currently planned, upon completion of the offering, TDS will own 82.4% to 84.3% of the capital stock of American Portable. It is estimated that the initial public offering price will be between $15 and $18 per Common Share. CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ----------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1995 Operating Revenues $209,975 $ 232,091 $256,508 $255,812 Operating Income 29,156 33,825 40,560 28,457 Net Income 23,193 22,580 42,596 15,609 Net Income Available to Common $ 22,701 $ 22,086 $ 42,338 $ 15,100 Weighted Average Common Shares (000s) 57,292 58,508 59,038 58,741 Earnings per Common Shares: $ .39 $ .38 $ .72 $ .26 1994 Operating Revenues $158,802 $ 173,585 $193,105 $205,318 Operating Income 22,304 29,005 32,303 25,210 Net Income Before Cumulative Effect of Accounting Changes 10,224 14,320 17,623 18,377 Cumulative Effect of Accounting Changes (723) -- -- -- Net Income 9,501 14,320 17,623 18,377 Net Income Available to Common $ 8,937 $ 13,810 $ 17,166 $ 17,876 Weighted Average Common Shares (000s) 52,555 53,217 54,282 55,612 Earnings per Common Share: Before Cumulative Effect of Accounting Changes $ .18 $ .26 $ .31 $ .32 Cumulative Effect of Accounting Changes (.01) -- -- -- Net Income $ .17 $ .26 $ .31 $ .32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Telephone and Data Systems, Inc.: We have audited the accompanying consolidated balance sheets of Telephone and Data Systems, Inc. (an Iowa corporation) and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telephone and Data Systems, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois February 6, 1996 (except with respect to the matter discussed in Note 17, as to which the date is February 20,1996) TDS STOCK AND DIVIDEND INFORMATION TDS's Common Shares are listed on the American Stock Exchange ("AMEX") under the symbol "TDS" and in the newspapers as "TeleData." As of February 29, 1996, TDS Common Shares were held by 3,921 record owners and the Series A Common Shares were held by 108 record owners. TDS has paid cash dividends on Common Shares since 1974, and paid dividends of $.38 and $.36 per Common and Series A Common Share during 1995 and 1994, respectively. The Common Shares of United States Cellular Corporation, an 80.8%-owned subsidiary of TDS, are listed on the AMEX under the symbol "USM" and in the newspapers as "US Cellu." The Common Shares of American Paging, Inc., an 82.3%-owned subsidiary of TDS, are also listed on the AMEX under the symbol "APP" and in the newspapers as "AmPaging." MARKET PRICE PER COMMON SHARE BY QUARTER TDS's Series A Common Shares and Preferred Shares are not actively traded and therefore, quotations are not reported for such securities. Dividends on TDS's Preferred Shares have been paid quarterly since the dates of issue. The high and low sales prices of the Common Shares on the AMEX as reported by the Dow Jones News Service are as follows:
1995 1ST 2ND 3RD 4TH -------------------------------------------------- High $ 46.38 39.38 42.88 43.25 Low $ 36.13 36.00 36.38 35.63 Dividend Paid $ .095 .095 .095 .095 -------------------------------------------------- -------------------------------------------------- 1994 1ST 2ND 3RD 4TH -------------------------------------------------- High $ 51.50 42.88 47.63 49.88 Low $ 36.75 36.00 35.50 39.50 Dividend Paid $ .09 .09 .09 .09 -------------------------------------------------- --------------------------------------------------
EX-21 6 EXHIBIT 21 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 TELEPHONE COMPANIES TDS Telecommunications Corporation CENTRAL REGION - MID-CENTRAL DIVISION Arcadia Telephone Company Camden Telephone Company Chatham Telephone Company Communications Corporation of Indiana Communication Corporation of Michigan Communications Corporation of Southern Indiana Continental Telephone Company Home Telephone Company, Inc. The Home Telephone Company of Pittsboro, Inc. Island Telephone Company Little Miami Communications Corporation Oakwood Telephone Company Shiawassee Telephone Company The Vanlue Telephone Company Wolverine Telephone Company CENTRAL REGION - MID-WEST DIVISION Arvig Telephone Company Badger Telecom, Inc. Black Earth Telephone Company, Inc. Bonduel Telephone Company Bridge Water Telephone Company Burlington, Brighton and Wheatland Telephone Company Central State Telephone Company Danube Telephone Company EastCoast Telecom, Inc. Grantland Telecom, Inc. KMP Telephone Company Mid-State Telephone Company Midway Telephone Company Mt. Vernon Telephone Company Riverside Telecom, Inc. Scandinavia Telephone Company Stockbridge & Sherwood Telephone Company, Inc. Tenney Telephone Company Waunakee Telephone Company, Inc. Winsted Telephone Company 1 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 TELEPHONE COMPANIES (Cont.) CENTRAL REGION - WESTERN DIVISION Arizona Telephone Company Asotin Telephone Company Cleveland County Telephone Company, Inc. Decatur Telephone Company Delta County Tele-Comm, Inc. Happy Valley Telephone Company Home Telephone Company Hornitos Telephone Company Lewis River Telephone Company McDaniel Telephone Company Mid-America Telephone Company, Inc. New London Telephone Company Oklahoma Communication Systems, Inc. Orchard Farm Telephone Company Potlatch Telephone Company Southwestern Telephone Company The Stoutland Telephone Company Strasburg Telephone Company Troy Telephone Company, Inc. Vernon Telephone Company Winterhaven Telephone Company Wyandotte Telephone Company NORTHEAST REGION Chichester Telephone Company, Inc. Edwards Telephone Company, Inc. Hampden Telephone Company Hartland & St. Albans Telephone Company The Island Telephone Company Kearsarge Telephone Company Ludlow Telephone Company Mahanoy & Mahantango Telephone Company Meriden Telephone Company, Inc. Northfield Telephone Company Oriskany Falls Telephone Corporation Perkinsville Telephone Company, Inc. Port Byron Telephone Company Somerset Telephone Company Sugar Valley Telephone Company Warren Telephone Company West Penobscot Telephone & Telegraph Company 2 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 TELEPHONE COMPANIES (Cont.) SOUTHEAST REGION Amelia Telephone Corporation Barnardsville Telephone Company Blue Ridge Telephone Company Butler Telephone Company, Inc. Camden Telephone & Telegraph Company Calhoun City Telephone Company, Inc. Concord Telephone Exchange, Inc. Goshen Telephone Company Grove Hill Telephone Corporation Humphreys County Telephone Company Leslie County Telephone Company Lewisport Telephone Company McClellanville Telephone Company, Inc. New Castle Telephone Company Norway Telephone Company Oakman Telephone Company, Inc. Peoples Telephone Company Quincy Telephone Company St. Stephen Telephone Company Salem Telephone Company, Inc. Saluda Mountain Telephone Company Service Telephone Company, Inc. Southeast Mississippi Telephone Company, Inc. Tellico Telephone Company, Inc. Tennessee Telephone Company Virginia Telephone Company Williston Telephone Company MANAGEMENT SERVICE COMPANIES Arvig Telcom, Inc. Arvig Cellular, Inc. Central Region - TSSD, Inc. Metroplex Communications Corporation Metroplex Olympia Cellular Communications Corporation Metroplex Portland Cellular Communications Corporation Metroplex RSD-7 Cellular Communications Corporation Metroplex Security Company Rural Development Acquisition Corporation TDSNet TDS Oklahoma Holdings, Inc. TDS Telecom N.E.R., Inc. Tennessee Telecommunications Service Corporation U.S. Link, Inc. 3 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 SERVICE COMPANIES American Communications Consultants, Inc. American Radio Communications, Inc. CellVest CommVest, Inc. Integrated Communications Services, Inc. National Telephone & Telegraph Company Rudevco, Inc. Suttle Press, Inc. TCC, Incorporated TDS Computing Services, Inc. TDS Realestate Investment Corporation Tel Radio Communications Properties, Inc. Telecommunications Technologies Fund, Inc. CABLE TV COMPANIES Acorn Cable Company TDS Cable Communications Company Carolina Cable T.V. Co., Inc. Comvideo Systems, Inc. Condon TV Systems, Inc. Interlake CableVision, Inc. Kearsarge Cable Communications, Inc. Lewisport Cable TV Metroplex Cable, Inc. 21st Century T.V., Inc. Volunteer TV Cable Company Warren Cable Company PCS COMPANIES American Portable Telecom, Inc. APT Operating Company, Inc. APT Alaska, Inc. APT Columbus, Inc. APT Guam, Inc. APT Houston, Inc. APT Kansas City, Inc. APT Minneapolis, Inc. APT of Pittsburgh G.P., Inc. APT Tampa/Orlando, Inc. 4 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 RADIO PAGING COMPANIES American Paging, Inc. Advanced Wireless Messaging, Inc. American Messaging Services, LLC A. P. of Pennsylvania, Inc. American Paging, Inc. (of Arizona) American Paging, Inc. (of California) American Paging, Inc. (of Connecticut) American Paging, Inc. (of District of Columbia) American Paging, Inc. (of Florida) American Paging, Inc. (of Georgia) American Paging, Inc. (of Illinois) American Paging, Inc. (of Indiana) American Paging, Inc. (of Kentucky) American Paging, Inc. (of Louisiana) American Paging, Inc. (of Maryland) American Paging, Inc. (of Massachusetts) American Paging, Inc. (of Minnesota) American Paging of Missouri, Inc. American Paging, Inc. (of New Mexico) American Paging, Inc. (of New York) American Paging, Inc. (of North Carolina) American Paging, Inc. (of Ohio) American Paging, Inc. (of Oklahoma) American Paging, Inc. (of Rhode Island) American Paging, Inc. (of South Carolina) American Paging, Inc. (of Tennessee) American Paging, Inc. (of Texas) American Paging, Inc. (of Utah) American Paging, Inc. (of Virginia) American Paging, Inc. (of Wisconsin) American Paging Network, Inc. APIXUS, Inc. APPNOC, Inc. Texas Paging Transmission, Inc. 5 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 CELLULAR COMPANIES United States Cellular Corporation United States Cellular Operating Company United States Cellular Investment Company Carry Phone, Inc. USCC Real Estate Corporation CellVest, Inc. ComVest, Inc. ILP, Inc. Arkansas RSA #9, Inc. California Rural Service Area #1, Inc. California RSA #2, Inc. California RSA #9, Inc. Florida RSA #8, Inc. USCOC of Florida RSA #9, Inc. Florida RSA #10, Inc. USCOC of Georgia RSA #1, Inc. USCOC of Georgia RSA #14, Inc. USCOC of Hawaii 3, Inc. USCOC of Idaho RSA #5, Inc. USCOC of Illinois RSA #1, Inc. Illinois RSA #3, Inc. USCOC of Illinois RSA #4, Inc. Indiana RSA #1, Inc. USCOC of Indiana RSA #2, Inc. Indiana RSA #4, Inc. Indiana RSA #5, Inc. USCOC of Indiana RSA #7, Inc. USCOC of Iowa RSA #1, Inc. Iowa RSA #3, Inc. Ohio State Cellular Phone Company, Inc. Iowa RSA #9, Inc. United States Cellular Operating Company - Des Moines Iowa RSA #12, Inc. Iowa 13, Inc. USCOC of Iowa RSA #16, Inc. Kansas RSA #5, Inc. Kentucky RSA #1, Inc. Kentucky RSA #2, Inc. Kentucky RSA #3, Inc. Kentucky RSA #9-10, Inc. Kentucky RSA #11, Inc. Maine RSA #1, Inc. Maine RSA #4, Inc. Maine RSA No. 4 Limited Partnership USCOC of Cumberland, Inc. Michigan RSA #4, Inc. 6 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 CELLULAR COMPANIES (cont'd) Mississippi RSA #9, Inc. USCOC of Missouri RSA #1, Inc. USCOC of Missouri RSA #5, Inc. United States Cellular Operating Company of Columbia USCOC of Missouri RSA #13, Inc. Missouri #15 Rural Cellular, Inc. Peace Valley Cellular Telephone Company NH #1 Rural Cellular, Inc. USCOC of New York RSA #6, Inc. Hudson Cellular Limited Partnership North Carolina RSA #4, Inc. Randolph Cellular Telephone Company North Carolina RSA No. 6, Inc. USCOC of North Carolina RSA #7, Inc. Ohio RSA #1, Inc. USCOC of Ohio RSA #7, Inc. United States Cellular Operating Company of Tulsa, Inc. Oklahoma Opco. of RSA #8, Inc. USCOC of Texahoma, Inc. Texahoma Cellular Telephone Corporation Texahoma Cellular Limited Partnership Oklahoma #9 Rural Cellular, Inc. USCOC of Oklahoma RSA #10, Inc. Oregon RSA #2, Inc. Oregon RSA #3, Inc. Oregon RSA No. 3 Limited Partnership USCOC of Oregon RSA #5, Inc. Oregon RSA #6, Inc. United States Cellular Operating Company of Williamsport Canton Cellular Telephone Company USCOC of Pennsylvania RSA #9, Inc. Uniontown Cellular Telco, Inc. Fayette-Greene Cellular Telco, Inc. PA Rural Service Area No. 9 Limited Partnership Block B Cellular Corporation Laurel Highland Cellular Telephone Company Tri-State Cellular Partnership Pennsylvania RSA No. 10B (II) Limited Partnership USCOC of South Carolina RSA #4, Inc. United States Cellular Investment Co. of Nashville Tennessee RSA #3, Inc. Tennessee RSA #4 Sub 2, Inc. Tennessee RSA #6 B, Inc. United States Cellular Operating Company of Knoxville United States Cellular Telephone Company (Greater Knoxville), L.P. Texas #20 Rural Cellular, Inc. TDS V2B Acquisition Corp. 7 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 CELLULAR COMPANIES (cont'd) Lake Champlain Cellular Partnership Vermont Independent Cellular Telephone General Partnership USCOC of Virginia RSA #2, Inc. USCOC of Virginia RSA #4, Inc. Virginia RSA #4, Inc. Virginia RSA #7, Inc. USCOC of Washington-4, Inc. Washington RSA #5, Inc. Western Sub-RSA Limited Partnership McDaniel Cellular Telephone Company USCOC of West Virginia RSA #2, Inc. Hardy Cellular Telephone Company Georgia RSA #13, Inc. USCOC of Wisconsin RSA #6, Inc. Wisconsin RSA #7, Inc. Wisconsin RSA #8, Inc. Wisconsin RSA General Partner, Inc. Wisconsin RSA No. 8 Limited Partnership United States Cellular Investment Company of Fresno, Inc. USCIC of Colorado RSA #3, Inc. Western Colorado Cellular, Inc. Western Colorado Cellular of Colorado Limited Partnership Idaho Invco of RSA #1, Inc. Idaho RSA No. 1 Limited Partnership Minnesota Invco of RSA #5, Inc. Minnesota Invco of RSA #7, Inc. Minnesota Invco of RSA #8, Inc. Minnesota Invco of RSA #9, Inc. Minnesota Invco of RSA #10, Inc. Minnesota Invco of RSA #11, Inc. USCIC of North Carolina RSA #1, Inc. North Carolina RSA 1 Partnership Pennsylvania Invco of RSA #5, Inc. Pennsylvania Invco of RSA #6, Inc. Texas Invco of RSA #6, Inc. Community Cellular Telephone Company Texas Invco of RSA #17, Inc. USCIC of Seattle, Inc. Wisconsin Invco of RSA #7, Inc. United States Cellular Investment Company of Rockford United States Cellular Operating Company of Atlantic City, Inc. United States Cellular Operating Company of Bangor Bangor Cellular Telephone, L.P. United States Cellular Operating Company of Biloxi United States Cellular Operating Company of Cedar Rapids Cedar Rapids Cellular Telephone, L.P. USCOC of Charlottesville, Inc. 8 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 CELLULAR COMPANIES (cont'd) Charlottesville Cellular Partnership USCOC of Corpus Christi, Inc. United States Cellular Operating Company - Quad Cities Davenport Cellular Telephone Company, Inc. Davenport Cellular Telephone Company United States Cellular Operating Company of Dubuque Dubuque Cellular Telephone, L.P. United States Cellular Operating Company of Evansville, Inc. Evansville Cellular Telephone Company United States Cellular Operating Company of Ft. Pierce Central Florida Cellular Telephone Company, Inc. USCOC of Gainesville, Inc. United States Cellular Operating Company of Joplin Joplin Cellular Telephone Company, Inc. Tri-States Cellular Communications, Inc. Joplin Cellular Telephone Company, L.P. United States Cellular Operating Company of LaCrosse, Inc. LaCrosse Cellular Telephone Company, Inc. Lar-Tex Cellular Telephone Company, Inc. United States Cellular Operating Company of Lewiston-Auburn Lewiston CellTelCo Partnership United States Cellular Operating Company of Manchester-Nashua, Inc. Manchester-Nashua Cellular Telephone, L.P. United States Cellular Operating Company of Medford United States Cellular Operating Company of Owensboro Owensboro Cellular Telephone, L.P. USCOC of Portland, Inc. United States Cellular Operating Company of Poughkeepsie, Inc. Dutchess County Cellular Telephone Company, Inc. United States Cellular Operating Company of Richland United States Cellular Operating Company of Rochester DRGP, Inc. Rochester Cellular Telephone Company, L.P. USCOC of Tallahassee, Inc. Tulsa General Partner, Inc. United States Cellular Telephone Company (Greater Tulsa) USCOC of Victoria, Inc. Victoria Cellular Partnership Victoria Cellular Corporation United States Cellular Operating Company of Waterloo Waterloo/Cedar Falls CellTelCo Partnership United States Cellular Operating Company of Wausau, Inc. Wausau Cellular Telephone Company Limited Partnership United States Cellular Operating Company of Yakima Yakima MSA Limited Partnership Yakima Valley Paging Limited Partnership United States Cellular Investment Co. of Allentown 9 TELEPHONE AND DATA SYSTEMS, INC. EXHIBIT 21 LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1995 CELLULAR COMPANIES (cont'd) USCIC of Amarillo, Inc. United States Cellular Investment Company of Baton Rouge Capitol Cellular, Inc. CSII of Baton Rouge, Inc. Star Cellular Communications, Inc. Star Cellular Telephone Company, Inc. Baton Rouge MSA Limited Partnership. United States Cellular Investment Company of Binghamton, Inc. Cellular America Telephone Company USCIC of Brownsville, Inc. United States Cellular Investment Company of Eau Claire, Inc. Univeral Cellular for Eau Claire MSA, Inc. Chibardun Cellular Telephone Corporation Lavaca Cellular Telephone Company United States Cellular Investment Company of Galveston United States Cellular Investment Company of Green Bay, Inc. United States Cellular Investment Company of Huntsville, Inc. United States Cellular Investment Company of Iowa City USCIC of Jackson, Inc. United States Cellular Investment Company of Lafayette United States Cellular Investment Corporation of Los Angeles USCIC of McAllen, Inc. USCIC of Ocala, Inc. Four D, Ltd. United States Cellular Investment Co. of Oklahoma City, Inc. United States Cellular Investment Company of Portsmouth, Inc. United States Cellular Investment Company of Raleigh-Durham Carolina Cellular, Inc. United States Cellular Investment Company of Santa Cruz, Inc. United States Cellular Investment Company of Sarasota United States Cellular Investment Company of St. Cloud, Inc. United States Cellular Investment Company of Wheeling 10 EX-23.1 7 EX-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 6, 1996 (except with respect to the matter discussed in Note 17, as to which the date is February 20, 1996), on the consolidated financial statements of Telephone and Data Systems, Inc. and Subsidiaries (the "Company") included in the Company's 1995 Annual Report to Shareholders, to the inclusion in this Form 10-K of our report dated February 6, 1996 (except with respect to the matter discussed in Note 17, as to which the date is February 20, 1996), on the financial statement schedules of the Company, and to the inclusion in this Form 10-K of our compilation report dated February 9, 1996, on the combined financial statements of the Los Angeles SMSA Limited Partnership, the Nashville/Clarksville MSA Limited Partnership, and the Baton Rouge MSA Limited Partnership, and to the incorporation of such reports into the Company's previously filed S-8 Registration Statements, File No. 33-1192, File No. 33-4420, File No. 33-35172, File No. 33-50747, File No. 33-57257, File No. 33-64035 and File No. 333-01041, and into the Company's previously filed S-3 Registration Statements, File No. 33-8564, File No. 33-8857, File No. 33-8858, File No. 33-28348, File No. 33-68456 and File No. 33-59435, and into the Company's previously filed S-4 Registration Statements, File No. 33-45570, File No. 33-64293, File No. 33-62925, File No. 33-61009 and File No. 333-00727. ARTHUR ANDERSEN LLP Chicago, Illinois March 21, 1996 EX-23.2 8 EX-23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-8564, 33-8857, 33-8858, 33-28348, 33-68456 and 33-59435) and Form S-4 (Nos. 33-45570, 33-64293, 33-62925, 33-61009 and 333-00727) and in the Registration Statements on Form S-8 (Nos. 33-1192, 33-4420, 33-35172, 33-50747, 33-57257, 33-64035 and 333-01041) of Telephone and Data Systems, Inc. of our report dated January 25, 1996 relating to the financial statements of Los Angeles SMSA Limited Partnership, which appears in Telephone and Data Systems, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995. PRICE WATERHOUSE LLP San Francisco, California March 21, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion in this Form 10-K of Telephone and Data Systems, Inc., of our report dated February 17, 1995, on our audits of the financial statements of the Los Angeles SMSA Limited Partnership as of December 31, 1994, and for each of the two years in the period ended December 31, 1994; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND L.L.P. Newport Beach, California March 20, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion in this Form 10-K of Telephone and Data Systems, Inc., of our reports dated February 9, 1996, February 10, 1995 and February 11, 1994, on our audits of the financial statements of the Nashville/Clarksville MSA Limited Partnership as of December 31, 1995, 1994 and 1993, and for the years ended December 31, 1995, 1994 and 1993; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND L.L.P. Atlanta, Georgia March 20, 1996 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion in this Form 10-K of Telephone and Data Systems, Inc., of our reports dated February 9, 1996, February 10, 1995 and February 11, 1994, on our audits of the financial statements of the Baton Rouge MSA Limited Partnership as of December 31, 1995, 1994 and 1993, and for the years ended December 31, 1995, 1994 and 1993; such financial statements are not included separately in this Form 10-K. COOPERS & LYBRAND L.L.P. Atlanta, Georgia March 20, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF TELEPHONE AND DATA SYSTEMS, INC. AS OF DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 55,116 25,217 110,254 5,103 20,738 261,210 3,252,456 780,621 3,469,082 427,724 858,857 1,587 29,710 58,030 1,626,335 3,469,082 0 954,386 0 822,388 (103,857) 0 50,848 185,007 81,029 103,978 0 0 0 103,978 1.74 1.74
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