TELEPHONE AND DATA SYSTEMS, INC.
INCORPORATED PORTIONS OF 1993 ANNUAL REPORT TO SECURITIES HOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified
telecommunications company which provides high-quality telecommunications
services to nearly 1.1 million consolidated telephone, cellular telephone and
radio paging customer units in 37 states and the District of Columbia. The
accompanying financial statements present the results of operations of the
Company's three primary businesses: TDS Telecommunications Corporation ("TDS
Telecom"), United States Cellular Corporation (AMEX symbol "USM"), and American
Paging, Inc. (AMEX symbol "APP"), as well as TDS and its service subsidiaries.
TDS's long-term business development strategy is to expand its operations
through internal growth and acquisitions, and to explore and develop other
telecommunications services.
Rapid growth in customers served generated substantial increases in
revenues and operating cash flows, while the costs of rapidly developing new
cellular markets and vigorously adding cellular customers slowed growth in
operating income and net income. TDS Telecom is expanding through the selective
acquisition of local exchange telephone companies serving rural and suburban
areas and by offering additional lines of telecommunications products and
services to existing customers. USM is developing its cellular operations by
rapidly building cell sites to broaden and improve its communications network,
by vigorously marketing its services to rapidly growing number of customers, and
by enhancing its cellular clusters through strategic acquisitions and trades.
APP is rapidly growing by focusing its efforts on improving the quality of its
messaging services and by vigorously marketing those services.
CONSOLIDATED
Consolidated operating results for 1993 and 1992 reflect primarily the effects
of very rapid expansion and development of cellular operations, steady growth in
telephone operations, dynamic increases in paging units in service, improving
economies of scale in cellular and paging operations, continuing improvements in
business processes and systems, the impact of acquisitions and trades and the
costs of financing these high-growth activities. During 1993 and 1992, the
Company's wireline telephone operations provided a growing foundation of
operating cash flow and earnings to support development of its wireless cellular
and paging operations. While wireless operations were not profitable during 1993
and 1992, they each contributed rapidly growing operating cash flow as they
progressed toward overall profitability. Results for 1993 include a $2.3
million net-of-tax gain on sales of cellular interests and a $600,000 provision
for discontinuance of national retailer distribution of pagers. Results for 1992
include net-of-tax gains on sales and exchanges of cellular interests totalling
$14.7 million, the $6.9 million one-time cost of adopting a new accounting
standard for postretirement benefits and other nonrecurring items totalling
$200,000. On a comparable basis, excluding these nonrecurring and unusual items,
net income available to common increased 44.5% to $29.8 million and earnings per
share rose 18.9% to $.63.
Year Ended December 31, 1993 1992 1991
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(DOLLARS IN THOUSANDS)
Operating Income
Telephone $ 79,110 $ 72,218 $ 65,242
Cellular telephone (8,656) (12,705) (16,831)
Radio paging (721) (5,448) (7,750)
--------------------------------------------
$ 69,733 $ 54,065 $ 40,661
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Operating Margin
Telephone 29.5% 30.3% 30.9%
Cellular telephone (3.5%) (7.7%) (16.9%)
Radio paging (1.0%) (10.0%) (17.6%)
Consolidated 11.8% 11.8% 11.5%
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Certain 1992 and 1991 amounts have been reclassified to conform to current year
presentation.
TDS Telecom has acquired nine telephone companies since December 31, 1991.
These acquisitions added 24,100 access lines while internal growth added 28,100
lines. USM, TDS's 85.1%-owned subsidiary, has added 51 markets to consolidated
operations through acquisitions
and the initiation of cellular operations. USM currently provides cellular
service through systems serving 116 majority-owned and managed markets. APP has
acquired three paging systems which added approximately 21,000 pagers. APP
provides service to its customers through 17 customer operations centers.
OPERATING REVENUES increased 29.3% during 1993 and 28.8% during 1992
primarily as a result of increases in customers served and modest price changes.
The rapid expansion of cellular telephone revenues, 41.9% and 35.9%,
respectively, of total 1993 and 1992 revenues, reflects sharp increases in
cellular telephones in service driven by vigorous marketing activities and rapid
expansion of cellular telephone systems, strong growth in keeper roaming
revenues and declines in average revenue per customer averaging 0.6% over the
two-year period ended December 31, 1993. Growth in telephone revenues, 45.4%
and 52.1%, respectively, of total 1993 and 1992 revenues, are the result of
access line growth averaging 0.6% and modest changes in average revenue per
access line averaging 4.6% during the two-year period. The rapid growth in
paging revenues, 12.7% and 12.0%, respectively, of total 1993 and 1992 revenues,
is due to increases in paging units in service of 43.0% during 1993 and 36.1%
during 1992 offset by continuing decreases in average revenue per unit averaging
5.3% over the two-year period.
OPERATING EXPENSES rose 29.3% ($118.2 million) in 1993 and 28.3% ($88.8 million)
in 1992 as a result of the continued rapid growth in and start-up of USM's
cellular telephone operations and the steady growth in TDS Telecom's and APP's
operations. The increase in cellular expenses reflects the rapid expansion of
this segment during the past three years. Telephone operating expenses increased
due to the effects of acquisitions and growth in internal operations. Radio
paging expenses increased to serve the growing customer base and to expand
market share in certain service areas.
OPERATING INCOME increased 29.0% ($15.7 million) in 1993 and 33.0% ($13.4
million) in 1992 due to improved operating results in all three business units.
Management anticipates continued rapid growth in revenues as all three
business units continue to add customers. This growth and additional expansion
and market development costs are anticipated to slow the rate of growth in
improvements in consolidated operating performance during 1994.
CELLULAR INVESTMENT INCOME, representing the Company's share of income of
markets in which the Company has a minority interest and follows the equity
method of accounting, increased 70.3% ($6.5 million) in 1993 and 35.2% ($2.4
million) in 1992.
GAIN ON SALE OF CELLULAR INTERESTS reflects the sale of a majority-owned
and managed cellular system in 1992 and the sale or exchange of minority
interests in 1993, 1992 and 1991. Approximately $2.9 million of the 1991 gain
was offset by an equal amount of income tax expense, resulting in no effect on
net income.
MINORITY SHARE OF INCOME includes (a) the minority shareholders' share of
USM's net income (1992) or losses (1993 and 1991), (b) the minority partners'
share of income or loss of the cellular markets majority-owned by USM and (c)
the minority shareholders' share of income of a telephone company majority-owned
by TDS.
MINORITY SHARE OF INCOME
Year Ended December 31, 1993 1992 1991
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(DOLLARS IN THOUSANDS)
United States Cellular
Minority Shareholders' Share $ 4,270 $ (1,088) $ 4,250
Minority Partner's Share (3,496) (2,615) (1,467)
-----------------------------------------
774 (3,703) 2,783
TDS Telecom (1,249) -- --
-----------------------------------------
$ (475) $ (3,703) $ 2,783
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OTHER INCOME, NET includes a $1.0 million pretax charge in 1993, as APP
elected to cease national retailer distribution of pagers through its wholly
owned subsidiary, American Paging Network ("APN").
INTEREST EXPENSE increase 14.9% ($4.9 million) in 1993 and 12.5% ($3.6
million) in 1992. Long-term debt under the TDS Medium-Term Note Program
increased $92.5 million in 1993 and $7.5 million in 1992, and cellular vendor
financing increased a net $35.4 million in 1992. Short-term interest expense
declined 7.8% ($154,000) in 1993 and 46.8% ($1.7 million) in 1992, as interest
rates declined in both years and as the average balance of notes payable during
1992 declined $11.9 million. The average amount of short-term debt outstanding
totalled $32.3 million in 1993, $31.1 million in 1992 and $43.0 million in 1991.
The average interest rate on such short-term debt was 3.9% in 1993, 4.5% in 1992
and 6.6% in 1991. See "Financial Resources and Liquidity" for a further
discussion of short- and long-term debt.
INCOME TAX EXPENSE decreased 11.0% ($3.3 million) in 1993 and increased
99.2% ($14.8 million) in 1992, reflecting primarily changes in pretax income.
The effective income tax rates were 43.9%, 43.6% and 41.4% in 1993, 1992 and
1991, respectively. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective January 1,
1993. Income tax expense for 1993 reflects the new accounting principle; income
tax expense for prior years has not been restated. The increase in the 1992 rate
over 1991 reflects primarily the effect of USM's net income and the related
pretax deduction for financial reporting purposes of the minority shareholders'
share of such income. For purposes of income tax accounting under the then
existing accounting principles, such pretax accounting deduction was a
"permanent difference" and had the effect of increasing the effective tax rate
in 1992.
NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES was $33.9 million in 1993, $38.5 million in 1992 and $21.1 million in
1991. The decrease in 1993 from 1992 and the increase in 1992 over 1991 reflect
the significant improvement in operating results of all three business segments
and the $14.7 million (after income taxes and minority shareholders' share)
gains on the sales of cellular interests in 1992.
EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGES were $.67 in 1993, $.91 in 1992 and $.59 in 1991. Changes
in earnings per share reflect changes in net income and 21.0% and 18.3%
increases in weighted average common shares outstanding in 1993 and 1992,
respectively. TDS sold 1,320,000 and 2,000,000 Common Shares for cash in 1993
and 1992, respectively. Approximately 6.8 million and 3.7 million Common Shares
have been issued in 1993 and 1992, respectively, in connection with
acquisitions.
EXTRAORDINARY ITEM: During 1992, the Company retired at a premium $20.8
million of its Senior Notes. The notes carried interest rates of 9.75% to 13.75%
and were due in 1996 through 2004. The transaction resulted in an extraordinary
loss of $769,000 ($.02 per share), net of income tax benefits of $491,000.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES: Effective January 1, 1992, the
Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." Approximately $11.3 million was recorded as the cumulative
effect of an accounting change for the year ended December 31, 1992. The
$6.9 million cumulative effect, net of related income tax benefits of $4.4
million, reduced earnings per share by $.17. Operating results for 1993 and 1992
reflect the new accounting standard. The 1991 financial statements have not been
restated.
Effective January 1, 1991, USM changed its method of accounting for sales
commissions from capitalizing and amortizing these costs over 36 months to
expensing as incurred. In addition, two of USM's equity method investees made a
similar change. The cumulative effect of the change on years prior to 1991 was a
charge to income of $5.0 million, or $.15 per share, net of USM's minority
shareholders' share, $1.9 million, and income tax benefits of $3.4 million.
EARNINGS PER COMMON SHARE were $.67 in 1993, $.72 in 1992 and $.44 in 1991,
reflecting results of operations, the 1992 extraordinary item and the accounting
changes in 1992 and 1991.
Excluding significant nonrecurring and unusual items, net income available
to common and earnings per share were approximately $29.8 million and $.63 for
1993 as compared to $20.6 million and $.53 for 1992 and $19.1 million and $.58
for 1991, as shown in the accompanying table.
NET INCOME AVAILABLE TO COMMON
Year Ended December 31, 1993 1992 1991
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(DOLLARS IN MILLIONS, EXCEPT EARNINGS PER SHARE AMOUNTS)
As Reported $31.5 $ 28.6 $ 14.4
Nonrecurring and Unusual
Items (estimated net-of-tax):
Provision for discontinuance
of national retailer
distribution of pagers
through APN .6 -- --
Cumulative effect of
accounting changes -- 6.9 5.0
Extraordinary loss on
retirement of debt -- .8 --
Gain on sales or exchanges
of cellular interests
(net of USM minority share) (2.3) (14.7) (.3)
TDS Telecom directory
revenue settlement -- (1.0) --
----------------------------------------
Excluding Nonrecurring and
Unusual Items $ 29.8 $ 20.6 $ 19.1
----------------------------------------
----------------------------------------
Earnings Per Share,
excluding Nonrecurring and
Unusual Items $ .63 $ .53 $ .58
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TELEPHONE OPERATIONS
Year Ended December 31, 1993 1992 1991
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(DOLLARS IN THOUSANDS, EXCEPT PER ACCESS LINE AMOUNTS)
OPERATING REVENUES
Local service $ 72,191 $ 65,131 $ 61,313
Network access and
long-distance 159,111 137,747 120,375
Miscellaneous 36,820 35,217 29,543
------------------------------------------
268,122 238,095 211,231
------------------------------------------
OPERATING EXPENSES
Plant operations 42,524 36,100 32,760
Depreciation 56,024 48,830 41,046
Amortization 3,538 3,116 2,379
Customer operations 39,416 35,103 31,255
Corporate and other 47,510 42,728 38,549
------------------------------------------
189,012 165,877 145,989
------------------------------------------
OPERATING INCOME $ 79,110 $ 72,218 $ 65,242
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Telephone revenues as a
percent of total revenues 45.4% 52.1% 59.6%
Construction expenditures $ 82,233* $67,357* $ 67,856*
Identifiable assets 829,489 723,855 674,712
Telephone plant in service
per access line $ 2,317 $ 2,210 $ 2,209
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Companies 94 90 85
Access lines 356,200 321,700 304,000
Growth in access lines
from prior year-end:
Acquisitions 20,100 4,000 15,800
Internal growth 14,400 13,700 9,500
Average monthly revenue
per access line $ 66 $ 63 $ 60
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<FN>
*Includes noncash amounts (in thousands) of $1,415, $1,705 and $(796),
respectively.
OPERATING REVENUES from telephone operations increased 12.6% ($30.0
million) in 1993 and 12.7% ($26.9 million) in 1992. The increases in revenues
were due to acquisitions, increased usage of the network, recovery of increased
costs of providing long-distance services and internal access line growth.
Acquisitions increased telephone revenues 4.9% ($11.7 million) in 1993 and 4.4%
($9.4 million) in 1992. Telephone results of operations include the results of
acquired companies since the respective dates of acquisition.
Local service revenues increased 10.8% ($7.1 million) in 1993 and 6.2%
($3.8 million) in 1992, with acquisitions increasing these revenues 3.8% ($2.5
million) in 1993 and 4.1% ($2.5 million) in 1992. Internal growth in access
lines and sales of custom-calling and other features increased local service
revenues approximately $3.3 million in 1993 and $3.1 million in 1992. 1991
revenues totalling $1.0 million for Extended Area Service ("EAS") were
eliminated in 1992 due to a change in a revenue settlement arrangement.
Network access and long-distance revenues increased 15.5% ($21.4 million)
in 1993 and 14.4% ($17.4 million) in 1992. Acquisitions increased these revenues
5.5% ($7.6 million) in 1993 and 4.5% ($5.4 million) in 1992. Recovery of
increased costs of providing long-distance services increased revenues
$4.4 million in 1993 and $4.6 million in 1992. Changes in Federal Communications
Commission ("FCC")-mandated cost separations rules increased revenues
$2.1 million in 1993 and $2.0 million in 1992. Certain settlements relating to
prior periods, due primarily to retroactively billed access services and
finalization of cost separation studies, increased these revenues 2.2%
($3.0 million) in 1993. Network access service and long-distance revenues
decreased 1.3% ($1.5 million) in 1992 as certain billing and collection revenues
are now reported as miscellaneous revenues. The remainder of the revenue
increases in 1993 and 1992 were primarily due to increased minutes of use,
increases in access lines served and changes in rates of return.
Miscellaneous revenues increased 4.6% ($1.6 million) in 1993 and 19.2%
($5.7 million) in 1992. Acquisitions increased miscellaneous revenues 4.8% ($1.7
million) in 1993 and 4.9% ($1.4 million) in 1992. A settlement relating to a
directory agreement increased these revenues 5.9% ($1.8 million) in 1992. A new
contract for billing and collection services decreased these revenues 1.6%
($550,000) in 1993. Certain billing and collection revenues previously reported
as long-distance and network access revenues increased miscellaneous revenues
5.2% ($1.5 million) in 1992. The remaining increases in 1993 and 1992 are due to
acquisitions, increased message volumes, providing billing and collection
services for Alternate Operator Service providers, and additional non-regulated
revenues as a result of increased marketing efforts and access line growth.
OPERATING EXPENSES increased 13.9% ($23.1 million) in 1993 and 13.6% ($19.9
million) in 1992. The effects of acquisitions increased expenses 5.4% ($9.0
million) in 1993 and 5.5% ($8.0 million) in 1992. Plant operations expense
increased 17.8% ($6.4 million) in 1993 and 10.2% ($3.3 million) in 1992, with
acquisitions increasing this expense 8.1% ($2.9 million) in 1993 and 5.2%
($1.7 million) in 1992. The remaining increase in 1993 was primarily due to
salary and work force changes along with the effects of general inflation. A
change in a settlement arrangement for EAS revenues decreased these expenses
3.2% ($1.0 million) in 1992.
Depreciation and amortization expense increased 14.7% ($7.6 million) in
1993 and 19.6% ($8.5 million) in 1992, with acquisitions increasing such expense
5.2%
($2.7 million) in 1993 and 6.4% ($2.8 million) in 1992. Lump-sum depreciation
adjustments and increases in certain depreciation rates increased these expenses
4.3% ($2.2 million) in 1993 and 5.6% ($2.4 million) in 1992. The remainder of
the increase in depreciation expense is due to growth in plant and equipment.
The composite depreciation rate was 7.3% in 1993, 7.2% in 1992 and 6.7% in 1991.
Customer operations expense increased 12.3% ($4.3 million) in 1993 and
12.3% ($3.8 million) in 1992, with acquisitions providing 3.9% ($1.4 million) of
the increase in 1993 and 4.1% ($1.3 million) in 1992. The remainder of the
increases are due primarily to increased marketing activities, increased
customer billing and programming costs and the effects of inflation.
Corporate and other expenses increased 11.2% ($4.8 million) in 1993 and
10.8% ($4.2 million) in 1992, with acquisitions increasing these expenses 4.6%
($2.0 million) in 1993 and 5.9% ($2.3 million) in 1992. The remainder of the
increases are due primarily to the effects of inflation, employee-related costs,
additional staffing and increases in legal and other costs related to new
business development and long-range planning activities.
OPERATING INCOME from telephone operations increased 9.5% ($6.9 million) in
1993 and 10.7% ($7.0 million) in 1992. The effects of acquisitions increased
operating income 3.8% ($2.8 million) in 1993 and 2.1% ($1.3 million) in 1992.
The telephone operating margin was 29.5% in 1993 compared to 30.3% in 1992 and
30.9% in 1991.
TDS Telecom's revenues are expected to continue to increase in 1994.
However, due to expected increases in customer operations expense (primarily due
to increased marketing activities) and accelerated depreciation on certain
switching equipment, the 1994 operating margin may be lower than the 1993 level.
CELLULAR TELEPHONE OPERATIONS
USM owns or has the right to acquire interests, both majority and minority, in
205 cellular telephone markets at December 31, 1993, representing 23,731,000
population equivalents ("pops") as summarized in the accompanying table.
Consolidated revenues and expenses include 100% of the revenues and expenses of
USM's majority-owned markets. The December 31, 1993 consolidated results of
operations include 116 markets compared to 92 markets in 1992 and 67 markets in
1991. Investment and Other Income includes USM's pro rata share of the net
income or loss of 18 minority-owned and managed markets and 15 minority-owned
markets managed by others. USM's investments in 46 minority-owned markets
managed by others, which are being held for sale or exchange, are accounted
for by the cost method of accounting.
December 31, 1993 1992 1991
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Population Equivalents(1)
Majority-Owned and
Managed(2) 18,212 14,268 10,427
Minority-Owned and
Managed 1,139 2,007 1,755
To Be Managed(4) 1,002 1,816 3,095
----------------------------------------
Total Managed by USM 20,353 18,091 15,277
----------------------------------------
Managed by Others(5) 3,378 3,474 3,229
----------------------------------------
Total 23,731 21,565 18,506
----------------------------------------
----------------------------------------
TDS's proportionate
share(6) 18,869 16,001 13,491
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December 31, 1993 1992 1991
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Markets
Majority-Owned and
Managed(2) 116 92 67
Minority-Owned and
Managed(3) 20 24 24
To Be Managed(4) 8 13 21
--------------------------------------
Total Managed by USM 144 129 112
--------------------------------------
Managed by Others(5) 61 64 65
--------------------------------------
Total 205 193 177
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<FN>
(1) 1993 Donnelley Marketing Service estimates are used for all years. Includes
pops relating to interests which are acquirable in the future.
(2) Includes one market managed by a third party in 1993 and 1992, and one
wholly owned reseller operation in 1992 and 1991.
(3) Includes markets where USM has the right to acquire an interest but did not
own an interest at the respective dates (two markets in 1993, six in 1992
and seven in 1991).
(4) Represents markets which are not yet operational or which are managed by
third parties until USM acquires a majority interest in the markets.
(5) Represents markets in which USM owns or has the right to acquire a minority
or other noncontrolling interest and which are managed by others. Some
markets were not in operation in 1991.
(6) Based on TDS's ownership of USM, assuming all pending acquisitions have
been completed.
CELLULAR TELEPHONE OPERATIONS
Year Ended December 31, 1993 1992 1991
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(DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS)
OPERATING REVENUES
Service $ 236,749 $ 154,822 $ 91,977
Equipment sales 10,510 9,263 7,500
---------------------------------------------
247,259 164,085 99,477
---------------------------------------------
OPERATING EXPENSES
System operations 67,251 48,373 30,746
Marketing and selling 43,478 30,643 18,053
Cost of equipment sold 25,688 17,311 13,575
General and administrative 74,471 50,824 34,665
Depreciation 25,665 16,606 8,814
Amortization 19,362 13,033 10,455
---------------------------------------------
255,915 176,790 116,308
---------------------------------------------
OPERATING (LOSS) $ (8,656) $ (12,705) $ (16,831)
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Cellular telephone
revenues as a percent
of total revenues 41.9% 35.9% 28.0%
Additions to property,
plant and equipment $ 94,088* $ 58,832* $ 66,037*
Identifiable assets $ 1,275,569 $ 858,795 $ 612,981
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Majority-Owned, Managed
and Consolidated Markets:
Customers 261,000 150,800 97,000
Market penetration 1.35% 1.00% .84%
Cell sites in service 522 320 186
Average monthly
revenue per customer $ 99 $ 105 $ 100
Churn rate per month 2.3% 2.4% 2.2%
Marketing cost per net
customer addition $ 677 $ 765 $ 710
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<FN>
*Includes noncash amounts (in thousands) of $6,611, $2,799 and $3,039,
respectively.
OPERATING REVENUES increased 50.7% ($83.2 million) in 1993 and 64.9% ($64.6
million) in 1992. Service revenues include monthly service fees for providing
access, airtime, and value-added services to customers; for providing airtime to
users roaming through USM's service areas; for other carriers providing airtime
to USM's customers roaming through their service areas; and long-
distance charges. Service revenues increased 52.9% ($81.9 million) in 1993 and
68.3% ($62.8 million) in 1992. The service revenue increases in 1993 and 1992
were primarily attributable to increases in the number of local retail telephone
customers and growth in inbound roamer revenues. In addition, acquisitions of
controlling interests and the start-up of operations in new markets increased
revenues 16.0% ($26.2 million) in 1993 and 31.9% ($31.7 million) in 1992.
Minutes of use averaged 103 per month in 1993 compared to 121 per month in 1992
and 130 in 1991. The decline in average local minutes of use follows an
industry-wide trend and is believed to be related to the tendency of the early
subscribers in a market to be the heaviest users. Average monthly service
revenue per customer was $99 in 1993, $105 in 1992 and $100 in 1991. Management
anticipates that average local minutes of use and average monthly revenue per
customer will continue to decline as USM adds more customers and as the growth
rate of USM's customer base exceeds the growth rate of inbound roamer revenue.
Service revenues from local customers' usage of USM's systems increased
52.6% ($40.5 million) in 1993 and 53.2% ($26.8 million) in 1992. The revenue
increases were primarily the result of the 73.1% and 55.5% customer growth,
respectively, in majority-owned markets, offset somewhat by the decrease in
average monthly local minutes of use. The decrease in average minutes of use
resulted in a decrease in average monthly retail revenue per customer, to $49
in 1993 from $52 in 1992 and $55 in 1991. Inbound roaming revenues, earned when
other systems' customers travel through USM's service areas increased 67.7%
($31.6 million) in 1993 and 110% ($24.5 million) in 1992. The increase is
attributable to an increase in the number of customers from other systems using
USM's systems as well as an increased number of USM-managed systems and cell
sites within those systems. Pass-through roamer revenue, earned when USM's
customers use systems other than their local systems,increased 27.0% ($5.2
million) in 1993 and 67.4% ($7.8 million) in 1992, due to USM's customer growth.
Monthly roamer revenue per customer averaged $43, $45 and $37 in 1993, 1992 and
1991, respectively. Long-distance revenues increased 45.7% ($4.4 million) in
1993 and 77.3% ($4.2 million) in 1992 as the number of customers and the volume
of long-distance calls increased.
Equipment sales revenue reflects the sale of 83,000 cellular telephone
units in 1993 compared to 44,400 in 1992 and 29,400 in 1991. The sale of
cellular telephone units at discounted rates, a widespread industry practice,
were the result of USM's use of marketing programs aimed at increasing customers
and service revenues. The average revenue per telephone unit sold was $127 in
1993, $208 in 1992 and $255 in 1991. The average revenue per unit decline
partially reflects USM's decision to reduce sales prices on cellular telephones
to stimulate customer growth as well as reduced manufacturers' prices. Also,
during the second half of 1993, USM used specific promotions which were based on
increased equipment discounting. The success of these promotions led to both an
increase in units sold and a decrease in average equipment sales revenue per
unit. USM will continue to discount equipment prices in its systems, as it has
done in the past, to maintain its market position, to meet competitive prices
and to increase the number of customers.
OPERATING EXPENSES increased 44.8% ($79.1 million) in 1993 and 52.0% ($60.5
million) in 1992. The increases in expenses were primarily due to increased
customer activations, acquisitions, starting up operations in new markets and
increased depreciation and amortization expense related to increases in fixed
assets and license costs. The acquisition of controlling interests and the
start-up of operations in new markets increased operating expenses 19.0% ($33.6
million) in 1993 and 32.7% ($38.1 million) in 1992.
System operations expenses increased 39.0% ($18.9 million) in 1993 and
57.3% ($17.6 million) in 1992 as a result of increases in customer usage
expenses and costs associated with operating USM's increased number of cellular
systems. Costs are expected to continue to increase as the number of cell sites
within these systems increases. Customer usage expenses represent charges from
other telecommunications service providers for local interconnection to the
landline network, toll charges and roamer expenses from USM's customers' use of
systems other than their local systems. Customer usage expenses grew 36.2%
($13.5 million) in 1993 and 72.0% ($15.7
million) in 1992 primarily due to the increase in roamer expenses. Maintenance,
utility and cell site expenses grew 48.8% ($5.4 million) in 1993 and 21.8% ($1.9
million) in 1992 reflecting growth in the number of cells to 522 in 1993 from
320 in 1992 and 186 in 1991, growth in the number of switches in service, and
the effects of acquisitions and start-up markets.
Marketing and selling expenses increased 41.9% ($12.8 million) in 1993 and
69.7% ($12.6 million) in 1992. Marketing and selling expenses primarily consist
of salaries, commissions and expenses of field sales personnel, agent
commissions, promotional expenses and local advertising and public relations
expenses. These expenses increased in 1993 and 1992 primarily due to the
increased number of customer activations and, in 1992, also due to the use of
various marketing programs which increased promotional expense. Excluding the
effects of acquisitions and divestitures, USM added 86,600 and 50,600 net new
customers in 1993 and 1992, respectively.
Cost of equipment sold reflects the increased unit sales related to the
increase in gross customer activations and second half 1993 promotional sales
discussed above, offset somewhat by falling manufacturers' prices. The average
cost of a telephone unit sold was $309 in 1993, $390 in 1992 and $462 in 1991.
General and administrative expenses increased 46.5% ($23.6 million) in 1993
and 46.6% ($16.2 million) in 1992. These expenses include the cost of operating
USM's local business offices and its corporate expenses. The increases result
from the expanding number of consolidated markets, due to both acquisitions and
the start-up of operations in new markets, as well as the growth in the customer
base in existing markets. USM is using its clustering concept to combine local
operations wherever feasible in order to reduce its administrative expenses.
Depreciation expense increased 54.6% ($9.1 million) in 1993 and 88.4% ($7.8
million) in 1992, reflecting increases in average fixed asset balances of 55.6%
and 77.3%, respectively. Amortization expense, primarily amortization of license
costs, increased 48.6% ($6.3 million) in 1993 and 24.7% ($2.6 million) in 1992
due to increases in license costs. The increase in 1992 was offset somewhat by a
change in the amortization period for license costs, from 20 to 40 years,
beginning January 1, 1992.
OPERATING LOSS was $8.7 million in 1993, $12.7 million in 1992 and $16.8
million in 1991. Operating margin, while still negative, improved to (3.5%) in
1993 from (7.7%) in 1992 and (16.9%) in 1991. The improvement in the 1993
operating loss was primarily due to improved results in the more established
markets and increased revenues from growth in the customer base, offset somewhat
by the start-up and acquisition of operations in new markets and increased
losses on equipment sales. The improvement in the 1992 operating loss is
primarily due to the improved operating results of the more established markets.
The Company expects service revenues to continue to grow in 1994 as USM
begins operations in new markets, as customers are added to USM's existing
markets and as it realizes a full year of revenue from customers added in 1993.
Additionally, the Company expects expenses to continue to increase significantly
in 1994 as a full year of expenses are recognized for markets and cell sites
added in 1993 and as USM initiates service in new markets in 1994. At least 14
additional markets are expected to be added to consolidated operations during
1994. Accordingly, the Company expects that the costs of constructing and
developing the new systems may exceed revenue growth during the next few
quarters. As a result, operating losses maybe generated over the next few
quarters.
CELLULAR INVESTMENT INCOME includes USM's and TDS's share of the net
incomes or losses of cellular markets in which they have a minority interest and
for which they follow the equity method of accounting, net of amortization of
license costs relating to these minority interests.
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Cellular Investment Income
(Loss), Net of License
Cost Amortization
Cellular Markets
Managed by USM $ (307) $ (976) $ (1,817)
Managed by Others 16,011 10,200 8,641
------------------------------------------
$ 15,704 $ 9,224 $ 6,824
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TDS's share of USM's net income (loss) before the cumulative effect of an
accounting change was $(21.2) million in 1993. $5.1 million in 1992 and $(20.1)
million in 1991. The net income (loss) excludes the USM minority shareholders'
share of such income (loss). The net income (loss) from cellular telephone
operations does not include federal income tax expense or benefits from the
inclusion of USM in TDS's consolidated federal tax return. In accordance with a
tax allocation agreement, TDS does not reimburse USM currently for income tax
benefits and credits. Instead, such benefits and credits are being carried
forward until they can be used by USM.
TDS owned an aggregate of 59,548,450 shares of common stock of USM at
December 31, 1993, representing over 85% of the combined total of USM's
outstanding Common and Series A Common Shares and over 97% of their combined
voting power. Assuming USM's Common Shares are issued in all instances in which
USM has the choice to issue its Common Shares or other consideration and
assuming all issuances of USM's common stock to TDS and third parties for
completed and pending acquisitions and redemptions of USM and TDS Preferred
Stock had been completed at December 31, 1993, TDS would have owned
approximately 79.5% of the total outstanding common stock of USM and controlled
over 95% of the combined voting power of both classes of its common stock. In
the event TDS's ownership of USM falls below 80% of the total value of all of
the outstanding shares of USM's stock, TDS and USM would be deconsolidated for
federal income tax purposes. TDS and USM have the ability to defer or prevent
deconsolidation, if deferring or preventing deconsolidation would be
advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's
Common Shares in connection with certain acquisitions.
RADIO PAGING OPERATIONS
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER AMOUNTS)
SERVICE OPERATIONS
Revenues $ 64,384 $ 48,582 $ 41,021
------------------------------------------
Costs and expenses
Cost of services 15,836 12,147 9,852
Selling and advertising 11,131 10,419 10,229
General and
administrative 24,785 20,585 19,543
Depreciation 11,182 9,335 8,186
Amortization 2,210 1,077 861
------------------------------------------
65,144 53,563 48,671
------------------------------------------
Service
Operating (Loss) (760) (4,981) (7,650)
------------------------------------------
EQUIPMENT SALES
Revenue 10,979 6,134 2,952
Cost of equipment sold 10,940 6,601 3,052
------------------------------------------
Equipment Sales
Income (Loss) 39 (467) (100)
------------------------------------------
OPERATING (LOSS) $ (721) $ (5,448) $ (7,750)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Radio paging revenues
as a percent of
total revenues 12.7% 12.0% 12.4%
Additions to property
and equipment $ 24,813* $ 15,501* $ 13,322*
Identifiable assets $ 74,923 $ 57,080 $ 41,726
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Pagers in service 460,900 322,200 236,800
Average monthly revenue
per customer $ 13.65 $ 14.93 $ 15.28
Transmitters in service 685 532 484
Churn rate per month 2.9% 2.9% 3.2%
Marketing cost per net
customer addition $ 80 $ 127 $ 290
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<FN>
*Includes noncash amounts (in thousands) of $2,177, $1,128 and $522,
respectively.
Certain 1992 and 1991 amounts have been reclassified to conform to current year
presentation.
SERVICE REVENUES increased 32.5% ($15.8 million) in 1993 and 18.4% ($7.6
million) in 1992, primarily as a result of growth in the number of pagers in
service, offset somewhat by a decline in average monthly revenue per unit.
Pagers in service increased 43.0% (138,700, including 10,700 from acquisitions)
in 1993 and 36.1% (85,400, including 10,000 from an acquisition) in 1992.
Average monthly revenue per unit was $13.65 in 1993, $14.93 in 1992 and $15.28
in 1991. This decline reflects the industry trend of declining average monthly
revenue per unit, which APP expects to continue. However, APP's average monthly
revenue per unit has been consistently above the industry average. Declining
average monthly revenue per unit is related to competitive factors and a shift
toward resellers and customers purchasing pagers through retail operations.
Average monthly revenue per unit for customer-owned pagers and pagers served
through resellers is lower than for leased pagers because the customers do not
pay monthly fees to lease pagers and because resellers purchase paging services
at wholesale rates. Growth in the customer base increased revenues by $21.8
million in 1993 and $8.7 million in 1992, while the decline in average monthly
revenue per unit (8.6% in 1993 and 2.3% in 1992) reduced revenues by $6.0
million in 1993 and $1.1 million in 1992. Increased use of lower revenue but
higher margin distribution channels and price competition contributed to the
decline in average monthly revenue per unit in 1993 and 1992.
SERVICE OPERATING EXPENSES increased 21.6% ($11.6 million) in 1993 and
10.1% ($4.9 million) in 1992 primarily as a result of the costs of serving new
customers added through both internal growth and acquisitions and the costs of
system expansion. Cost of services increased 30.4% ($3.7 million) in 1993 and
23.3% ($2.3 million) in 1992. The additional costs of providing service to the
increased customer base, which include alphanumeric transcription, nationwide
and local reseller and telephone expenses, increased cost of services
approximately $3.0 million in 1993 and $1.6 million in 1992. The remainder of
the increases in cost of services were due primarily to the costs of upgrading
and expanding APP's transmission systems to improve reliability and coverage.
APP had 685 transmitters in service at year-end 1993, 532 at year-end 1992 and
484 at year-end 1991.
Selling and advertising expense increased 6.8% ($712,000) in 1993 and 1.9%
($190,000) in 1992. Selling and advertising expense increased at a slower rate
than the rate of growth in pagers in service due to improved productivity of
sales personnel and increased use of lower-cost distribution channels (such as
resellers and retail outlets). Cost per gross additional customer added,
excluding acquisitions, was $42 in 1993, $62 in 1992 and $88 in 1991.
General and administrative expense increased 20.4% ($4.2 million) in 1993
and 5.3% ($1.0 million) in 1992. Additional employees added in 1993 to serve the
growing customer base increased these expenses $1.6 million. Bad debt expense
increased $1.1 million 1993 due to APP's increased use of retail distribution
and the increase in the customer base. The 1992 increase reflects additional
personnel costs incurred for employees added to serve the growing customer base,
largely offset by decreases in 1992 due to the elimination of one-time personnel
costs
related to a 1991 strategic exchange of customers and related economies of scale
resulting from the exchange. Certain amounts formerly included as general and
administrative expenses in prior years have been reclassified as equipment sales
revenues and cost of equipment sold to conform to 1993's presentation.
Depreciation and amortization charges increased 28.6% ($3.0 million) in
1993 and 15.1% ($1.4 million) in 1992, reflecting the increased investment in
pagers and related equipment. APP's gross fixed assets balance grew 19.7% in
1993 and 16.6% in 1992, primarily due to increases in terminals and transmitters
added to improve service quality and coverage and increases in pagers due to the
growth in customers.
EQUIPMENT SALES REVENUE increased 79.0% ($4.8 million) in 1993 and 108%
($3.2 million) in 1992 due to APP's increased emphasis on selling pagers to
customers, particularly through retail stores and resellers. Cost of equipment
sold increased 65.7% ($4.3 million) in 1993 and 116% ($3.5 million) in 1992.
While APP generally plans to break even on equipment sales, it may at times, in
selected locations, discount paging equipment due to competitive pressures,
sales promotions or sales of discontinued pagers. In June of 1993, APP elected
to cease national retailer distribution of pagers through its wholly owned
subsidiary, APN. The decision to cease operations at APN resulted in a pretax
charge of $1.0 million, included in other income, net in the Consolidated
Statements of Income.
OPERATING LOSS was $721,000 in 1993, $5.4 million in 1992 and $7.8 million
in 1991. Operating margin, while still negative, improved to (1.0)% in 1993 from
(10.0%) in 1992 and (17.6%) in 1991. The improvement in operating loss reflects
a) rapid growth in revenues, offset by a continuing decline in average monthly
revenue per unit and APP's increased use of lower revenue but higher margin
distribution channels, and b) increased operating expenses due to growth in the
number of customers served, tempered by APP's efforts to reduce costs through
process improvements and economies of scale. The lower revenue distribution
channels, while reducing the rate of revenue growth, are associated with lower
customer acquisition costs.
The Company expects service revenues to continue to grow in 1994 as
customers are added to APP's existing service areas and as it realizes a full
year of revenue from customers added in 1993. The industry trend of declining
average monthly revenue per unit is expected to continue in 1994. However, APP's
average monthly revenue per unit has consistently been above the industry
average and the Company expects this to continue. The Company expects expenses
to continue to increase in 1994 as the customer base grows and as APP continues
to upgrade and expand its transmission systems to further improve reliability
and coverage.
PARENT AND SERVICE COMPANY OPERATIONS
OTHER INCOME, NET includes the operating income of TDS's computer, engineering
and printing service companies and costs of corporate operations. Additionally,
1993's amount includes the $1.0 million charge to cease operations at APN, as
discussed previously.
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Additions to property
and equipment $ 7,386* $ 20,555* $ 7,359*
Identifiable assets $ 79,202 $ 56,756 $ 38,726
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<FN>
*Includes noncash amounts (in thousands) of $(426), $7,994 and $54,
respectively.
INFLATION
Management believes that inflation effects TDS's business to no greater extent
than the general economy.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," which became effective in
January 1994, requiring employers to recognize the obligation to provide
benefits to former or inactive employees after employment but before retirement.
Based on a study of the provisions of SFAS No. 112, the Company estimates that
implementation of the new standard will result in a charge to income (to be
treated as the cumulative effect of an accounting change) estimated to be
approximately $725,000 net-of-tax.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
The FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," in May 1993, which became effective in January 1994. SFAS
No. 115 addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Those investments are to be classified in one of three
categories: a) held-to-maturity securities, reported at amortized cost; b)
trading securities, reported at fair value; and c) available-for-sale
securities, reported at fair value with unrealized gains and losses excluded
from earnings and reported in a separate component of shareholders' equity.
Based on a review of the provisions of SFAS No. 115, management believes that
implementation will not have a material effect on results of operations or
financial condition.
FINANCIAL RESOURCES AND LIQUIDITY
TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid
growth has caused financing requirements for construction, expansion and
acquisition programs to exceed internally generated cash flow in recent years.
Accordingly, TDS and USM have obtained substantial funds from external sources
to finance construction and development of cellular telephone systems and to
fund acquisitions during the past three years. Continued requirements for
construction, expansion and acquisition activities will require substantial
additional funds from external sources.
CASH FLOWS FORM OPERATING ACTIVITIES, as presented in the Consolidated
Statements of Cash Flows, totalled $160.2 million in 1993, $115.4 million in
1992 and $77.8 million in 1991. Cash flows from operating activities increased
38.9% ($44.8 million) in 1993 and 48.2% ($37.5 million) in 1992. The increase in
cash flows represents primarily improved operating results in all three business
segments and increases in operating payables. Consolidated operating cash flows
(operating income plus depreciation and amortization) totalled $187.7 million in
1993, $146.1 million in 1992 and $112.4 million in 1991. The increase in
operating cash flows in 1993 reflects the increase in the operating cash flows
of all three business segments. The increase in 1992's operating cash flows
represents primarily increases in telephone and cellular cash flows. Cash flows
for other operating activities (investment and other income, interest and income
tax expense, and changes in working capital and other assets and liabilities)
required $27.5 million in 1993, $30.7 million in 1992 and $34.6 million in 1991.
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Operating cash flow
(Operating income
plus depreciation
and amortization)
Telephone $ 138,672 $ 124,164 $ 108,667
Cellular telephone 36,371 16,934 2,438
Radio paging 12,671 4,964 1,297
-------------------------------------------
187,714 146,062 112,402
Other operating
activities (27,518) (30,703) (34,564)
-------------------------------------------
$ 160,196 $ 115,359 $ 77,838
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES totalled $131.0 million in 1993, $83.2
million in 1992 and $108.4 million in 1991. Sales of debt securities and common
stock by TDS and common stock by USM provided most of the external financing
requirements during 1993. Sales of common stock by TDS provided most of the
Company's external financing requirements during 1992. Sales of debt securities
by TDS and common stock by USM provided most of the external financing
requirements during 1991. TDS has used short-term debt to finance its cellular
telephone and radio paging operations, for acquisitions and for general
corporate purposes. Proceeds from the sale of the long-term debt and equity
securities from time to time have retired such short-term debt.
TDS sold 1.3 million Common Shares for cash during 1993. The $65.6 million
net proceeds were used to retire short-term bank debt totalling $58.9 million
and for general corporate purposes. TDS sold 2.0 million Common Shares at $35
per share through a public offering during 1992. The $68.2 million net proceeds
from this offering were used to retire short-term bank debt totalling $54.0
million and for general corporate purposes.
During 1993, the Company sold $92.5 million under its Medium-Term Note
("MTN") program, most of which was used to retire short-term debt. During 1991,
the Company sold $100 million under this MTN program. Approximately $93.0
million of the proceeds was used to retire short-term debt.
During 1993, USM sold approximately 1.1 million of its Common Shares to
parties other than TDS pursuant to a rights offering. TDS used the $37 million
proceeds to retire existing short-term debt. In 1991, USM sold 2.0 million
Common Shares to the public at an offering price of $18 and an additional
368,000 Common Shares at $18 per share to one of its major shareholders pursuant
to a Common Stock Purchase Agreement. The net proceeds of over $40 million were
used to repay short-term debt. TDS and USM have also issued TDS Common Shares,
TDS Preferred Shares and USM Common Shares to third parties to acquire telephone
companies and cellular interests.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
TDS Telecom and USM have also used long-term debt to finance their
construction and development activities. Telephone subsidiaries borrowed $28.2
million in 1993, $14.4 million in 1992 and $8.1 million in 1991 under the Rural
Electrification Administration and the Rural Telephone Bank long-term federal
government loan programs. Financing under these programs comprises 98.6% of
total outstanding telephone subsidiary long-term debt at an average annual
interest rate of 5.3%. USM financed cellular system equipment and construction
costs totalling $36.6 million in 1992 and $17.5 million in 1991 under two vendor
financing arrangements. Loans under these programs bear interest approximating
the prime rate and have terms of seven to eight years.
Consolidated equity capital increased to 62.3% of total capitalization at
December 31, 1993, compared to 54.5% at the end of 1990, primarily as a result
of equity offerings and stock issuances in connection with acquisitions. TDS
targets a ratio of equity to total capital in the range of 55% to 60%.
CASH FLOWS FROM INVESTING ACTIVITIES required cash totalling $276.3 million
in 1993, $194.8 million during 1992 and $192.6 million during 1991. Such cash
flows primarily consist of additions to property, plant and equipment requiring
the use of cash and cash flows for acquisitions and for investments in cellular
telephone partnerships. Expenditures for property, plant and equipment additions
totalled $198.7 million in 1993, $148.6 million during 1992 and $151.8 million
during 1991 as summarized in the following table:
PROPERTIES AND EQUIPMENT ADDITION
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
TELEPHONE
Central offices $ 30,287 $ 24,447 $ 28,034
Outside plant 39,861 31,765 27,848
Other 12,085 11,145 11,974
-------------------------------------------
82,233 67,357 67,856
-------------------------------------------
CELLULAR TELEPHONE
Switching office and
cell site equipment 73,471 47,412 50,140
Other 20,617 11,420 15,897
-------------------------------------------
94,088 58,832 66,037
-------------------------------------------
RADIO PAGING
Pagers 13,990 11,621 7,732
Terminals and
transmitters 7,009 2,597 3,413
Other 3,814 1,283 2,177
-------------------------------------------
24,813 15,501 13,322
-------------------------------------------
OTHER 7,386 20,555 7,359
-------------------------------------------
208,520 162,245 154,574
-------------------------------------------
Less noncash amounts (9,777) (13,626) (2,819)
-------------------------------------------
As shown on
consolidated
statements of
cash flows $ 198,743 $ 148,619 $ 151,755
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TDS Telecom installed 54 digital switches in 1993, 18 in 1992 and 51 in
1991 and made substantial improvements in outside plant facilities during each
year. TDS Telecom now serves over 96% of its access lines with digital
switching. USM added three switching offices and 138 cell sites in 1993, three
switching offices and 107 cell sites during 1992 and seven switching offices and
67 cell sites during 1991. In addition to substantial expenditures for pagers in
the past three years, APP added 153 new transmitters in 1993, 107 in 1992 and
185 transmitters during 1991 to improve signal quality and expand the coverage
areas of its paging systems.
During the past three years, TDS purchased telephone, cellular and paging
interests as part of its ongoing acquisition program. During 1993, the Company
completed the purchase of four telephone companies (which also own cellular
interests representing 416,000 population equivalents), one paging company,
and cellular interests representing 3.8 million population equivalents,
including controlling interests in 25 cellular markets and several minority
cellular interests. Some of the entities acquired during 1993 were subject to
acquisition agreements prior to 1993. During 1992, the Company completed the
purchase of five telephone companies, two paging companies and cellular
interests representing 2.6 million population equivalents including controlling
interests in 13 cellular markets and several minority interests. During 1991,
the Company completed the purchase of seven telephone companies and cellular
interests representing 4.0 million population equivalents including controlling
interests in 32 cellular markets and several minority interests. The
consideration paid for these acquisitions is shown in the following table.
Year Ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Cash $ 58.8 $ 27.6 $ 20.3
Long-term Debt -- -- 3.5
TDS Common Shares
(6.8 million, 3.7 million
and 4.4 million, respectively) 277.1 134.5 147.0
TDS Series A Common
Shares (199,000) -- .1 --
TDS Preferred Shares (30,000
and 231,000, respectively) 3.0 -- 23.1
TDS Common Shares
Issuable (94,000 and 59,000,
respectively) 4.5 -- 1.9
USM Common Shares
(157,000, 130,000 and
260,000, respectively) 4.7 2.8 3.8
USM Common Shares
Issuable in the future,
primarily in 1994 or later
(140,000, 778,000 and
5.2 million, respectively) 3.0 16.7 109.9
Subsidiary preferred stock
(29,000) 2.9 -- --
--------------------------------------
Total Consideration $ 354.0 $ 181.7 $ 309.5
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ANTICIPATED REQUIREMENTS for 1994 reflect the Company's construction,
expansion and acquisition programs. Telephone, cellular telephone, radio paging
and other property, plant and equipment additions are anticipated to aggregate
approximately $305 million for 1994. The telephone plant additions budget totals
approximately $110 million in 1994, including about $45 million for new digital
switches and other switching facilities and $47 million for improvements to
outside plant facilities. The cellular capital additions budget totals $160
million for 1994 including anticipated expenditures for both enhancements to
existing systems and construction of new systems. Planned expenditures for
enhancements of existing majority-owned cellular systems, including additional
radio channel capacity as well as new cell sites, total about $140 million.
Anticipated expenditures for construction of switching offices and digital
expansion total $7 million. Radio paging property and equipment additions,
primarily the purchase of pagers, are anticipated to total about $25 million in
1994. Other fixed asset expenditures are estimated to total $10 million in 1994.
Investments in cellular partnerships, primarily minority-owned and managed
partnerships, are expected to total $5 million in 1994.
TDS's active acquisition program may require substantial external financing
during 1994. The Company maintains shelf registration of its Common Shares for
use in connection with acquisitions. The following table shows outstanding
Common and Series A Common Shares, Common Shares reserved for pending
acquisitions, and Common Shares registered under the shelf registration.
Common and Series A Common Shares
- -------------------------------------------------------------------------------
(SHARES IN THOUSANDS)
Shares outstanding December 31, 1993 50,385
Shares issuable 304
Shares reserved for pending acquisitions
under definitive agreements 3,540
------
Total shares outstanding and committed 54,229
- -------------------------------------------------------------------------------
Unissued shares previously registered for
acquisitions, including shares reserved
under definitive agreements 6,706
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At December 31, 1993, the Company had agreements awaiting regulatory
approvals to acquire controlling interests in two telephone companies (which
also own cellular interests representing approximately 90,000 population
equivalents) for an aggregate consideration of $53.2 million. Completion of
these pending acquisitions will require the issuance of approximately 1.1
million TDS Common Shares.
TDS and/or USM have entered into definitive agreements at December 31,
1993, to acquire controlling interests in nine cellular markets plus a minority
interest representing an aggregate of approximately 1.2 million population
equivalents for an aggregate consideration estimated to be $128.4 million. If
all of these acquisitions are completed as planned, TDS and/or USM will issue
approximately 2.4 million TDS Common Shares, 49,000 USM Common Shares and will
pay approximately $6.2
million in cash. Any cellular interests acquired by TDS in these transactions
are expected to be assigned to USM, and at the time this occurs, USM will
reimburse TDS for TDS's consideration delivered and costs incurred in such
acquisitions in the form of USM Common Shares and notes payable. In addition to
the agreements discussed above, the Company has pending agreements to acquire
interests representing 302,000 population equivalents in three cellular markets.
The consideration for these acquisitions will be determined based on future
appraisals of the fair market value of the interests to be acquired.
TDS and USM plan to continue to acquire additional cellular interests in
markets that strengthen USM's position, while at the same time considering the
disposition of interests in some markets that do not fit well with USM's long-
term plans. TDS and USM are currently negotiating agreements for the acquisition
of additional cellular interests. TDS is also currently negotiating agreements
for the acquisition of additional telephone and paging companies.
TDS is a party to legal proceeding before the FCC involving its cellular
license in a Wisconsin Rural Service Area. Pending the resolution of the issues
in the Wisconsin proceeding, further FCC grants to TDS and its subsidiaries will
be conditioned on the outcome of that proceeding. TDS's and USM's ability to
sell or exchange properties with third parties while such proceeding is pending
may be affected. See Note 14 of Notes to Consolidated Financial Statements,
Legal Proceedings (LaStar Application), for a discussion of the proceeding
involving the Wisconsin Rural Service Area.
LIQUIDITY. Management believes that TDS has sufficient internal and
external resources to finance the anticipated requirements of its business
development, construction and acquisition programs. TDS and its subsidiaries
have cash and temporary investments totalling $73.4 million and longer-term
investments in marketable non-equity securities totalling $64.6 million at
December 31, 1993. These cash and other investments are primarily the result of
telephone operations' internally generated cash. While certain regulated
telephone subsidiaries' debt agreements place limits on intercompany
dividend payments, these restrictions are not expected to affect the Company's
ability to meet its cash obligations.
TDS and its subsidiaries also have access to a variety of external capital
sources. The TDS Telecom telephone subsidiaries had $93.9 million in unadvanced
loan funds from federal government programs at year-end to finance the telephone
construction program. These loan commitments have a weighted average annual
interest rate of 6.1%.
TDS and its subsidiaries had $117.3 million of bank lines of credit for
general corporate purposes at December 31, 1993, all of which were committed.
Unused amounts of such lines totalled $111.0 million, all of which were
committed. These line of credit agreements provide for borrowings at negotiated
rates up to the prime rate.
TDS and USM also have access to debt and equity capital markets, including
shelf registration statements to issue common stock and preferred stock for
acquisitions. TDS's shelf registration statement for Common Shares for
acquisitions had 6.7 million unissued shares at December 31, 1993, including 2.5
million shares reserved under definitive agreements. TDS filed a $300 million
universal shelf registration statement in September 1993 which may be used from
time to time to issue debt securities and/or Common Shares for cash. As of
December 31, 1993, $282.6 million remained unused on the universal shelf. In
February 1994, APP issued 3.5 million Common Shares in an initial public
offering at a price of $14.00 per share. The $45.6 million proceeds (after
underwriting discount) were used to reduce TDS's short-term debt and for general
corporate purposes.
The Company plans to continue financing its telephone construction program
primarily using internally generated cash supplemented by long-term financing
from federal government programs. Internally generated cash financed 60.1% of
telephone property, plant and equipment additions in 1993, 76.4% in 1992 and
88.3% in 1991. Financing from federal government programs provided 39.9% of
telephone construction in 1993, 23.6% in 1992 and 11.7% in 1991.
Management believes that TDS's internal cash flows and funds available from
cash and cash investments provide substantial financial flexibility. TDS also
has substantial lines of credit and longer-term financing commitments to meet
its short- and longer-term financing needs. Moreover, TDS and USM have access to
public and private capital markets and anticipate issuing debt and equity
securities when capital requirements (including acquisitions), financial market
conditions and other factors warrant.
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31, 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating Revenues $ 590,744 $ 456,896 $ 354,681 $ 294,574 $ 239,803
Operating Income 69,733 54,065 40,661 47,124 26,906
Net Income before Extraordinary Item and
Cumulative Effect of Accounting Changes 33,896 38,520 21,113 27,208 11,051
Extraordinary Item -- (769) -- -- --
Cumulative Effect of Accounting Changes -- (6,866) (5,035) -- --
Net Income 33,896 30,885 16,078 27,208 11,051
Net Income Available to Common $ 31,510 $ 28,648 $ 14,390 $ 26,047 $ 9,768
Weighted Average Common Shares (000s) 47,266 39,074 33,036 30,415 27,543
Earnings per Common Share:
Before Extraordinary Item and Cumulative
Effect of Accounting Changes $ .67 $ .91 $ .59 $ .86 $ .35
Extraordinary Item -- (.02) -- -- --
Cumulative Effect of Accounting Changes -- (.17) (.15) -- --
Net Income $ .67 $ .72 $ .44 $ .86 $ .35
Pretax Profit on Revenues 10.2% 14.9% 10.2% 14.8% 7.9%
Effective Income Tax Rate
(Before Extraordinary Item and
Cumulative Effect of Accounting Changes) 43.9% 43.6% 41.4% 37.6% 41.8%
Dividends per Common
and Series A Common Share $ .34 $ .32 $ .30 $ .28 $ .26
Cash and Cash Equivalents
and Temporary Investments 73,385 58,145 53,346 65,824 57,296
Property, Plant and Equipment (Net) 1,738,298 1,275,516 997,187 624,541 514,020
Total Assets 2,259,182 1,696,486 1,368,145 940,289 771,181
Notes Payable 6,309 46,816 41,283 70,571 1,465
Long-term Debt (including current portion) 537,566 426,885 395,960 270,066 269,762
Redeemable Preferred Shares
(including current portion) 27,367 27,967 28,779 6,965 11,258
Common Stockholders' Equity 1,224,285 877,419 645,290 429,666 361,321
Construction Expenditures $ 208,520 $ 162,245 $ 154,574 $ 111,002 $ 81,750
Current Ratio 1.1 .9 .9 .8 1.5
Common Equity per Share $ 24.15 $ 21.27 $ 18.42 $ 14.17 $ 12.22
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING REVENUES
Telephone $268,122 $238,095 $211,231
Cellular telephone 247,259 164,085 99,477
Radio paging 75,363 54,716 43,973
-----------------------------------------------------
590,744 456,896 354,681
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Telephone 189,012 165,877 145,989
Cellular telephone 255,915 176,790 116,308
Radio paging 76,084 60,164 51,723
-----------------------------------------------------
521,011 402,831 314,020
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 69,733 54,065 40,661
- --------------------------------------------------------------------------------------------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income 8,082 7,708 8,100
Minority share of cellular (income) losses (475) (3,703) 2,783
Cellular investment income,
net of license cost amortization 15,704 9,224 6,824
Gain on sale of cellular interests 4,970 31,396 3,407
Other income, net (155) 2,207 3,275
-----------------------------------------------------
28,126 46,832 24,389
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST AND INCOME TAXES 97,859 100,897 65,050
Interest expense 37,466 32,610 28,993
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 60,393 68,287 36,057
Income tax expense 26,497 29,767 14,944
- --------------------------------------------------------------------------------------------------
NET INCOME BEFORE EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 33,896 38,520 21,113
Extraordinary Item -- (769) --
Cumulative Effect of Accounting Changes -- (6,866) (5,035)
- --------------------------------------------------------------------------------------------------
NET INCOME 33,896 30,885 16,078
Preferred Dividend Requirement (2,386) (2,237) (1,688)
- --------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON $ 31,510 $ 28,648 $ 14,390
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES (000s) 47,266 39,074 33,036
EARNINGS PER COMMON SHARE:
Before Extraordinary Item and
Cumulative Effect of Accounting Changes $ .67 $ .91 $ .59
Extraordinary Item -- (.02) --
Cumulative Effect of Accounting Changes -- (.17) (.15)
-----------------------------------------------------
Net Income $ .67 $ .72 $ .44
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON AND SERIES A
COMMON SHARE $ .34 $ .32 $ .30
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 33,896 $ 30,885 $ 16,078
Add (Deduct) adjustments to reconcile
net income to net cash provided by
operating activities
Extraordinary item -- 769 --
Cumulative effect of accounting
changes -- 6,866 5,035
Depreciation and amortization 127,509 98,986 76,841
Deferred taxes 5,846 6,999 2,829
Equity income (20,015) (13,265) (9,404)
Minority share of cellular
income (losses) 475 3,703 (2,783)
Gain on sale of cellular interests (4,970) (31,396) (3,407)
Other noncash expense 5,336 10,128 2,120
Change in accounts receivable (11,262) (10,057) (10,934)
Change in accounts payable 11,308 6,984 (1,392)
Change in accrued taxes 4,661 1,087 (965)
Change in other assets and liabilities 7,412 3,670 3,820
-----------------------------------------------------
160,196 115,359 77,838
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 122,275 59,294 125,334
Repayment of long-term debt (37,969) (40,517) (19,654)
Premium on retirement of long-term debt -- (1,117) --
Change in notes payable (40,533) 5,507 (30,294)
Common stock issued 69,644 72,201 2,146
Minority partner capital (distributions)
contributions (1,528) 1,690 1,640
Redemption of preferred shares (220) (407) (226)
Dividends paid (17,830) (13,902) (11,294)
Sale of stock by a subsidiary 37,154 407 40,742
----------------------------------------------------
130,993 83,156 108,394
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (198,743) (148,619) (151,755)
Investments in and advances to
cellular minority partnerships (14,595) (16,981) (26,124)
Distributions from partnerships 11,943 9,676 4,637
Proceeds from investment sales 6,750 7,343 8,595
Other investments (35,054) (16,934) (16,807)
Acquisitions, excluding cash acquired (51,579) (30,117) (17,653)
Change in temporary investments 4,945 864 6,529
----------------------------------------------------
(276,333) (194,768) (192,578)
- -------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 14,856 3,747 (6,346)
CASH AND CASH EQUIVALENTS--
Beginning of period 40,810 37,063 43,409
----------------------------------------------------
End of period $ 55,666 $ 40,810 $ 37,063
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED BALANCE SHEETS-ASSETS
December 31, 1993 1992
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
CURRENT ASSETS
Cash and cash equivalents $ 55,666 $ 40,810
Temporary investments 17,719 17,335
Construction funds 1,473 709
Accounts receivable
Due from customers, net 37,802 28,644
Other, principally connecting companies 42,994 35,865
Materials and supplies, at average cost 13,870 9,681
Other 10,032 10,334
--------------------------------
179,556 143,378
- -------------------------------------------------------------------------------------------------
INVESTMENTS
Cellular limited partnership interests 101,210 87,060
Cellular license acquisition costs, net of amortization 92,277 80,132
Marketable equity securities 19,368 19,557
Other 115,532 84,652
--------------------------------
328,387 271,401
- -------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Telephone
In service and under construction, substantially
at original cost 846,491 749,251
Less accumulated depreciation 322,301 280,181
--------------------------------
524,190 469,070
Franchise and other costs in excess of the
underlying book value of subsidiaries,
net of amortization 114,658 97,248
--------------------------------
638,848 566,318
--------------------------------
Cellular Telephone
In service and under construction 306,118 193,681
License acquisition costs 816,621 505,522
--------------------------------
1,122,739 699,203
Less accumulated depreciation and amortization 108,636 64,616
--------------------------------
1,014,103 634,587
--------------------------------
Radio Paging
In service 84,282 67,858
Less accumulated depreciation and amortization 31,337 26,220
--------------------------------
52,945 41,638
--------------------------------
Other
In service 57,228 54,415
Less accumulated depreciation and amortization 24,826 21,442
--------------------------------
32,402 32,973
--------------------------------
1,738,298 1,275,516
- -------------------------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES 12,941 6,191
--------------------------------
$2,259,182 $1,696,486
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED BALANCE SHEETS-
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1993 1992
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock $ 24,859 $ 22,707
Notes payable 6,309 46,816
Accounts payable 82,878 58,193
Advance billings and customer deposits 17,273 13,720
Accrued interest 8,968 6,314
Accrued taxes 7,995 3,070
Other 15,249 13,422
---------------------------------
163,531 164,242
- --------------------------------------------------------------------------------------------------
DEFERRED LIABILITIES AND CREDITS
Investment tax credits 6,285 7,120
Income taxes 59,842 46,949
Postretirement benefits obligation other than pensions 14,213 14,414
Other 10,639 7,026
---------------------------------
90,979 75,509
- --------------------------------------------------------------------------------------------------
LONG-TERM DEBT, excluding current portion 514,442 404,982
- --------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion 25,632 27,163
- --------------------------------------------------------------------------------------------------
MINORITY INTEREST in subsidiaries 223,480 132,938
- --------------------------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES 16,833 14,233
- --------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share;
authorized 100,000,000 shares; issued and outstanding
43,503,584 and 34,383,483 shares, respectively 43,504 34,383
Series A Common Shares, par value $1 per share;
authorized 25,000,000 shares; issued and outstanding
6,881,001 and 6,863,819 shares, respectively 6,881 6,864
Common Shares issuable, 304,328 shares 15,189 --
Capital in excess of par value 1,069,022 761,706
Retained earnings 89,689 74,466
---------------------------------
1,224,285 877,419
---------------------------------
$ 2,259,182 $ 1,696,486
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF COMMON
STOCKHOLDERS' EQUITY
Year Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
COMMON SHARES
Balance beginning of period $ 34,383 $ 28,319 $ 23,680
Add
Acquisitions 7,477 3,720 4,449
Employee stock ownership plans 158 155 37
Dividend reinvestment plan 26 29 26
Sales of Common Shares 1,320 2,000 --
Conversion of Preferred Shares 140 160 127
--------------------------------------------------------
Balance end of period $ 43,504 $ 34,383 $ 28,319
- -----------------------------------------------------------------------------------------------------
SERIES A COMMON SHARES
Balance beginning of period $ 6,864 $ 6,645 $ 6,637
Add
Acquisitions -- 199 --
Dividend reinvestment plan 17 20 8
--------------------------------------------------------
Balance end of period $ 6,881 $ 6,864 $ 6,645
- -----------------------------------------------------------------------------------------------------
COMMON SHARES ISSUABLE
Balance beginning of period $ -- $ 1,936 $ --
Add (Deduct)
Acquisitions 15,189 -- 1,936
Shares issued pursuant
to acquisition agreements -- (1,936) --
--------------------------------------------------------
Balance end of period $ 15,189 $ -- $ 1,936
- -----------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE
Balance beginning of period $ 761,706 $550,096 $345,576
Add (Deduct)
Acquisitions 299,146 132,980 143,903
Employee stock ownership plans 2,578 4,053 1,324
Dividend reinvestment plans 1,835 1,605 972
Sales of Common Shares 64,271 66,160 --
Capital stock expense (333) (284) (211)
Conversion of Preferred shares 1,972 5,309 2,031
(Loss) gain on sale of subsidiary stock (62,153) 1,787 56,501
--------------------------------------------------------
Balance end of period $1,069,022 $761,706 $550,096
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance beginning of period $ 74,466 $ 58,294 $ 53,773
Add net income 33,896 30,885 16,078
--------------------------------------------------------
108,362 89,179 69,851
--------------------------------------------------------
Deduct
Dividends
Common and Series A Common Shares 16,287 12,466 9,841
Preferred Shares 2,386 2,247 1,716
--------------------------------------------------------
18,673 14,713 11,557
--------------------------------------------------------
Balance end of period $ 89,689 $ 74,466 $ 58,294
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Telephone and Data Systems, Inc. and its
subsidiaries ("TDS" or the "Company") conform to generally accepted accounting
principles. The accounting records of the telephone subsidiaries are maintained
in accordance with the uniform systems of accounts prescribed by the regulatory
bodies under whose jurisdiction the subsidiaries operate.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TDS, its
majority-owned subsidiaries since acquisition and the cellular telephone
partnerships in which TDS has a majority general partnership interest. All
material intercompany items have been eliminated.
TDS includes as investments in subsidiaries the value of the consideration
given and all direct and incremental costs relating to acquisitions accounted
for as purchases. All costs relating to unsuccessful negotiations for
acquisitions are expensed. TDS includes as investments in cellular licenses all
direct and incremental costs incurred in participating in the Federal
Communications Commission ("FCC") lottery process to obtain cellular licenses.
Such costs are being amortized in accordance with Company policy.
CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of three months to twelve months are classified as
temporary investments. Temporary investments are stated at cost, which
approximates market.
Cash and cash equivalents and temporary investments consist of the
following:
December 31, 1993 1992
- ------------------------------------------------------------
(DOLLARS IN THOUSANDS)
General funds $30,966 $21,238
Government agency securities 8,158 5,021
Tax-exempt municipal bonds 1,000 9,353
Certificates of deposit 8,761 6,033
Money-market preferred stock -- 16,500
Commercial paper 24,500 --
-----------------
$73,385 $58,145
- ------------------------------------------------------------
INVESTMENTS
Investments in cellular limited partnership interests consists of amounts
invested in cellular entities in which TDS holds a minority interest. The
Company follows the equity method of accounting, which recognizes TDS's
proportionate share of the income and losses accruing to it under the terms of
its partnership or shareholder agreements, for its long-term investments ($87.9
million and $71.3 million at December 31, 1993 and 1992, respectively). Income
and losses from these entities are reflected in the consolidated income
statements on a pretax basis.
The cost method of accounting is followed for those minority interests
which TDS is holding for sale of exchange ($13.3 million and $15.8 million at
December 31, 1993 and 1992, respectively). TDS's unaudited proportionate share
of the income or (loss) of such cellular investments which are accounted for
under the cost method and are therefore not included in the consolidated income
statements were approximately $979,000 in 1993, $840,000 in 1992 and $(199,000)
in 1991. TDS's proportionate share of all such losses since the inception of
operations or acquisition was $1.8 million at December 31, 1993.
Cellular license acquisition costs consist of costs incurred in acquiring
FCC licenses or minority interests which have been awarded FCC licenses to
provide cellular service. These costs include amounts paid to license applicants
and owners of interest in cellular entities awarded licenses; amounts paid for
legal, engineering, and consulting services; amounts incurred by TDS in
acquiring these interests; and goodwill. These costs are capitalized and had
been amortized through charges to expense over 20 years upon commencement of
operations. Effective January 1, 1992, the Company prospectively changed its
amortization period for license costs from 20 years to 40 years to conform with
industry practices. Amortization amounted to $1.6 million in 1993, $607,000 in
1992 and $1.0 million in 1991. Accumulated amortization of cellular license
costs was $4.4 million and $3.2 million at December 31, 1993 and 1992,
respectively. Cellular license costs with an unamortized financial reporting
basis of approximately $16 million have no tax basis because the associated
purchase transactions were structured to be tax-free. This basis difference is
goodwill and no deferred taxes have been provided.
Marketable equity securities are stated at the lower of cost or market
value. At December 31, 1993, the aggregate market value of such securities
exceeded their cost by $207,000.
Other investments consist of the following:
December 31, 1993 1992
- ----------------------------------------------------------
(DOLLARS IN THOUSANDS)
Minority telephone interests $ 32,238 $ 31,924
Marketable non-equity
securities, at cost which
approximates market 64,556 35,814
Rural Telephone Bank Stock,
at cost 4,863 4,419
Long-term notes receivable 7,764 6,768
Other 6,111 5,727
-----------------
$115,532 $ 84,652
- ----------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The equity method of accounting is followed for investments in which TDS
holds common stock ownership of at least 20% or can influence policies of the
affiliated company. Earnings from these investments are reflected in the
consolidated income statements net of applicable tax effects. At December 31,
1993, the cumulative share of income from investments accounted for under the
equity method was $58.7 million, of which $16.7 million was undistributed. Other
investments are stated at cost. Amortization of excess cost relating to
minority telephone interests totalled $545,000 in 1993, $485,000 in 1992 and
$306,000 in 1991.
Shares of Rural Telephone Bank ("RTB") Class B stock are purchased as a
condition of obtaining long-term financing from the RTB. Holders of Class B
stock are entitled to patronage dividends in the form of additional Class B
stock. Such stock must be held until the related RTB loan is repaid.
PROPERTY, PLANT AND EQUIPMENT
TELEPHONE plant in service and under construction is stated at the original
cost of construction including the capitalized costs of certain taxes, payroll-
related expenses, and an allowance for funds used during construction ("AFUDC").
AFUDC, a noncash item of nonoperating income, totalled $698,000 in 1993,
$559,000 in 1992 and $430,000 in 1991. The composite weighted average rates
were 9.2% in 1993, 8.6% in 1992 and 9.4% in 1991. The amount of such allowance
has varied principally as a result of changes in the level of construction work
in progress and in the cost of capital.
Renewals and betterments of units of property are added to telephone plant
in service. The original cost of depreciable property retired is removed from
plant in service and, together with removal costs less any salvage realized, is
charged to accumulated depreciation. Repairs and renewals of minor items of
property are included in plant operations expense. No gain or loss is recognized
on ordinary retirements of depreciable telephone property.
Telephone franchise and other costs include the costs in excess of the
underlying book value of acquired telephone companies. Costs in excess of the
underlying book value relating to acquisitions initiated before November 1,
1970, aggregating $6.5 million, are not being amortized. At December 31, 1993,
costs aggregating $125.1 million relating to acquisitions since November 1, 1970
are being amortized on a straight-line basis over a 40-year period. Amortization
amounted to $3.0 million in 1993, $2.4 million in 1992 and $2.3 million in 1991.
Accumulated amortization of excess cost was $16.9 million and $13.9 million at
December 31, 1993 and 1992, respectively.
CELLULAR TELEPHONE property and equipment is stated at cost. Costs incurred
in acquiring FCC licenses or interests in entities which have filed for or have
been awarded FCC licenses to provide cellular service have been capitalized.
These costs include amounts paid for legal, engineering, and consulting
services; amounts paid to license applicants and owners of interest in cellular
entities awarded licenses; amounts incurred by TDS in acquiring these interests;
and goodwill. These costs had been amortized on a straight-line basis over 20
years upon commencement of operations. Effective January 1, 1992, the Company
prospectively changed its amortization period for license costs from 20 years to
40 years to conform with industry practices. Amortization amounted to $17.3
million in 1993, $10.9 million in 1992 and $8.9 million in 1991. Cellular
license costs with an unamortized financial reporting basis of approximately
$242 million have no tax basis because the associated purchase transactions were
structured to be tax-free. This basis difference is goodwill and no deferred
taxes have been provided. Costs incurred prior to the commencement of cellular
service in cellular telephone markets have been capitalized and are amortized
over five years upon commencement of operations.
RADIO PAGING property and equipment is stated at cost. Costs relating to
the acquisition and development of radio paging licenses have been capitalized
and are being amortized over five to ten years upon commencement of operations.
OTHER property and equipment is stated at cost. Certain costs relating to
the development of computer software for internal use are capitalized and are
amortized over the estimated five-year life of the software.
DEPRECIATION is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, are as follows:
Year Ended December 31, 1993 1992 1991
- ----------------------------------------------------------
Telephone 7.3% 7.2% 6.7%
Cellular Telephone 10.5 10.5 10.4
Radio Paging 17.4 17.2 17.1
Other 12.9 12.8 10.1
- ----------------------------------------------------------
REVENUE RECOGNITION
TDS's revenues are recognized when earned. Telephone network access and
long-distance services are furnished jointly with other companies, primarily
AT&T Communications, Inc, and the Bell Operating Companies. Compensation for
interstate access services is based on tariffed access charges to interstate
long-distance carriers as filed by the National Exchange Carrier Association
with the FCC on behalf of TDS. Such compensation amounted to 31% of telephone
revenues in 1993, 28% in 1992 and 26% in 1991. Compensation for intrastate toll
and access service is based on tariffed access charges, cost separation
studies, nation-wide average schedules or special settlement arrangements with
intrastate long-distance carriers. Network access and long-distance revenues
based on cost separation studies represent estimates pending completion and
acceptance of final cost studies. Management believes that recorded amounts
represent reasonable estimates of the final amounts.
PENSION PLAN
Telephone and Data Systems, Inc. Employees' Pension Trust I (the "Pension
Trust"), a qualified non-contributory defined contribution pension plan,
provides pension benefits for most of the employees of TDS, its telephone
subsidiaries and its service companies. Under this plan, pension benefits and
costs are calculated separately for each participant and are funded currently.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employees of certain of the telephone subsidiaries not covered by the Pension
Trust are covered under other pension plans or receive direct pension payments.
Total pension costs were $3.3 million in 1993, $2.4 million in 1992 and $2.4
million in 1991.
OTHER POSTRETIREMENT BENEFITS
The Company adopted Statements of Financial Accounting Standards No. 106
("SFAS 106"), "Employers's Accounting for Postretirement Benefits Other than
Pensions" effective January 1, 1992. SFAS 106 requires companies to accrue
postretirement benefits during the employment years. The Company provides health
care benefits and life insurance coverage which were expensed as paid in 1991.
Such payments totalled $401,000, $302,000 and $241,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
The Company sponsors two defined benefit post-retirement plans that cover
most of the employees of TDS, its telephone subsidiaries and its service
companies. One plan provides medical benefits and the other provides life
insurance benefits. Both plans are contributory, with retiree contributions
adjusted annually. The accounting for the medical plan anticipates future cost-
sharing changes to the written plan that are consistent with the Company's
intent to increase retiree contributions by the health care cost trend rate.
During 1992 the Company established a Medical Benefit Fund (the "Fund") within
the Pension Trust, under Internal Revenue Code Section 401(h). The Fund was
established to pay for part of the cost of the medical benefits. An amount equal
to 25% of the contribution to the pension plan will be contributed to the Fund
annually. The Company established a Voluntary Employees' Beneficiary Association
during 1993 to fund the costs of the life insurance benefits.
The following table sets forth the plans' combined funded status reconciled
with the amount shown in the Company's consolidated balance sheet at
December 31, 1993 (dollars in thousands):
Accumulated postretirement benefit obligation:
Retirees $ 4,384
Fully eligible active plan participants 2,400
Other active plan participants 9,277
------
16,061
Plan assets at fair value 2,184
------
Accumulated postretirement benefit
obligation in excess of plan assets 13,877
Unrecognized net gain from past experience
different from that assumed and from
changes in assumptions 336
------
Accrued postretirement benefit cost
at December 31, 1993 $ 14,213
- --------------------------------------------------------------------------------
The Company's medical and life insurance plans are underfunded. The
accumulated postretirement benefit obligations for the health care plan and the
life insurance plan are $13.7 million and $2.4 million, respectively. Plan
assets for the health care plan and the life insurance plan totalled $1.9
million and $243,000, respectively, at December 31, 1993.
The Company's accumulated postretirement benefit for both plans as of
January 1, 1992 totalled approximately $12.9 million. Of this amount, $1.6
million was capitalized to telephone plant by the Company's regulated
operations. The remaining $11.3 million, net of related income tax benefits of
$4.4 million, was recorded as the cumulative effect of a change in accounting
principle for the year ended December 31, 1992. The Consolidated Statement of
Income for 1991 was not restated. The effect of the change in 1992 is shown
below (dollars in thousands, except per share amounts):
Net Income before extraordinary item and
cumulative effect of change $ (830)
Cumulative effect of change (6,866)
--------
Net Income $(7,696)
- --------------------------------------------------------------------------------
Earnings per share before extraordinary
item and cumulative effect of change $ (.02)
Cumulative effect of change (.17)
--------
Earnings per Common Share $ (.19)
- --------------------------------------------------------------------------------
Net postretirement cost for 1993 and 1992 includes the following
components:
December 31, 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Service cost $ 806 $ 652
Interest cost on accumulated
post-retirement benefit
obligation 1,378 1,094
Actual return on plan assets (64) --
Net amortization and deferral (49) --
-----------------
Net postretirement cost $ 2,071 $ 1,746
- --------------------------------------------------------------------------------
For measurement purposes, an 11.6% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1993; the rate was
assumed to decrease over nine years to 6.1% and to remain at 6.1% thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. Increasing the assumed health care costs trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1993, by $2.9 million and the aggregate
of the service and interest cost components of postretirement expense for the
year then ended by $432,000.
The weighted average discount rate and rate of compensation increase used
in determining the accumulated postretirement benefit obligation were 7.0% and
5.0%, respectively. The trust that holds the plan assets is subject to federal
income taxes at a 39.6% marginal tax rate.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Financial Accounting Standards Board issued SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which became effective in January 1994,
requiring employers to recognize the obligation to provide benefits to former or
inactive employees after employment but before retirement. Based on a study of
the provisions of SFAS No. 112, the Company estimates that implementation of the
new standard will result in a charge to income in 1994 (to be treated as the
cumulative effect of an accounting change) estimated to be approximately
$725,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GAIN ON SALE OF CELLULAR INTERESTS
Gains in 1993 reflect primarily the sale of two minority cellular
interests. USM received $6.8 million cash consideration on the sales.
Gains in 1992 reflect the sales and exchange of minority- and
majority-owned cellular interests as follows: (a) USM transferred its
controlling interests in two Rural Services Areas ("RSAs"), its minority
interests in two Metropolitan Statistical Areas ("MSAs") and approximately $2.9
million in cash in exchange for controlling interests in two other MSAs and a
minority interest in a combined MSA/RSA system. The exchange of the controlling
interests in the RSAs has been recorded using book values, with no gain or loss
recognized on the exchange. The exchange of the minority interests in the two
MSAs has been recorded at the fair market value of approximately $15.7 million.
A gain of $11.4 million, representing the excess of the fair market value of
the MSA interests traded over the book value of such interests, was included in
income for 1992. (b) USM sold a majority interest in an MSA in exchange for
certain marketable equity securities then valued at $18.2 million. A gain of
$17.1 million was recognized on the sale. (c) USM sold a minority interest in an
MSA for $3.8 million in cash. A gain of $2.9 million was recognized on the sale.
Gains in 1991 reflect primarily sales of cellular minority interests.
Approximately $2.9 million of the gain in 1991 equals the income tax liability
associated with the sale.
EXTRAORDINARY ITEM
During 1992 the Company retired at a premium $20.8 million of its Senior Notes.
The notes carried interest rates of 9.75% to 13.75% and were due in 1996 through
2004. The transaction resulted in an extraordinary loss of $769,000 ($.02 per
share), net of income tax benefits of $491,000.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1991, USM changed its method of accounting for sales
commissions from capitalizing and amortizing these costs over 36 months to
expensing as incurred. Also in 1991, two of USM's equity-method investees made a
similar accounting change.
The ($5.0 million) cumulative effect of both USM's and its equity-method
investees' changes on prior years after reduction for the minority USM
shareholders' share of $1.9 million and income tax benefits of $3.4 million is
included in income for the twelve months ended December 31, 1991. The effect of
the changes in 1991 was to decrease net income and earnings per share before the
cumulative effect of accounting changes by $463,000 and $.01, respectively, and
to decrease net income and earnings per share by $5.5 million and $.16,
respectively.
EARNINGS PER COMMON SHARE
Earnings per Common Share were computed by dividing Net Income Available to
Common, less (in 1992) an amount due to a subsidiary's issuable securities ("the
minority income adjustment") by the weighted average number of Common Shares,
Series A Common Shares and dilutive common equivalent shares outstanding during
the year. The minority income adjustment, $546,000 in 1992 reflects the
additional minority share of the subsidiary's income computed as if all of the
subsidiary's issuable securities were outstanding. Dilutive common stock
equivalents consist of Common Shares issuable upon conversion of dilutive series
of Preferred Shares and Common Share options. The calculation of Earnings per
Common Share assuming full dilution had no effect.
Preferred dividend requirements include all dividends paid on Preferred
Shares which are not dilutive common stock equivalents. For the year ended
December 31, 1993, the preferred dividend requirement on all outstanding
Preferred Shares was $2.4 million.
SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures for interest and income
taxes paid, acquisitions and other noncash transactions. TDS paid interest of
$34.4 million, $32.4 million and $26.1 million and income taxes of $17.3
million, $20.2 million and $13.4 million during 1993, 1992 and 1991,
respectively.
TDS has acquired operating telephone and paging companies, certain cellular
licenses and operating companies and certain other assets since January 1, 1991.
In conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:
Year Ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Property, plant
and equipment $ 78,252 $ 33,987 $ 70,784
Cellular licenses 312,656 157,966 257,017
Minority interest (14,115) 132 1,000
Increase (decrease)
in equity method
investment in
cellular interests (4,690) (8,159) (3,922)
Long-term debt (23,930) (2,492) (18,759)
Deferred credits (5,300) (754) (2,043)
Other assets and
liabilities, excluding
cash and cash
equivalents 3,821 3,548 559
Common Shares
issued and issuable (281,553) (134,612) (150,288)
Preferred Shares issued (3,000) -- (23,059)
USM stock issued
and issuable (7,653) (19,499) (113,636)
Subsidiary preferred
stock issued (2,909) -- --
-----------------------------
Decrease in cash due
to acquisitions $ 51,579 $ 30,117 $ 17,653
- --------------------------------------------------------------------------------
TDS issued Common Shares aggregating $2.1 million in 1993, $5.5 million in 1992
and $2.2 million in 1991 for TDS Preferred Shares and subsidiary preferred stock
converted into Common Shares. TDS issued Common Shares in 1993 aggregating $40.3
million for certain cellular acquisitions completed in prior years. The
consideration specified in the original acquisition agreements was USM Common
shares. The Company also added $7.1 million in other property and equipment
financed with long-term obligations in 1992.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2
INCOME TAXES
TDS files a consolidated federal income tax return. Effective January 1,
1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS 109
requires companies to record all deferred tax liabilities or assets for the
deferred tax consequences of all temporary differences. Additionally, the
statement requires that deferred tax balances be adjusted to reflect new tax
rates when they are enacted into law. The cumulative effect of the
implementation of SFAS 109 on years prior to 1993 had no material effect on
net income or earnings per share. Income tax expense for 1993 reflects the new
method of accounting; income tax expense for prior years has not been restated.
Income tax provisions charged to net income before extraordinary items and
the cumulative effect of accounting changes are summarized as follows:
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Current:
Federal $ 15,562 $ 17,564 $ 10,294
State 4,521 5,008 2,593
Deferred:
Federal 6,696 8,344 3,236
State 1,510 851 523
Amortization of
deferred investment
tax credits (1,792) (2,000) (1,702)
-----------------------------
Total income tax
expense $ 26,497 $ 29,767 $ 14,944
- --------------------------------------------------------------------------------
In August of 1993, the Revenue Reconciliation Act of 1993 increased the
1993 statutory federal corporate income tax rate from 34 percent to 35 percent.
As a result of this change, federal tax expense increased by $568,000.
Effective with the adoption of SFAS 109 in 1993, deferred income taxes were
provided for the temporary differences between the amount of the Company's
assets and liabilities for financial reporting purposes and their tax bases. The
Company's current deferred tax assets totalled $2.6 million as of December 31,
1993, which primarily represents the deferred tax effects of unearned revenues.
The temporary differences that gave rise to the noncurrent deferred tax assets
and liabilities as of December 31, 1993 are as follows:
Deferred Income Taxes
------------------------
Assets Liabilities
- --------------------------------------------------------------------------------
Property, plant and equipment $ -- $ 65,141
Alternative minimum tax credit
carryforwards 19,553 --
State operating loss
carryforwards 14,610 --
Postretirement benefits 5,251 --
Partnership investments -- 9,722
Licenses -- 7,313
Marketable equity securities -- 6,797
Minority Share of USM income 5,823
Effects of corporations not
included in consolidated
federal return -- 3,878
Other 10,281 2,159
-------------------
49,695 100,833
Less valuation allowance (8,704) --
-------------------
Total $ 40,991 $100,833
- --------------------------------------------------------------------------------
At December 31, 1993 TDS had $19.5 million of federal alternative minimum
tax credit carryforwards available to offset regular income tax payable in
future years, and $211 million of state net operating loss carryforwards
expiring between 1999 and 2008. Income tax benefits of $1.4 million associated
with Company employee stock purchase plans and certain stock option arrangements
were recorded directly to Common Stockholders' Equity in 1993. Investment tax
credits resulting from investments in telephone plant and equipment have been
deferred and are being amortized over the service lives of the related property.
A valuation allowance of $6.5 million has been established upon the
adoption of SFAS 109 since it is more likely than not that a portion of the
state operating loss carryforwards will expire before they can be utilized.
During 1993, the valuation allowance increased $2.2 million due primarily to
the increase in state operating loss carryforwards.
The statutory federal income tax rate is reconciled to TDS's effective
income tax rate before an extraordinary item and the cumulative effect of
accounting changes below.
Year Ended December 31, 1993 1992 1991
- --------------------------------------------------------------------------------
Statutory federal
income tax rate 35.0% 34.0% 34.0%
State income taxes,
net of federal benefit 6.2 5.5 5.7
Amortization of license
acquisition costs and costs
in excess of book value 4.8 3.6 7.0
Amortization of deferred
investment tax credits (3.0) (2.7) (4.4)
Effects of corporations not
included in consolidated
federal tax return 1.9 1.8 1.1
Minority share of
USM income (loss) -- .5 (4.0)
Deferred tax rate differential (.7) (.7) (1.1)
Gain on sale of
cellular interest -- .5 4.0
Other differences, net (.3) 1.1 (.9)
-----------------------------------
Effective income tax rate 43.9% 43.6% 41.4%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total income tax provision for the years ended December 31, 1992 and
1991, including the extraordinary item and cumulative effect of accounting
changes, was $25.5 million and $11.6 million, respectively. The effective
income tax rate, including the extraordinary item and cumulative effect of
accounting changes, was 45.7% in 1992 and 41.9% in 1991.
Upon the adoption of SFAS 109, TDS's telephone subsidiaries recorded
additional deferred income tax liabilities related primarily to temporary
differences not deferred under rate-making policy. Deferred income tax
balances were also adjusted to recognize the current federal income tax rate of
35%. Deferred income tax assets were recorded to recognize unamortized
investment tax credits as a temporary difference. A corresponding regulatory
asset or liability has been established to offset these deferred income tax
adjustments. The unamortized regulated asset and liability balances as of
December 31, 1993, are $6.7 million and $7.9 million, respectively. These
amounts are being amortized over the lives of the related temporary differences.
NOTE 3
BUSINESS SEGMENT INFORMATION
TDS's operations are classified into three principal segments: Telephone,
Cellular Telephone and Radio Paging operations. See Management's Discussion and
Analysis of Results of Operations and Financial Condition, specifically "Results
of Operations" for certain required financial information regarding TDS's
business segments.
NOTE 4
ACQUISITIONS
During 1993 and 1992, TDS and its subsidiaries completed the following business
combinations.
Consideration
------------------------------
TDS and USM
Common Stock, TDS
Preferred Shares,
Cash, Notes and and Subsidiary
Long-term Debt Preferred Stock
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Acquisitions During 1993
Majority interest in four
telephone companies $34,396 $ 32,821
Cellular interest 19,538 262,346
Paging interests 4,896 --
Acquisitions During 1992
Five telephone
companies $ 279 $ 15,844
Cellular interests 22,674 138,267
Paging interest 4,650 --
- --------------------------------------------------------------------------------
Assuming that these acquisitions which were accounted for as purchases had
taken place on January 1, 1992, unaudited pro forma results of operations from
continuing operations would have been as follows:
Year Ended December 31, 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Operating revenues $608,020 $503,992
Net income before extraordinary
item and cumulative effect
of accounting changes 29,393 30,765
Earnings per share before
extraordinary item and
cumulative effect of
accounting changes $ .49 $ .42
- --------------------------------------------------------------------------------
NOTE 5
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash and Cash Equivalents, Temporary Investments,
Marketable Non-Equity Securities and Short- and Long-term Debt approximate fair
value. The following assumptions were used by the Company for its fair value
estimates for financial instruments:
Cash and Cash Equivalents and Short-term Debt: based on face
amounts.
Temporary Investments and Marketable Non-Equity Securities: based on quoted
market prices.
Long-term Debt: estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying value of the Company's Redeemable Preferred Shares, $27.4
million, is less that its fair value, estimated to be $33.4 million. The fair
value was estimated using discounted cash flow analyses based on the Company's
current dividend yield on issues of its non-convertible preferred shares, and,
for convertible series, the net present value of the common stock to be issued
upon conversion (valued at the December 31, 1993 quoted market price).
It was not practicable to estimate the fair value of the Company's cost
method investments in other companies because of the lack of quoted market
prices. The carrying amounts at December 31, 1993 represent the original cost of
the investments, which management believes is not impaired.
NOTE 6
NOTES PAYABLE
TDS has used short-term debt to finance its investments in cellular
telephone and radio paging operations, for acquisitions, and for general
corporate purposes. Long-term debt and equity financing from time to time have
retired such short-term debt. Proceeds from the sale of medium-term debt retired
$91.4 million of short-term debt in 1993 and $7.5 million in 1992. Proceeds of
TDS's sales of Common Shares retired $58.9 million of short-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
term debt in 1993 and $54 million of short-term debt in 1992. Proceeds from a
USM rights offering (see Note 7) reduced $29.6 million of short-term debt in
1993.
TDS and its subsidiaries had $117 million of bank lines of credit for
general corporate purposes at December 31, 1993, all of which were committed.
Unused amounts of such lines totalled $111 million, all of which were committed.
These line-of-credit agreements provide for borrowings at negotiated rates up to
the prime rate.
Information concerning notes payable is shown in the table below.
December 31 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Balance
at end of period $ 6,309 $46,816 $41,283
Weighted average
interest rate at
end of period 3.6% 4.3% 5.8%
Maximum amount
outstanding during
the period 49,851 $71,803 $80,035
Average amount
outstanding during
the period(1) $32,270 $31,053 $42,959
Weighted average
interest rate during
the period (1) 3.9% 4.5% 6.6%
- --------------------------------------------------------------------------------
<FN>
(1) The average was computed based on month-end balances.
NOTE 7
SALE OF STOCK BY A SUBSIDIARY
In 1993, USM sold 5.9 million Common Shares and 5.5 million Series A Common
Shares at a price of $33 per share pursuant to a rights offering. Approximately
4.8 million of the Common Shares and all of the Series A Common Shares were
issued to TDS in exchange for a reduction in the amount of debt USM owes TDS of
approximately $341 million.
In 1991, USM sold 2.0 million Common Shares at a public offering price of
$18 per share. Immediately prior to the public offering, $110 million of USM's
debt to TDS was converted into additional USM Common Shares, also at $18 per
share. USM issued Common Shares during 1993, 1992 and 1991 in connection with
acquisitions and employee stock purchase plans. In addition, certain 1993, 1992
and 1991 acquisitions require USM to deliver Common Shares in the future.
The USM Common Share transactions were recorded at fair market values which
were substantially either less than or in excess of TDS's book value investment
in USM. The (decrease) increase in TDS's book value investment (as a result of
these issues and commitments to issue Common Shares) totalled ($62.2 million) in
1993, $1.8 million in 1992 and $56.5 million in 1991, and was (debited) credited
to capital in excess of par value.
NOTE 8
LONG-TERM DEBT
Long-term debt as of December 31, 1993 and 1992 is as follows:
December 31 1993 1992
- ------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Telephone and Data Systems,
Inc. (Parent) Medium-term
notes, 8% to 10%, due
through 2023 $ 200,000 $ 107,500
Senior notes, 8.875% to 14% -- 10,970
Purchase contracts, 8% to 14%,
due through 2003 4,272 4,417
Subordinated debentures,
8.0% to 14.5%, due through
2008 2,364 3,154
---------------------------------
206,636 126,041
Less current portion 1,604 3,935
---------------------------------
Total parent debt 205,032 122,106
- ---------------------------------------------------------------
Subsidiaries
REA, RTB and FFB Mortgage
Notes, due through 2030
2% 30,141 29,698
4% to 6% 162,714 135,390
6.05% to 9% 59,846 52,661
9.025% to 11% 6,994 7,183
---------------------------------
259,695 224,932
Vendor financing,
approximating prime 62,931 64,866
Other long-term notes,
6% to 13%, due
through 2003 8,304 11,046
---------------------------------
330,930 300,844
Less current portion 21,520 17,968
---------------------------------
Total subsidiaries'
debt 309,410 282,876
- ---------------------------------------------------------------
Total long-term debt $ 514,442 $ 404,982
- ---------------------------------------------------------------
- ---------------------------------------------------------------
The Company sold $92.5 million and $7.5 million of senior unsecured debt
securities in 1993 and 1992, respectively, under its Medium-Term Note Program.
The proceeds were used principally to retire short-term debt, as well as for
working capital and general corporate purposes.
The mortgage notes issued under certain loan agreements with the Rural
Electrification Administration ("REA"), Rural Telephone Bank ("RTB") and Federal
Financing Bank ("FFB"), agencies of the United States of America, are to be
repaid in equal monthly or quarterly installments covering principal and
interest beginning six months to three years after dates of issue and expiring
through 2030.
Substantially all telephone plant is pledged under REA and RTB mortgage
notes and various other obligations of the subsidiaries.
USM has financing arrangements with an equipment vendor for cellular system
equipment and construction costs. The borrowings are collateralized by a secured
interest in some or all of the assets of USM's operating subsidiaries.
Borrowings have terms of seven to eight years at interest rates approximating
the prime rate (6.0% at December 31, 1993).
The annual requirements for principal payments on long-term debt are
approximately $23.1 million, $23.2 million, $21.0 million, $19.9 million and
$20.2 million for the years 1994 through 1998, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9
PREFERRED SHARES
TDS Cumulative Voting Preferred Shares, authorized 5,000,000 shares, have a
stated value of $100 per share. The Preferred Shares are issuable in series by
the Board of Directors who establish the terms of the issue. Those issues which
contain mandatory redemption features or which are redeemable at the option of
the holder are classified as Redeemable Preferred Shares. Those issues which are
not redeemable or which are redeemable at the option of TDS are classified as
Nonredeemable Preferred Shares.
REDEEMABLE PREFERRED SHARES
Redeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares with redemption features as described below. Dividends
on Series MM through QQ are payable in additional shares of each of those
series. All other dividends are payable in cash. At December 31, 1993, Series
W,X and DD are convertible into TDS Common Shares as shown in the following
table.
Outstanding Amount Outstanding
Dividend Conversion Preferred December 31,
Series Rate Ratio Shares 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT DIVIDEND RATES)
H $7.00 -- 1,594 $ 174 $ 211
N 8.00 -- 5,495 550 628
O 9.00 -- 709 71 71
W 7.50 9/1 8,500 850 850
X 6.00 7.88/1 1,700 170 170
CC 6.00 5.25/1 -- -- 14
DD 7.00 5.25/1 12,000 1,200 2,400
HH 6.00 -- 2,627 263 367
II 6.00 -- 6,738 674 674
JJ 6.00 -- 6,738 674 674
KK 6.00 -- 6,735 674 674
LL 6.00 -- 6,735 674 674
MM 4.00 -- 9,425 942 906
NN 4.00 -- 9,058 905 870
OO 4.00 -- 55,895 5,589 5,371
PP 4.00 -- 48,582 4,858 4,669
QQ 4.00 -- 90,992 9,099 8,744
------------------------------------------
273,523 27,367 27,967
Less current portion 1,735 804
----------------
$25,632 $27,163
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Series H Preferred Shares are required to be redeemed at $119 per share and
are stated on the balance sheets at redemption price. Series N through LL
Preferred Shares are redeemable at the option of the holder at $100 per share
plus accrued and unpaid dividends. Series MM through QQ Preferred Shares are
redeemable at the option of the holder into (at TDS's option) a specified number
of USM Common Shares, a number of TDS Common Shares having a market value equal
to the specified number of USM Common Shares, or a combination of USM and TDS
Common Shares. The annual requirements for redemption of Redeemable Preferred
Shares are $1.7 million, $10.8 million, $11.4 million, $1.2 million and $249,000
for the years 1994 through 1998, respectively.
The following is a schedule of the Redeemable Preferred Shares' activity.
Year Ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Balance, beginning of period $27,967 $28,779 $ 6,965
Add:
Acquisitions -- -- 23,059
Stock dividends 834 802 68
Less:
Redemption of preferred (220) (407) (106)
Conversion of preferred (14) -- --
Expiration of
redemption feature (1,200) (1,207) (1,207)
--------------------------------------------------
Balance, end of period $ 27,367 $ 27,967 $ 28,779
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES
Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. Outstanding
Nonredeemable Preferred Shares are redeemable at the option of TDS (except
Series S, which is not redeemable) at $100 per share, plus accrued and unpaid
dividends. At December 31, 1993, Series V through RR Preferred Shares are
convertible into TDS Common Shares as shown in the following table.
Outstanding Amount Outstanding
Dividend Conversion Preferred December 31,
Series Rate Ratio Shares 1993 1992
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT DIVIDEND RATES)
A $6.00 -- 1,395 $ 139 $ 139
B 7.00 -- 1,955 195 195
D 6.00 -- 646 65 65
G 7.00 -- 1,368 137 137
S 7.00 -- 1,209 121 121
U 8.50 -- 1,100 110 110
V 7.50 9/1 3,100 310 370
AA 7.00 9/1 -- -- 1,259
BB 9.00 9/1 19,000 1,900 1,900
CC 6.00 5.25/1 -- -- 22
DD 7.00 5.25/1 48,000 4,800 3,600
EE 6.00 4.5/1 14,304 1,431 1,515
GG 5.00 2.3/1 46,400 4,640 4,800
RR 7.50 2.06/1 29,851 2,985 --
-----------------------------------------
168,328 $16,833 $14,233
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following is a schedule of the Nonredeemable Preferred Shares'
activity.
Year Ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Balance, beginning
of period $ 14,233 $ 13,183 $ 13,134
Add:
Acquisitions 3,000 -- --
Reclassification
from Redeemable
Preferred Shares 1,200 1,207 1,207
Less:
Conversion of preferred (1,600) (157) (1,158)
------------------------------------------
Balance, end of period $16,833 $14,233 $13,183
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10
RESTRICTION ON COMMON STOCK DIVIDENDS
Under TDS's loan agreements at December 31, 1993, all of the consolidated
retained earnings were available for the payment of cash dividends on shares of
TDS common stock.
Certain regulated telephone subsidiaries may not transfer funds to the
parent in the form of cash dividends, loans or advances until certain financial
requirements of their mortgages have been met. Of the $209 million underlying
retained earnings of all TDS subsidiaries at December 31, 1993, $99 million was
available for the payment of dividends on the subsidiaries' common stock. Of
the $1.5 billion underlying net assets of the TDS subsidiaries at
December 31, 1993, $1.1 billion was available for transfer to TDS.
NOTE 11
COMMON STOCK
COMMON SHARES ISSUABLE
Certain telephone and cellular acquisition agreements require TDS to
deliver Common Shares in 1994. In connection with these agreements, TDS expects
to deliver these Common Shares during the first quarter of 1994.
EMPLOYEE AND SHAREHOLDER STOCK PLANS
The following table summarizes Common and Series A Common Shares issued for
the employee stock ownership plans and dividend reinvestment plans described
below.
Year Ended December 31, 1993 1992 1991
- ----------------------------------------------------------------------------
Common Shares
Employee
stock purchase plan 31,065 44,399 945
Tax-deferred
savings plan 29,760 31,539 23,312
Employee stock
options and stock
appreciation rights 96,877 78,195 12,938
Dividend
reinvestment plan 26,070 29,468 25,569
--------------------------------------
183,772 183,601 62,764
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Series A Common Shares
Dividend
reinvestment plan 17,182 20,525 7,206
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 125,000 Common Shares for sale
to the employees of TDS and its subsidiaries at $44.73 per share in connection
with the 1993 Employee Stock Purchase Plan.
TAX-DEFERRED SAVINGS PLAN. TDS has reserved 218,569 Common Shares for issue
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, USM Common Shares or four other nonaffiliated funds. Employer
matching contributions, equal to 20% of employee contributions up to a certain
limit, are made in TDS Common Shares.
EMPLOYEE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. TDS has reserved 574,342
Common Shares for options granted to key employees. TDS has established certain
plans that provide for the grant of stock options and stock appreciation rights
to officers and employees. The options are exercisable over a specified period
not in excess of ten years. The options expire from 1994 to 2003, or the date of
the employee's termination of employment, if earlier. The following table
summarizes the status of the plans.
Weighted
Number Average
Stock Options of Shares Option Prices
- -------------------------------------------------------------------------------
Outstanding January 1, 1991
(174,593 exercisable) 532,963 $11.68
Granted 24,000 $32.24
Exercised (11,925) $ 9.52
----------------------------
Outstanding December 31, 1991
(233,542 exercisable) 545,038 $12.63
Granted 1,125 $32.36
Exercised (128,439) $13.15
----------------------------
Outstanding December 31, 1992
(174,751 exercisable) 417,724 $12.52
Granted 11,125 $35.54
Exercised (133,414) $ 9.62
----------------------------
Outstanding December 31, 1993
(104,411 exercisable) 295,435 $14.70
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Stock appreciation rights ("SARs") allow the grantee to receive an amount in
cash or Common Shares, or a combination thereof, equivalent to the difference
between the exercise price and the fair market value of the Common Shares on the
exercise date. The following table summarizes the SARs outstanding at $4.43 to
$36.60 per share. These rights expire March 1997, or the date of the employee's
termination of employment, if earlier.
Year Ended December 31, 1993 1992 1991
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Outstanding beginning
of period 22,076 20,725 24,024
Granted 9,410 9,828 10,015
Exercised (22,386) (8,477) (13,314)
------------------------------------------
Outstanding end of period 9,100 22,076 20,725
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Compensation expense, measured on the difference between the year-end market
price of the Common Shares and option prices, was $644,000 in 1993, $553,000 in
1992 and $378,000 in 1991.
DIVIDEND REINVESTMENT PLANS. TDS has reserved 205,597 Common Shares for issue
under the Automatic Dividend Reinvestment and Stock Purchase Plan and 244,337
Series A Common Shares for issue under the Series A Common Share Automatic
Dividend Reinvestment Plan. These plans enable holders of TDS's Common Shares
and Preferred Shares to reinvest cash dividends in newly issued Common Shares
and holders of Series A Common Shares to reinvest cash dividends in newly issued
Series A Common Shares. The purchase price of the shares is 95% of the market
value, based on the average of the daily high and low sales prices for TDS's
Common Shares on the American Stock Exchange for the ten trading days preceding
the date on which the purchase is made.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONVERTIBLE PREFERRED SHARES
TDS has reserved 2,401,399 Common Shares for the possible conversion of its
convertible Preferred Shares (See Note 9). TDS issued 139,689 Common Shares in
1993, 160,166 in 1992 and 126,917 in 1991 for shares of TDS and subsidiary
preferred stock converted.
SERIES A COMMON SHARES
The holders of Common Shares and the outstanding Preferred Shares are entitled
to one vote per share. The holders of Series A Common Shares are entitled to ten
votes per share. Series A Common Shares are convertible, on a share-for-share
basis, into Common Shares. TDS has reserved 6,881,001 Common Shares for possible
issuance upon such conversion.
PUBLIC OFFERING
TDS issued 1.3 million Common Shares for cash under its shelf registration
statements in 1993. Proceeds aggregated $65.6 million. TDS sold 2.0 million
Common Shares at $35.50 per share in connection with a public offering in 1992.
Proceeds to TDS were $34.08 per share, or $68.2 million.
NOTE 12
COMMITMENTS
The primary purpose of TDS's construction and expansion program is to provide
for normal growth, to upgrade telephone service, to expand into new
communication areas, and to take advantage of service-enhancing and cost-
reducing technological developments. Telephone construction expenditures are
estimated to be approximately $110 million during 1994. Property and equipment
expenditures for cellular telephone operations are estimated to be approximately
$160 million during 1994. Radio paging fixed asset expenditures are estimated to
be approximately $25 million during 1994. Other fixed asset expenditures are
estimated to be approximately $10 million during 1994. Investments in cellular
partnerships, primarily in minority-owned and managed systems, are expected to
total $5 million in 1994.
The Company has an ongoing acquisition program to acquire telephone companies
and cellular telephone interests. For a discussion of pending acquisitions, see
Management's Discussion and Analysis of Results of Operations and Financial
Condition, specifically "Financial Resources and Liquidity."
TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 1993, 1992 and 1991, rent expense for term
leases was $7.8 million, $6.7 million and $6.5 million, respectively, and rent
expense under cancelable and short-term leases was $5.4 million, $3.1 million
and $3.1 million, respectively. At December 31, 1993, the aggregate minimum
rental commitments under noncancelable operating leases for the years 1994
through 1998 are approximately $7.9 million, $7.0 million, $6.2 million, $5.3
million and $4.9 million, respectively.
NOTE 13
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited results of operations of the telephone and cellular
companies in which TDS's investments are accounted for by the equity method.
December 31, 1993 1992
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(DOLLARS IN THOUSANDS)
Assets
Current assets $ 186,931 $ 147,100
Due from affiliates 34,159 18,993
Property and other 570,594 535,015
---------------------------------------
$ 791,684 $ 701,108
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- ----------------------------------------------------------------------------
Liabilities and Equity
Current liabilities $ 136,636 $ 97,952
Due to affiliates 35,591 41,614
Deferred credits 6,777 5,839
Long-term debt 84,781 97,470
Partners' capital
and stockholders' equity 527,899 458,233
-----------------------------------------
$ 791,684 $ 701,108
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Year Ended December 31, 1993 1992 1991
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Results of Operations
Revenues $ 765,983 $ 599,548 $ 491,233
Costs and expenses (568,458) (446,149) (338,708)
Other income
(expense) (8,045) 3,086 1,231
Interest expense (9,046) (8,288) (2,231)
Income taxes (3,596) (4,593) (3,707)
Cumulative effect of
accounting changes 432 (1,495) (4,658)
-----------------------------------------
Net income $ 177,270 $ 142,109 $ 143,160
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14
LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain landline or cellular telephone systems. The
more significant proceedings involving the Company are described in the
following paragraphs.
LA STAR APPLICATION. Star Cellular Telephone Company, Inc. ("Star
Cellular"), an indirect wholly owned subsidiary of USM, is a 49% owner of La
Star Cellular Telephone Company ("La Star"), an applicant for a construction
permit for a cellular system in St. Tammany Parish in the New Orleans MSA. In
June 1992, the FCC affirmed an Administrative Law Judge's order which had
granted the mutually exclusive application of New Orleans CGSA, Inc. ("NOCGSA")
and dismissed La Star's application. The ground for the FCC's action was its
finding that Star Cellular, and not the 51% owner, SJI Cellular Inc. ("SJI"), in
fact controlled La Star. La Star, TDS and USM have appealed that order to the
United States Court of Appeals of the District of Columbia Circuit and those
appeals are pending.
In a footnote to its decision, the FCC stated, in part, that "Questions
regarding the conduct of SJI and [USM] in this case may be revisited in light of
the relevant findings and conclusions here in future proceedings where the other
interests of these parties have decisional significance." Certain adverse
parties have attempted to use the footnote in the La Star decision in a number
of unrelated, contested proceedings which TDS and USM have pending before the
FCC. In addition, since the La Star proceeding, FCC authorizations in
uncontested FCC proceedings have been granted subject to any subsequent action
the FCC may take concerning the La Star footnote.
On February 1, 1994, in a proceeding involving a license originally issued
to TDS for a Rural Service Area in Wisconsin, the FCC instituted a hearing to
determine whether in the La Star case USM had misrepresented facts to, lacked
candor in its dealing with or attempted to mislead the FCC and, if so, whether
TDS possesses the requisite character qualifications to hold that Wisconsin
license. The FCC stated that, pending resolution of the issues in the Wisconsin
proceeding, further grants to TDS and its subsidiaries will be conditioned on
the outcome of that proceeding. TDS was granted interim authority to continue to
operate the Wisconsin system pending completion of the hearing.
An adverse finding in the Wisconsin hearing could result in a variety of
possible sanctions, ranging from a fine to loss of the Wisconsin license, and
could, as stated in the FCC order, be raised and considered in other proceedings
involving TDS and its subsidiaries. TDS and USM believe they acted properly in
connection with the La Star application and that the findings and record in the
La Star proceeding are not relevant in any other proceeding involving their FCC
license qualifications.
TOWNES TELECOMMUNICATIONS, INC., ET. AL. V. TDS, ET. AL. Plaintiffs Townes
Telecommunications, Inc. ("Townes"), Tatum Telephone Company ("Tatum Telephone")
and Tatum Cellular Telephone Company ("Tatum Cellular") filed a suit in the
District Court of Rusk County, Texas, against both TDS and USM as defendants.
Plaintiff Townes alleges that it entered into an oral agreement with defendants
which established a joint venture to develop cellular business in certain
markets. Townes alleges that defendants usurped a joint venture opportunity and
breached fiduciary duties to Townes by purchasing interests in nonwireline
markets in Texas RSA #11 and the Tyler (Texas) MSA on their own behalf rather
than on behalf of the alleged joint venture. In its Fifth Amended Original
Petition Townes seeks unspecified damages not to exceed $33 million for
usurpation, breach of fiduciary duty, civil conspiracy, breach of contract and
tortious interference. Townes also seeks imposition of a constructive trust on
defendants' profits from Texas RSA #11 and the Tyler (Texas) MSA and transfer of
those interests to the alleged joint venture. In addition, Townes seeks
reasonable attorneys' fees equal to one-third of the judgment, along with
prejudgment interest. Plaintiffs Tatum Telephone and Tatum Cellular seek a
declaration that transfers by defendants of a 49% interest in Tatum Cellular
violated a five-year restriction on alienation of Tatum Cellular shares
contained in a written shareholders' agreement. Tatum Telephone and Tatum
Cellular seek to void the transfers. All plaintiffs together seek as much as
$200 million in punitive damages.
Defendants have asserted meritorious defenses to each of the plaintiffs'
claims and are vigorously defending this case. Discovery in ongoing. A jury
trial is this case is set to commence on April 25, 1994.
CONSOLIDATED QUARTERLY INCOME INFORMATION
(UNAUDITED)
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1993
Operating Revenues $126,702 $144,781 158,650 $160,611
Operating Income 15,376 20,735 21,162 12,460
Net Income 6,803 8,967 11,887 6,239
Net Income Available to Common $6,207 $8,371 $11,290 $5,642
Weighted Average Common Shares (000s) 44,261 46,469 48,302 50,045
Earnings per Common Share $.14 $.18 $.23 $.11
1992
Operating Revenues $100,737 $111,189 $118,604 $126,366
Operating Income 14,305 15,039 14,038 10,683
Net Income Before Extraordinary Item and
Cumulative Effect of Accounting Change 13,159 6,992 6,626 11,743
Extraordinary Item -- -- -- (769)
Cumulative Effect of Accounting Change (6,866) -- -- --
Net Income 6,293 6,992 6,626 10,974
Net Income Available to Common $5,955 $6,432 $6,065 $10,416
Weighted Average Common Shares (000s) 36,877 39,479 40,027 40,637
Earnings per Common Share:
Before Extraordinary Item and Cumulative
Effect of Accounting Change $.35 $.16 $.15 $.26
Extraordinary Item -- -- -- (.02)
Cumulative Effect of Accounting change (.19) -- -- --
Net Income $.16 $1.6 $.15 $.24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Telephone and Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Telephone and
Data Systems, Inc. (an Iowa Corporation) and Subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of income, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in "Changes in Accounting Principle" in Note 1 of the Notes to
Consolidated Financial Statements, the method of accounting for cellular sales
commissions was changed effective January 1, 1991. As discussed in "Other
Postretirement Benefits" in Note 1, the method of accounting for postretirement
benefits other than pensions was changed effective January 1, 1992. As discussed
in Note 2 of the Notes to Consolidated Financial Statements, the method of
accounting for income taxes was changed effective January 1, 1993.
As discussed in Note 14 of the Notes to Consolidated Financial Statements,
the Company is a defendant in a lawsuit involving a joint venture opportunity, a
shareholders' agreement and other related matters. The ultimate outcome from the
litigation cannot presently be determined. Accordingly, no provision for any
liability which may result has been made in the consolidated financial
statements.
/s/ Arthur Andersen & Co.
Chicago, Illinois
February 8, 1994