--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8251
--------------------------------------------------------------------------------
TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
--------------------------------------------------------------------------------
IOWA 36-2669023
-------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or No.)
organization)
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER: (312) 630-1900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
----------------------------- -----------------------------
Common Shares, $1 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.___X___
As of February 28, 1995, the aggregate market values of the registrant's
Common Shares, Series A Common Shares and Preferred Shares held by nonaffiliates
were approximately $2.3 billion, $14.6 million and $62.0 million, respectively.
The closing price of the Common Shares on February 28, 1995, was $45.625, as
reported by the American Stock Exchange. Because no market exists for the Series
A Common Shares and Preferred Shares, the registrant has assumed for purposes
hereof that (i) each Series A Common Share has a market value equal to one
Common Share because the Series A Common Shares were initially issued by the
registrant in exchange for Common Shares on a one-for-one basis and are
convertible on a share-for-share basis into Common Shares, (ii) each
nonconvertible Preferred Share has a market value of $100 because each of such
shares had a stated value of $100 when issued, and (iii) each convertible
Preferred Share has a value of $45.625 times the number of Common Shares into
which it was convertible on February 28, 1995.
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 28, 1995, is 50,147,231 Common Shares, $1 par
value, and 6,876,432 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1994 Annual Report to
Shareholders described in the cross reference sheet and table of contents
attached hereto are incorporated by reference into Part II of this report.
--------------------------------------------------------------------------------
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PAGE NUMBER
OR REFERENCE(1)
---------------
Item 1. Business............................................. 3
Item 2. Properties........................................... 31
Item 3. Legal Proceedings.................................... 32
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 33
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 33 (2)
Item 6. Selected Financial Data.............................. 33 (3)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 33 (4)
Item 8. Financial Statements and Supplementary Data.......... 33 (5)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 33
Item 10. Directors and Executive Officers of the Registrant... 34
Item 11. Executive Compensation............................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 34
Item 13. Certain Relationships and Related Transactions....... 34
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 35
<FN>
---------
(1) Parenthetical references are to information incorporated by reference from
the registrant's Exhibit 13, which includes portions of its Annual Report
to Shareholders for the year ended December 31, 1994 ("Annual Report").
(2) Annual Report sections entitled "TDS Stock and Dividend Information" and
"Market Price per Common Share by Quarter."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
(5) Annual Report sections entitled "Consolidated Statements of Income,"
"Consolidated Statements of Cash Flows," "Consolidated Balance Sheets,"
"Consolidated Statements of Common Stockholders' Equity," "Notes to
Consolidated Financial Statements," "Consolidated Quarterly Income
Information (Unaudited)" and "Report of Independent Public Accountants."
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TELEPHONE AND DATA SYSTEMS, INC.
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
TELEPHONE (312) 630-1900
[LOGO]
--------------------------------------------------------------------------------
PART I
--------------------------------------------------------------------------------
ITEM 1. BUSINESS
Telephone and Data Systems, Inc. (the "Company" or "TDS"), is a diversified
telecommunications service company with cellular telephone, local telephone and
radio paging operations. At December 31, 1994, the Company served approximately
1.5 million customer units in 37 states, including 421,000 cellular telephones,
392,500 telephone access lines and 652,800 pagers. For the year ended December
31, 1994, cellular operations provided 45% of the Company's consolidated
revenues; telephone operations provided 42%; and paging operations provided 13%.
The Company's business development strategy is to expand its existing operations
through internal growth and acquisitions and to explore and develop other
telecommunications businesses that management believes will utilize the
Company's expertise in customer-based telecommunications services.
The Company conducts substantially all of its cellular operations through
its 81.3%-owned subsidiary, United States Cellular Corporation (AMEX symbol
"USM"), which is engaged through subsidiaries and joint ventures primarily in
the development and operation of and the acquisition of interests in cellular
markets. USM owns, operates, invests in and has the right to acquire interests
in cellular telephone systems representing approximately 25.2 million population
equivalents in 207 markets in 36 states. USM owns a controlling interest in and
manages cellular systems serving 130 markets ("consolidated markets"). Since the
beginning of 1990, the number of cellular customers in USM's consolidated
markets has increased from 36,100 to 421,000.
The Company conducts substantially all of its telephone operations through
its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom").
TDS Telecom currently operates 96 telephone companies serving 392,500 access
lines in 29 states. TDS Telecom is expanding through the selective acquisition
of local exchange telephone companies serving rural and suburban areas and by
offering additional lines of telecommunications products and services to
existing customers. TDS Telecom has acquired 23 telephone companies since the
beginning of 1990. These acquisitions added 64,800 access lines during this
five-year period, while internal growth added 63,800 lines.
The Company conducts substantially all of its radio paging operations
through its 82.5%-owned subsidiary, American Paging, Inc. (AMEX symbol "APP").
APP offers radio paging and related services through its subsidiaries. Since the
beginning of 1990, the number of pagers in service increased from 161,600 to
652,800 at December 31, 1994, primarily from internal growth. APP provides
service through 36 sales and service operating centers in 14 states and the
District of Columbia. APP's service areas cover a total population of
approximately 75 million.
The Company was incorporated in Iowa in 1968. The Company's executive
offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its
telephone number is 312-630-1900.
Unless the context indicates otherwise: (i) references to "TDS" or the
"Company" refer to Telephone and Data Systems, Inc., and its subsidiaries; (ii)
references to "USM" refer to United States Cellular Corporation and its
subsidiaries; (iii) references to "TDS Telecom" refer to TDS
3
Telecommunications Corporation and its subsidiaries; (iv) references to "APP"
refer to American Paging, Inc. and its subsidiaries; (v) references to "MSA" or
to a particular city refer to the Metropolitan Statistical Area, as designated
by the U.S. Office of Management and Budget and used by the Federal
Communications Commission ("FCC") in designating metropolitan cellular market
areas; (vi) references to "RSA" refer to the Rural Service Area, as used by the
FCC in designating non-MSA cellular market areas; (vii) references to cellular
"markets" or "systems" refer to MSAs, RSAs or both; and (viii) references to
"population equivalents" mean the population of a market, based on 1994
Donnelley Marketing Service Estimates, multiplied by the percentage interests
that the Company owns or has the right to acquire in an entity licensed,
designated to receive a license or expected to receive a construction permit
("licensee") by the FCC to construct or operate a cellular or a Personal
Communications Services ("PCS") system in such market.
RECENT DEVELOPMENTS
In March 1995, American Portable Telecommunications, Inc. ("APT"), a wholly
owned subsidiary of TDS, was the successful bidder for eight broadband PCS
licenses at an auction conducted by the FCC. These 30 Megahertz ("MHz") PCS
licenses will, when granted, authorize the Company to provide two-way voice and
data services on new wireless, digital networks. TDS's licenses will cover the
Major Trading Areas of Minneapolis-St. Paul, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City, Columbus, Alaska and Guam-N. Mariana Islands,
and account for 27.9 million population equivalents.
APT's successful bid commitment totalled $289.2 million for the eight
licenses, or $10.35 per population equivalent. As required by FCC auction
procedures, the Company has made a 20% down payment (less its initial $20.4
million deposit) on the licenses, and will complete the payment five business
days after the FCC has granted the licenses. Management anticipates that initial
construction will begin in late 1995 or early 1996 following detailed
engineering and site procurement. Marketing and selling activities along with
commercial operations are anticipated to commence in late 1996 or early 1997.
Management anticipates that construction, development and introduction of
PCS networks and services in these new markets (excluding the cost of the
licenses) may involve expenditures of $400 million to $500 million or more over
the next five years. TDS is considering a variety of financing options that
appropriately balance the interests of its shareholders and debtholders. These
options include sales of non-strategic cellular interests, long-term debt at USM
and equity in a balanced program structured with the goal of preserving the
Company's investment-grade debt rating. At the present time, management
anticipates the costs of financing the acquisition of the PCS licenses and
preconstruction activities should not significantly reduce operating cash flow
during 1995 and 1996. Financing costs may, however, reduce consolidated net
income and earnings per share somewhat during 1995 and 1996.
REGULATORY DEVELOPMENTS
Each of the diversified telecommunications operations of TDS conducted by
its cellular telephone, local telephone and radio paging subsidiaries is subject
to FCC and state regulation. The licenses held by these subsidiaries are granted
by the FCC for the use of radio frequencies and are an important component of
the overall value of the assets of TDS. Recent Congressional legislation,
legislative proposals under consideration and FCC regulatory proceedings may
have significant impact on some or all of its diversified telecommunications
operations by altering FCC and state regulatory responsibilities for mobile
service, the procedures for the award by the FCC of licenses to conduct existing
and new mobile services, the terms and conditions of business relationships
between mobile service providers and Local Exchange Carriers ("LECs") and the
scope of the competitive opportunities available to mobile service providers. In
general, the trend of these developments is toward an increase in the number of
competitors and of competitive services. For the most part, FCC regulations
which implement changes in the law have not yet been adopted, or are subject to
requests for reconsideration, and the Company is therefore not now able to
predict the extent of such impact.
The Omnibus Reconciliation Act of 1993 (the "Budget Act"), amended the
Communications Act of 1934 (the "Communications Act") by eliminating
legislatively enacted distinctions affecting FCC and
4
state regulation of common carrier and private carrier mobile operations and
directed the FCC to classify all mobile services, including cellular, paging,
Specialized Mobile Radio ("SMR") and other services under two categories:
Commercial Mobile Radio Services ("CMRS"), subject to common carrier regulation;
or Private Mobile Radio Services ("PMRS"), not subject to common carrier
regulation. In 1994, the FCC released a decision classifying mobile service
offerings as CMRS operations if they include a service offering to the public
for a fee which is interconnected to the public switched network. Cellular, SMR
and paging, among other services, will be classified as CMRS if they fit this
definition. In addition, the FCC decision established a regulatory precedent for
hybrid CMRS/PMRS regulation of mobile operations which offer both CMRS and PMRS
service. The Company anticipates that most of its mobile service offerings will
be classified as CMRS. The FCC decision also states that it would forebear from
requiring that CMRS providers comply with a number of statutory provisions,
otherwise applicable to common carriers, such as the filing of tariffs. It
requires LECs to provide reasonable and fair interconnection to all CMRS
providers, subject to mutual compensation, reasonable charges for interstate
interconnection and reasonable forms of interconnection. Numerous petitions for
reconsideration of this decision were filed and remain pending.
The Budget Act also amended the Communications Act to authorize the FCC to
use a system of competitive bidding to issue initial licenses for the use of
radio frequencies for which there are mutually exclusive applications and where
the principal use of the license will be to offer service in return for
compensation from customers. In response, the FCC adopted generic rules for
competitive bidding, defined eligibility criteria for small businesses,
minority- and female-owned businesses and rural telephone companies which
qualify for preferential bidding treatment, as required under the Budget Act,
and described the bidding mechanisms to be used by businesses qualifying for
preferential treatment in future spectrum auctions.
Under other amendments to the Communications Act included in the Budget Act,
states will generally be prohibited from regulating the entry of, or the rates
charged by, any CMRS provider. The new law does not, however, prohibit a state
from regulating other terms and conditions of CMRS offerings and permits states
to petition the FCC for authority to continue rate regulation. These new
statutory provisions took effect in August 1994, and eight states filed
petitions.
The FCC has adopted both substantive and competitive bidding rules for both
narrowband and broadband PCS. It has completed its narrowband auctions covering
the ten nationwide licenses and the thirty regional licenses the FCC assigned to
this service. An APP subsidiary was high bidder with a total bid in excess of
$53 million on the same frequency block in each of the five regions specified by
the FCC, so that it has the potential to be able to provide a nationwide
service. That subsidiary is now prosecuting its application for an appropriate
license or licenses before the FCC. The Company believes that its ability to
provide narrowband PCS service throughout the country will be of considerable
value, but it is not now able to predict with certainty the nature and extent of
competition it will face or the conditions and restrictions the FCC will place
on its provision of service.
The FCC has allocated a total of 140 MHz to broadband PCS, 20 MHz to
unlicensed operations and 120 MHz to licensed operations, consisting of two 30
MHz blocks in each of the 51 Rand McNally Major Trading Areas ("MTA"), and one
30 MHz block and three 10 MHz blocks in each of 493 Rand McNally Basic Trading
Areas. Cellular operators are permitted to participate in the award of these new
PCS licenses, except for licenses reserved for rural, small, minority- and
female-owned businesses and licenses for markets in which such cellular operator
owns a 20% or greater interest in a cellular licensee which holds a license
covering 10% or more of the population of the respective PCS licensed area. In
the latter case, the cellular licensee is limited to one 10 MHz PCS channel
block. Numerous requests for reconsideration of the FCC's decision have been
filed and remain pending before the FCC and at least one appeal was filed. On
March 15, 1995, the U.S. Court of Appeals for the District of Columbia issued an
order delaying the commencement of the auction of the 30 MHz block for Basic
Trading Areas pending a resolution of a challenge to the FCC's rules giving
bidding preferences to certain participants. A September 1995 hearing is
scheduled. The FCC has classified PCS as CMRS.
In March 1995, APT was the successful bidder for eight broadband PCS
licenses at an auction conducted by the FCC. See "Recent Developments" above.
5
PCS technology is currently under development and is expected to be similar
in some respects to cellular technology. When it becomes commercially available,
this technology is expected to offer increased capacity for wireless two-way and
one-way voice, data and multimedia communications services and is expected to
result in increased competition in each area of the Company's diversified
telecommunications operations. The ability of these future PCS licensees to
complement or compete with existing cellular licensees will be affected by
future FCC rule-making. It is expected that the new wireless services will be
both complementary services and competitive alternatives to current cellular and
landline telephone services. These and other future technological developments
in the wireless telecommunications industry and the enhancement of current
technologies will likely create new products and services that are competitive
with the services currently offered by the Company and its subsidiaries. There
can be no assurance that the Company will not be adversely affected by such
technological developments.
CELLULAR TELEPHONE OPERATIONS
THE CELLULAR TELEPHONE INDUSTRY
Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle and hand-held portable cellular
telephones. Cellular technology is a major improvement over earlier mobile
telephone technologies. Cellular telephone systems are designed for maximum
mobility of the customer. Access is provided through system interconnections to
local, regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, facsimile and
data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO"). The MTSO is connected to the conventional ("landline")
telephone network and potentially other MTSOs. Each conversation on a cellular
phone involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
USM provides cellular telephone service under licenses granted by the FCC.
The FCC grants only two licenses to provide cellular telephone service in each
market. However, competition for customers includes competing communications
technologies such as conventional landline and mobile telephone, SMR systems and
radio paging. In addition, emerging technologies such as Enhanced Specialized
Mobile Radio ("ESMR"), mobile satellite communication systems and PCS may prove
to be competitive with cellular service in the future in some or all of the
markets where USM has operations.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers are charged a separate fee
for system access, airtime, long-distance calls, and ancillary services.
Cellular system operators often provide service to customers of other
operators' cellular systems while the customers are temporarily located within
the operators' service areas. Customers using service away from their home
system are called "roamers." Roaming is available because technical standards
require that analog cellular telephones be compatible in all market areas in the
United States. The system that provides the service to these roamers will
generate usage revenue. Many operators, including USM, charge premium rates for
this roaming service.
There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, most
of the radio transmission is done on an analog basis. Digital radio technology
offers advantages, including less transmission noise, greater system capacity,
and potentially lower incremental costs for additional customers. The conversion
from analog to digital radio technology is expected to be an industry-wide
process that will take a number of years.
6
During 1992, a new transmission technique was approved for implementation by
the cellular industry. Time Division Multiple Access ("TDMA") technology was
selected as one industry standard by the cellular industry and has been deployed
in several markets, including USM's operations in Tulsa, Oklahoma. Another
digital technology, Code Division Multiple Access ("CDMA"), is expected to be in
a commercial trial by the end of 1995. USM expects to deploy some CDMA digital
radio channels in other markets in the near future.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
CELLULAR OPERATIONS
A significant portion of the aggregate market value of TDS's Common Shares
is represented by the market value of TDS's interest in USM. From its inception
in 1983 until very recently, USM has principally been in a start-up phase. USM's
activities have been concentrated significantly on the acquisition of interests
in entities licensed or designated to receive a license ("licensees") from the
FCC to provide cellular service and on the construction and initial operation of
cellular systems. The development of a cellular system is capital-intensive and
requires substantial investment prior to and subsequent to initial operation.
USM has experienced operating losses and net losses from its inception until the
past few quarters. Management anticipates accelerating growth in cellular units
in service and revenues as USM continues its vigorous expansion and development
programs. Marketing and systems operations expenses associated with this rapid
expansion will most likely reduce the rate of growth in operating cash flow and
operating income over the next several quarters.
While there are numerous cellular systems operating in the United States and
other countries, the industry has only a limited operating history. While USM
produced operating income and net income during 1994, changes in any of several
factors may reduce USM's growth in operating income and net income over the next
few years. These factors include: (i) the growth rate in USM's customer base;
(ii) the usage and pricing of cellular services; (iii) the percentage of
customers who terminate service each month (the "churn rate"); (iv) the cost of
providing cellular services, including the cost of attracting new customers; and
(v) continuing technological advances which may provide competitive
alternatives.
USM is building a substantial presence in selected geographic areas
throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include operating clusters of
markets in the following areas: Iowa, Wisconsin/Illinois/Minnesota, Missouri,
Eastern North Carolina/Virginia/South Carolina, West
Virginia/Pennsylvania/Maryland, Indiana/ Kentucky, Oregon/California,
Washington/Oregon, Oklahoma/Missouri/Kansas, Texas/Oklahoma, Maine/New
Hampshire/Vermont, Eastern Tennessee/Western North Carolina, Northern
Florida/Georgia and Southwestern Texas. See "The Company's Cellular Interests."
USM has acquired its cellular interests through the wireline application process
(22%), including settlements and exchanges with other applicants, and through
acquisitions (78%), including acquisitions from TDS and third parties.
USM's management plans to retain minority interests in certain cellular
markets which it believes will earn a favorable return on investment. Other
minority interests may be traded for interests in markets which enhance USM's
market clusters or may be sold for cash or other consideration.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. During the last five years, USM has expanded its size,
particularly in contiguous or adjacent markets, through an ongoing acquisition
program aimed at strengthening USM's position in the cellular industry. This
growth has resulted primarily from acquisitions of interests in RSAs and has
been based on obtaining interests with rights to manage the underlying market.
The Company has more than doubled its population equivalents from
approximately 11.8 million at December 31, 1989, to approximately 25.2 million
at December 31, 1994. However, population equivalents grew at a compound annual
rate of 10% over the last three years and only 5% in 1994.
7
Markets managed or to be managed by USM have increased from 50 markets at
December 31, 1989, to 150 markets at December 31, 1994. As of December 31,
1994, almost 86% of the Company's population equivalents represented interests
in markets USM manages or expects to manage compared to 70% at December 31,
1989.
USM plans to acquire additional cellular interests through acquisitions or
trades in markets that further strengthen its market clusters and in other
attractive markets. USM also seeks to acquire minority interests in markets
where it already owns (or has the right to acquire) the majority interest. USM
also continues to evaluate the disposition of interests which are not essential
to its corporate development strategy.
USM, or TDS for the benefit of USM, will ordinarily make acquisitions using
securities or cash or by exchanging cellular interests it already owns. While
management believes that it will be succcessful in making additional
acquisitions or trades, there can be no assurance that USM or TDS for the
benefit of USM will be able to negotiate additional acquisitions or trades on
terms acceptable to it or that regulatory approvals, where required, will be
received.
USM, or TDS for the benefit of USM, has negotiated acquisitions of cellular
interests from third parties primarily in consideration for USM's Common Shares
or TDS's Common or Preferred Shares. Cellular interests acquired by TDS are
generally assigned to USM. At that time, USM reimburses TDS for the value of TDS
securities issued in such transactions, generally by issuing Common Shares to
TDS or by increasing the balance due TDS under USM's Revolving Credit Agreement
in amounts equal to the value of TDS securities delivered at the time the
acquisitions are closed. The fair market value of the USM securities issued to
TDS in connection with these transactions is equal to the fair market value of
the TDS securities delivered in the transactions and is determined at the time
the transactions are closed.
COMPLETED ACQUISITIONS. During 1994, USM completed the acquisition of
controlling interests in nine markets and several minority interests
representing approximately 1.3 million population equivalents for an aggregate
consideration of $140.3 million. The consideration consisted of 2.2 million TDS
Common Shares, 53,000 USM Common Shares, $28.2 million in cash, $1.4 million
cancellation of a note receivable and the obligation to deliver approximately
42,000 TDS Common Shares in the future. USM reimbursed TDS for TDS securities
issued and cash paid in the acquisitions through an increase of $309,000 in the
debt to TDS under the Revolving Credit Agreement and the issuance to TDS of 4.2
million USM Common Shares.
PENDING ACQUISITIONS. At December 31, 1994, USM, or TDS for the benefit of
USM had entered into agreements to acquire controlling interests in seven
markets and several minority interests representing approximately 1.2 million
population equivalents for an aggregate consideration estimated to be
approximately $101.5 million. If all of the pending acquisitions are completed
as planned, TDS and/or USM will deliver approximately 1.9 million TDS Common
Shares, all of which are expected to be issued in 1995, and 102,000 USM Common
Shares, and will pay approximately $12.8 million in cash. Any interests acquired
by TDS in these transactions are expected to be assigned to USM and, at that
time, USM will reimburse TDS for TDS's consideration delivered and costs
incurred in such acquisitions in the form of USM Common Shares or increases in
the balance under the Revolving Credit Agreement. USM has also entered into
agreements to exchange markets with four other cellular operators. Pursuant to
the exchange agreements, USM will receive majority interests in nine new markets
in exchange for majority interests in seven markets and three market partitions
USM currently owns.
TDS and USM maintain shelf registration of their respective Common Shares
and Preferred Shares under the Securities Act of 1933 for issuance specifically
in connection with acquisitions.
The Company has had voting control of USM since USM's incorporation. TDS
owned an aggregate of 63,879,673 shares of common stock of USM at December 31,
1994, representing over 81% of the combined total of USM's outstanding Common
and Series A Common Shares and over 96% of their combined voting power. Assuming
USM's Common Shares are issued in all instances in which USM has the choice to
issue its Common Shares or other consideration and assuming all other issuances
of USM's common stock to TDS and third parties for completed and pending
acquisitions and redemptions of USM Preferred Stock and TDS Preferred Shares had
been completed at December 31, 1994, TDS would have owned over 80% of the total
outstanding common stock of USM and controlled over 95% of
8
the combined voting power of both classes of its common stock. In the event
TDS's ownership of USM falls below 80% of the total value of all of the
outstanding shares of USM's stock, TDS and USM would be deconsolidated for
federal income tax purposes. TDS and USM have the ability to defer or prevent
deconsolidation, if deferring or preventing deconsolidation would be
advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's
Common Shares in connection with certain acquisitions.
CELLULAR INTERESTS AND CLUSTERS
USM operates clusters of adjacent cellular systems wherever feasible,
enabling its customers to benefit from larger service areas than otherwise
possible. Where USM offers wide-area coverage, its customers enjoy uninterrupted
service within the designated area. Customers may also make outgoing calls and
receive incoming calls within this area without special roaming arrangements. In
addition to benefits to customers, clustering also has provided to USM certain
economies in its capital and operating costs. These economies are made possible
through increased sharing of facilities, personnel and other costs and have
resulted in a reduction of USM's per customer cost of service. The extent to
which USM benefits from these revenue enhancements and economies of operation is
dependent on market conditions, population sizes of each cluster and engineering
considerations.
USM's market clusters continue to grow rapidly. At December 31, 1994, USM's
service territory covered approximately 18% of the geography and approximately
9% of the population of the United States. USM operated nine market clusters at
that date, four of which have a population of two million or more. USM
anticipates that it will continue to pursue strategic acquisitions and trades
which will complement its established market clusters. From time to time, USM
may also consider trading or selling its interests in markets which do not fit
well with its long-term strategies.
USM owned or had the right to acquire interests in cellular telephone
systems in 207 markets at December 31, 1994, representing 25.2 million
population equivalents. Of these population equivalents, 84% are in markets
which will be consolidated, 2% are in managed but not consolidated markets and
14% are in markets in which USM holds an investment interest. The following
table summarizes the growth in USM's population equivalents in recent years and
the development status of these population equivalents.
9
DECEMBER 31,
-------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
(THOUSANDS OF POPULATION EQUIVALENTS) (1)
Operational Markets:
Majority-Owned and Managed..................................................... 18,204 18,464 14,475 10,572 5,172
Minority-Owned and Managed (2)................................................. 1,191 1,157 2,039 1,783 1,310
Markets Under Construction and to be Managed: (3)
Majority-Owned................................................................. 2,187 1,012 1,831 3,015 4,445
Minority-Owned (2)............................................................. -- 6 5 124 451
------- ------- ------- ------- -------
Total Markets Managed and to be Managed 21,582 20,639 18,350 15,494 11,378
Minority Interests in Markets Managed by Others.................................. 3,619 3,429 3,517 3,274 3,480
------- ------- ------- ------- -------
Total.......................................................................... 25,201 24,068 21,867 18,768 14,858
------- ------- ------- ------- -------
------- ------- ------- ------- -------
<FN>
---------
(1) Based on 1994 Donnelley Marketing Services estimates for all years.
(2) Includes markets where USM has the right to acquire an interest but does
not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
The following section details USM's cellular interests, including those it
owned or had the right to acquire as of December 31, 1994. The table presented
therein lists clusters of markets, including both MSAs and RSAs, that USM
manages or anticipates managing. USM's market clusters show the areas in which
USM is currently focusing its development efforts. These clusters have been
devised with a long-term goal of allowing delivery of cellular service to areas
of economic interest and along corridors of economic activity.
10
THE COMPANY'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which USM and TDS owned or had the right to acquire pursuant
to definitive agreements as of December 31, 1994.
The number of population equivalents represented by USM's cellular interests
may have no direct relationship to the number of potential cellular customers or
the revenues that may be realized from the operation of the related cellular
systems. The fair market value of USM's cellular interests will ultimately
depend on the success of its operations. There is no assurance that the value of
cellular interests will not be significantly lower in the future than at
present.
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1994 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
-------------------------------------------- ---------- ----------- -------------- -------- -----------------
MARKETS MANAGED BY THE COMPANY:
MIDWEST REGIONAL MARKET CLUSTER:
IOWA:
Des Moines, IA.......................... 413,000 100.00% 100.00% 413,000
Davenport, IA-IL........................ 362,000 97.37 97.37 353,000
Humboldt (IA 10)........................ 183,000 100.00 100.00 183,000
Cedar Rapids, IA........................ 173,000 94.90 %.34 95.24 165,000
Muscatine (IA 4)#....................... 156,000 100.00 100.00 156,000
Iowa (IA 6)#............................ 153,000 100.00 100.00 153,000
Waterloo-Cedar Falls, IA................ 150,000 88.59 88.59 133,000
Hardin (IA 11)#......................... 109,000 100.00 100.00 109,000
Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000
Iowa City, IA #......................... 98,000 1.95 98.05 100.00 98,000
Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000
Dubuque, IA............................. 88,000 70.41 .40 70.81 62,000
Mills (IA 1)............................ 61,000 100.00 100.00 61,000
Audubon (IA 7).......................... 55,000 100.00 100.00 55,000
Union (IA 2)............................ 50,000 100.00 100.00 50,000
Monroe (IA 3)*(2)....................... 91,000 49.00 49.00 44,000
Winneshiek (IA 12)*..................... 115,000 24.50 24.50 28,000
Ida (IA 9)*............................. 63,000 16.67 16.67 11,000
---------- -----------------
2,495,000 2,249,000
---------- -----------------
WISCONSIN/ILLINOIS/MINNESOTA:
Peoria, IL.............................. 349,000 100.00 100.00 349,000
Jo Daviess (IL 1)....................... 316,000 100.00 100.00 316,000
Vernon (WI 8)(3)*....................... 228,000 100.00 100.00 228,000
Adams (IL 4)(4)*........................ 217,000 100.00 100.00 217,000
Mercer (IL 3)........................... 204,000 100.00 100.00 204,000
Rochester, MN*.......................... 115,000 100.00 100.00 115,000
Pierce (WI 5)........................... 92,000 100.00 100.00 92,000
Wausau, WI*............................. 119,000 71.76 71.76 86,000
Trempealeau (WI 6)(4)................... 82,000 100.00 100.00 82,000
LaCrosse, WI............................ 99,000 73.16 .71 73.87 73,000
---------- -----------------
1,821,000 1,762,000
---------- -----------------
MISSOURI:
Columbia, MO*........................... 122,000 100.00 100.00 122,000
Brown (KS 5)............................ 121,000 100.00 100.00 121,000
Callaway (MO 6)*........................ 85,000 100.00 100.00 85,000
DeKalb (MO 4)........................... 69,000 100.00 100.00 69,000
Linn (MO 5)............................. 68,000 100.00 100.00 68,000
Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000
Atchison (MO 1)......................... 43,000 100.00 100.00 43,000
---------- -----------------
564,000 564,000
---------- -----------------
TOTAL MIDWEST REGIONAL MARKET
CLUSTER.............................. 4,880,000 4,575,000
---------- -----------------
11
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1994 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
-------------------------------------------- ---------- ----------- -------------- -------- -----------------
VIRGINIA/NORTH CAROLINA/SOUTH CAROLINA
REGIONAL MARKET CLUSTER:
EASTERN NORTH CAROLINA/VIRGINIA/SOUTH
CAROLINA:
Northampton (NC 8)...................... 286,000 100.00% 100.00% 286,000
Rockingham (NC 7)....................... 281,000 100.00 100.00 281,000
Harnett (NC 10)......................... 271,000 100.00 100.00 271,000
Greene (NC 13).......................... 238,000 100.00 100.00 238,000
Greenville (NC 14)...................... 236,000 100.00 100.00 236,000
Hoke (NC 11)............................ 215,000 100.00 100.00 215,000
Chesterfield (SC 4)..................... 209,000 100.00 100.00 209,000
Bedford (VA 4).......................... 175,000 100.00 100.00 175,000
Sampson (NC 12)......................... 123,000 100.00 100.00 123,000
Chatham (NC 6).......................... 149,000 81.16 81.16 121,000
Camden (NC 9)........................... 119,000 100.00 100.00 119,000
Buckingham (VA 7)....................... 89,000 100.00 100.00 89,000
Bath (VA 5)............................. 63,000 100.00 100.00 63,000
---------- -----------------
2,454,000 2,426,000
---------- -----------------
WEST VIRGINIA/PENNSYLVANIA/MARYLAND:
Monongalia (WV 3)*...................... 269,000 100.00 100.00 269,000
Raleigh (WV 7)#......................... 255,000 100.00% 100.00 255,000
Greene (PA 9)........................... 188,000 100.00 100.00 188,000
Grant (WV 4)*........................... 168,000 100.00 100.00 168,000
Tucker (WV 5)*.......................... 130,000 100.00 100.00 130,000
Hagerstown, MD*......................... 127,000 100.00 100.00 127,000
Cumberland, MD-WV*...................... 103,000 100.00 100.00 103,000
Wetzel (WV 2)........................... 79,000 100.00 100.00 79,000
Bedford (PA 10)(4)*..................... 49,000 100.00 100.00 49,000
Garrett (MD 1)*......................... 30,000 100.00 100.00 30,000
---------- -----------------
1,398,000 1,398,000
---------- -----------------
OTHER MARKETS:
Tuscarawas (OH 7)....................... 255,000 100.00 100.00 255,000
Williams (OH 1)(5)...................... 127,000 75.00 25.00 100.00 127,000
Ross (OH 9)*............................ 247,000 49.00 49.00 121,000
Union (PA 8)*........................... (6) 100.00 (100.00) --
Williamsport, PA*....................... (6) 100.00 (100.00) --
---------- -----------------
629,000 503,000
---------- -----------------
TOTAL VIRGINIA/NORTH CAROLINA/SOUTH
CAROLINA REGIONAL MARKET CLUSTER..... 4,481,000 4,327,000
---------- -----------------
12
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1994 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
-------------------------------------------- ---------- ----------- -------------- -------- -----------------
INDIANA/KENTUCKY REGIONAL MARKET CLUSTER:
INDIANA/KENTUCKY:
Meade (KY 3)............................ 304,000 100.00% 100.00% 304,000
Evansville, IN-KY....................... 318,000 78.13 78.13 249,000
Owen (IN 7)............................. 221,000 100.00 100.00 221,000
Fulton (KY 1)#.......................... 187,000 100.00% 100.00 187,000
Union (KY 2)............................ 128,000 100.00 100.00 128,000
Owensboro, KY........................... 90,000 79.11 .22 79.33 71,000
Warren (IN 5)*.......................... 120,000 33.33 33.33 40,000
Miami (IN 4)*........................... 184,000 14.29 14.29 26,000
---------- -----------------
1,552,000 1,226,000
---------- -----------------
OTHER MARKETS:
Newton (IN 1)........................... 212,000 60.50 39.50 100.00 212,000
Elliott (KY 9).......................... 206,000 100.00 100.00 206,000
Clay (KY 11)#........................... 170,000 100.00 100.00 170,000
Kosciusko (IN 2)........................ 164,000 100.00 100.00 164,000
Powell (KY 10).......................... 153,000 100.00 100.00 153,000
Cheboygan (MI 4)*....................... 129,000 100.00 100.00 129,000
---------- -----------------
1,034,000 1,034,000
---------- -----------------
TOTAL INDIANA/KENTUCKY REGIONAL MARKET
CLUSTER.............................. 2,586,000 2,260,000
---------- -----------------
NORTHWEST REGIONAL MARKET CLUSTER:
OREGON/CALIFORNIA:
Coos (OR 5)............................. 250,000 100.00 100.00 250,000
Del Norte (CA 1)........................ 212,000 100.00 100.00 212,000
Medford, OR*............................ 160,000 100.00 100.00 160,000
Mendocino (CA 9)........................ 141,000 100.00 100.00 141,000
Crook (OR 6)*........................... 182,000 37.50 37.50 68,000
Modoc (CA 2)............................ 60,000 100.00 100.00 60,000
---------- -----------------
1,005,000 891,000
---------- -----------------
WASHINGTON/OREGON:
Pacific (WA 6)*......................... 178,000 49.00 51.00 100.00 178,000
Richland-Kennewick-Pasco, WA*........... 168,000 100.00 100.00 168,000
Yakima, WA*............................. 206,000 54.55 54.55 113,000
Okanogan (WA 4)......................... 112,000 100.00 100.00 112,000
Umatilla (OR 3)*........................ 147,000 60.42 60.42 89,000
Kittitas (WA 5)(4)*..................... 68,000 83.50 83.50 57,000
Hood River (OR 2)*...................... 69,000 30.32 30.32 21,000
Skamania (WA 7)*........................ 26,000 30.32 30.32 8,000
---------- -----------------
974,000 746,000
---------- -----------------
OTHER MARKETS:
Clark (ID 6)............................ 288,000 100.00 100.00 288,000
Butte (ID 5)............................ 153,000 100.00 100.00 153,000
---------- -----------------
441,000 441,000
---------- -----------------
TOTAL NORTHWEST REGIONAL MARKET
CLUSTER.............................. 2,420,000 2,078,000
---------- -----------------
13
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1994 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
-------------------------------------------- ---------- ----------- -------------- -------- -----------------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL
MARKET CLUSTER:
OKLAHOMA/MISSOURI/KANSAS:
Tulsa, OK*.............................. 791,000 55.06% 55.06% 436,000
Elk (KS 15)*............................ 155,000 99.00% 99.00 154,000
Joplin, MO*............................. 140,000 100.00 100.00 140,000
Seminole (OK 6)......................... 215,000 55.06 55.06 119,000
Nowata (OK 4)(4)*#...................... 105,000 100.00 100.00 105,000
---------- -----------------
1,406,000 954,000
---------- -----------------
MISSOURI:
Stone (MO 15)........................... 105,000 100.00 100.00 105,000
Laclede (MO 16)......................... 93,000 100.00 100.00 93,000
Washington (MO 13)...................... 89,000 100.00 100.00 89,000
Shannon (MO 17)*........................ 54,000 100.00 100.00 54,000
Madison (AR 1).......................... (6) 100.00 (100.00) --
---------- -----------------
341,000 341,000
---------- -----------------
TEXAS/OKLAHOMA:
Garvin (OK 9)........................... 198,000 100.00 100.00 198,000
Haskell (OK 10)......................... 82,000 100.00 100.00 82,000
Wichita Falls, TX*...................... 135,000 51.65 51.65 70,000
Lawton, OK*............................. 112,000 51.65 51.65 58,000
Jackson (OK 8)*......................... 97,000 51.65 51.65 50,000
Hardeman (TX 5)(4)*..................... 40,000 51.65 51.65 21,000
Briscoe (TX 4)(4)*...................... 11,000 51.65 51.65 6,000
Beckham (OK 7)(4)*...................... 10,000 51.65 51.65 5,000
Cherokee (TX 11)........................ (6) 100.00 (100.00) --
Tyler, TX............................... (6) 100.00 (100.00) --
---------- -----------------
685,000 490,000
---------- -----------------
TOTAL TEXAS/OKLAHOMA/MISSOURI/KANSAS
REGIONAL MARKET CLUSTER.............. 2,432,000 1,785,000
---------- -----------------
NORTHEAST REGIONAL MARKET CLUSTER:
MAINE/NEW HAMPSHIRE/VERMONT:
Manchester-Nashua, NH................... 345,000 87.59 87.59 302,000
Coos (NH 1)*............................ 227,000 100.00 100.00 227,000
Kennebec (ME 3)......................... 222,000 100.00 100.00 222,000
Somerset (ME 2)......................... 159,000 100.00 100.00 159,000
Bangor, ME.............................. 147,000 89.58 .40 89.98 133,000
Addison (VT 2)(3)*...................... 104,000 100.00 100.00 104,000
Washington (ME 4)*...................... 85,000 100.00 100.00 85,000
Lewiston-Auburn, ME..................... 102,000 82.04 82.04 84,000
Oxford (ME 1)........................... 81,000 100.00 100.00 81,000
---------- -----------------
1,472,000 1,397,000
---------- -----------------
OTHER MARKETS:
Poughkeepsie, NY........................ 265,000 81.32 .79 82.11 217,000
Columbia (NY 6)......................... 110,000 100.00 100.00 110,000
Jefferson (NY 1)........................ (6) 100.00 (100.00) --
---------- -----------------
375,000 327,000
---------- -----------------
TOTAL NORTHEAST REGIONAL MARKET
CLUSTER.............................. 1,847,000 1,724,000
---------- -----------------
14
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1994 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
-------------------------------------------- ---------- ----------- -------------- -------- -----------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA
MARKET CLUSTER:
Knoxville, TN*.......................... 544,000 96.03% 96.03% 522,000
Whitfield (GA 1)........................ 212,000 100.00 100.00 212,000
Asheville, NC*.......................... 204,000 100.00 100.00 204,000
Henderson (NC 4)(4)(7)*................. 186,000 100.00 100.00 186,000
Bledsoe (TN 7)(4)*...................... 143,000 96.03 96.03 137,000
Hamblen (TN 4)(4)*...................... 127,000 100.00 100.00 127,000
Giles (TN 6)*........................... 157,000 80.00 80.00 126,000
Lake (TN 1)*............................ 78,000 16.33 83.67% 100.00 78,000
Macon (TN 3)*........................... 330,000 16.67 16.67 55,000
Yancey (NC 2)(4)*....................... 31,000 100.00 100.00 31,000
---------- -----------------
TOTAL EASTERN TENNESSEE/WESTERN NORTH
CAROLINA MARKET CLUSTER.............. 2,012,000 1,678,000
---------- -----------------
SOUTHEAST REGIONAL MARKET CLUSTER:
NORTHERN FLORIDA/GEORGIA:
Tallahassee, FL #....................... 272,000 100.00 100.00 272,000
Worth (GA 14)........................... 243,000 100.00 100.00 243,000
Gainesville, FL......................... 221,000 100.00 100.00 221,000
Toombs (GA 11).......................... 150,000 100.00 100.00 150,000
Walton (FL 10).......................... 108,000 100.00 100.00 108,000
Putnam (FL 5)(7)........................ 69,000 100.00 100.00 69,000
Jefferson (FL 8)........................ 53,000 100.00 100.00 53,000
Dixie (FL 6)............................ 51,000 100.00 100.00 51,000
Calhoun (FL 9).......................... 39,000 100.00 100.00 39,000
Early (GA 13)*.......................... (6) 100.00 (100.00) --
---------- -----------------
1,206,000 1,206,000
---------- -----------------
OTHER MARKETS:
Fort Pierce, FL (8)*.................... 279,000 49.00 49.00 137,000
Copiah (MS 9)........................... 118,000 100.00 100.00 118,000
Glades (FL 2)(7)........................ 83,000 100.00 100.00 83,000
---------- -----------------
480,000 338,000
---------- -----------------
TOTAL SOUTHEAST REGIONAL MARKET
CLUSTER.............................. 1,686,000 1,544,000
---------- -----------------
SOUTHWESTERN TEXAS MARKET CLUSTER:
Corpus Christi, TX #.................... 374,000 100.00 100.00 374,000
Atascosa (TX 19)........................ 218,000 100.00 100.00 218,000
Edwards (TX 18)......................... 207,000 100.00 100.00 207,000
Laredo, TX.............................. 154,000 92.76 92.76 143,000
Wilson (TX 20).......................... 139,000 100.00 100.00 139,000
Victoria, TX............................ 80,000 99.22 99.22 79,000
---------- -----------------
TOTAL SOUTHWESTERN TEXAS MARKET
CLUSTER.............................. 1,172,000 1,160,000
---------- -----------------
OTHER OPERATIONS:
Atlantic City, NJ#...................... 335,000 9.09 50.01 59.10 198,000
Hawaii (HI 3)........................... 140,000 100.00 100.00 140,000
Vineland-Millville-Bridgeton, NJ........ 142,000 78.73 .99 79.72 113,000
---------- -----------------
617,000 451,000
---------- -----------------
Total Managed Markets................. 24,133,000 21,582,000
---------- -----------------
15
PERCENTAGE
ACQUIRABLE TOTAL CURRENT AND
CURRENT UNDER ACQUIRABLE
1994 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
-------------------------------------------- ---------- ----------- -------------- -------- -----------------
MARKETS MANAGED BY OTHERS:
Los Angeles/Oxnard, CA*................. 15,416,000 5.50% 5.50% 848,000
Nashville/Clarksville-Hopkinsville,
TN-KY*................................. 1,224,000 49.00 49.00 599,000
Baton Rouge, LA (9)*.................... 558,000 52.00 52.00 290,000
Seattle-Everett/Tacoma/Bremerton, WA*... 2,991,000 6.25 6.25 187,000
Biloxi/Pascagoula, MS*.................. 341,000 49.00 49.00 167,000
Oklahoma City, OK*...................... 973,000 14.60 14.60 142,000
Portland, ME*........................... 279,000 49.00 49.00 136,000
McAllen, TX............................. 431,000 26.20 26.20 113,000
Portsmouth-Dover-Rochester, NH-ME*...... 270,000 40.00 40.00 108,000
Others (Fewer than 100,000 population
equivalents each)...................... 1,029,000
-----------------
Total Population Equivalents of
Markets Managed by Others............ 3,619,000
-----------------
Total Population Equivalents.......... 25,201,000
-----------------
-----------------
<FN>
------------
* Designates wireline market.
# Designates operational market operated by third parties until USM acquires a
controlling interest.
(1) Interests under these agreements are expected to be acquired at the various
times specified therein following the satisfaction of customary closing
conditions.
(2) The licensee in this market will exchange the wireline license for the
non-wireline license in the same market.
(3) USM's interest in the license for this market has been set aside by the
FCC. USM is currently operating the market under interim operating
authority granted by the FCC. See Item 3., "Legal Proceedings -- La Star
and Wisconsin RSA 8 Applications."
(4) These markets have been or will be partitioned into more than one licensed
area. The 1994 population, percentage ownership and number of population
equivalents shown are for the licensed areas within the markets in which
USM owns or has the right to acquire an interest.
(5) USM currently owns a 75% interest in the wireline license in this market
and has an agreement to divest this interest. USM also has an agreement to
acquire a 100% interest in the nonwireline license in this market.
(6) USM has agreements to divest its 100% ownership interests in these markets.
The 1994 populations of these markets are not included in the related
cluster or group totals.
(7) USM has agreements to divest partitioned areas in these markets. The 1994
population, percentage ownership and number of population equivalents shown
are for the licensed areas within the markets which USM will continue to
own upon completion of each divestiture.
(8) USM owns 80% of the entity which owns and operates this market but has only
a 49% interest in its earnings and profits.
(9) USM owns a noncontrolling limited partnership interest in this market.
SYSTEM DESIGN AND CONSTRUCTION. USM designs and constructs its systems in a
manner it believes will permit it to provide high-quality service to mobile,
transportable and portable cellular telephones, generally based on market and
engineering studies which relate to specific markets. Engineering studies are
performed by USM personnel or independent engineering firms. USM's switching
equipment is digital, which reduces noise and crosstalk and is capable of
interconnecting in a manner which reduces costs of operation. While digital
microwave interconnections are typically made between the MTSO and cell sites,
primarily analog radio transmission is used between cell sites and the cellular
telephones themselves.
In accordance with its strategy of building and strengthening market
clusters, USM has selected high capacity digital cellular switching systems that
are capable of serving multiple markets through a single MTSO. USM's cellular
systems are designed to facilitate the installation of equipment which will
permit microwave interconnection between the MTSO and each cell site. USM has
implemented such microwave interconnection in most of the cellular systems it
manages. In other systems in which USM owns or has an option to purchase a
majority interest and where it is believed to be cost-efficient, such microwave
technology will also be implemented. Otherwise, such systems will rely upon
landline telephone connections or microwave links owned by others to link cell
sites with the MTSO. Although the installation of microwave network
interconnection equipment requires a greater initial capital investment,
16
a microwave network enables a system operator to avoid the current and future
charges associated with leasing telephone lines from the landline telephone
company, while generally improving system reliability. In addition, microwave
facilities can be used to connect separate cellular systems to allow shared
switching, which reduces the aggregate cost of the equipment necessary to
operate both systems.
USM has continued to expand its internal network in 1994 to encompass over
100 markets in the United States. This network provides automatic call delivery
for USM's customers and handoff between adjacent markets. The network has also
been extended, using IS-41 technology, through links with certain systems
operated by several other carriers, including GTE, US West, Ameritech,
BellSouth, Centennial Cellular Corp., Southwestern Bell, McCaw Cellular
Communications, Vanguard Cellular Systems and others. Additionally, USM has
implemented two Signal Transfer Points which will allow it to interconnect
efficiently with network providers such as Independent Telephone Network and the
North American Cellular Network.
During 1995, USM intends to extend the network for its customers through
interconnection with one or more network providers as well as additional "point
to point" connections required for hand-off. This expanded network will increase
the area in which customers can automatically receive incoming calls, and should
also reduce the incidence of fraud due to the pre-call validation feature of the
IS-41 technology.
USM believes that currently available technologies will allow sufficient
capacity on USM's networks to meet anticipated demand over the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. USM, consistent
with FCC control requirements, uses primarily its own personnel to engineer and
oversee construction of each cellular system where it owns or has the right to
acquire a controlling interest. In so doing, USM expects to improve the overall
quality of its systems and to reduce the expense and time required to make them
operational.
The costs (exclusive of license costs) of the operational systems in which
USM owns or has the right to acquire an interest are generally financed through
capital contributions or intercompany loans to the partnerships or subsidiaries
owning the systems, and through certain vendor financing.
MARKETING
USM's marketing plan is designed to continue rapid penetration of its market
clusters and to increase customer awareness of cellular service. The marketing
plan stresses the quality of USM's service offerings and incorporates rate plans
which are designed to meet the needs of a variety of customer usage patterns.
USM's distribution channels include direct sales personnel and agents and USM
has recently added retail service centers in many of its markets. These
USM-owned and managed locations are designed to market cellular service to the
consumer segment in a setting which is familiar to these potential customers.
USM manages each cluster of markets out of one administrative office with a
local staff, including marketing, customer service, engineering and in some
cases installation personnel. Direct sales consultants market cellular service
to potential customers throughout each cluster. Retail associates work out of
the retail locations and market cellular service to the consumer segment. USM
maintains an ongoing training program to improve the effectiveness of sales
consultants and retail associates by focusing their efforts on obtaining
customers and maximizing the sale of high-user packages. These packages commit
customers to pay for a minimum amount of usage at discounted rates per minute,
even if usage falls below a defined monthly minimum amount.
USM also relies on agents, dealers and non-USM retailers to obtain
customers. Agents and dealers are independent business people who obtain
customers for USM on a commission basis. USM's agents are generally in the
business of selling cellular telephones, cellular service packages and other
related products. USM's dealers include car stereo companies and other companies
whose customers are also potential cellular customers. The non-USM retailers
include car dealers, major appliance dealers, office supply dealers and mass
merchants.
17
USM opened its own retail locations in late 1993, expanding to over 140
locations by the end of 1994. These USM-owned and operated businesses utilize
rental facilities located in high-traffic areas. USM is working toward a uniform
appearance in these stores, with all having similar displays and layouts. The
retail centers' hours of business match those of the retail trade in the local
marketplace, often staying open on weekends and later in the evening than a
typical business supplier. Additionally, to fully serve customer needs, these
stores sell accessories to complement the phones and services USM has
traditionally provided.
In addition to its own retail centers, USM actively pursues national retail
accounts which may potentially yield new customer additions in multiple markets.
Agreements have been entered into with such national distributors as Chrysler
Corporation, Ford Motor Company, General Motors, AT&T, Radio Shack, Best Buy and
Sears, Roebuck & Co. in certain of USM's markets. Upon the sale of a cellular
telephone by one of these national distributors, USM receives, often exclusively
within the territories served, the resulting cellular customer.
USM uses a variety of direct mail, billboard, radio, television and
newspaper advertising to stimulate interest by prospective customers in cellular
service and to establish familiarity with USM's name. Advertising is directed at
gaining customers, increasing usage by existing customers and increasing the
public awareness and understanding of the cellular services offered by USM. USM
attempts to select the advertising and promotion media that are most appealing
to the targeted groups of potential customers in each local market. USM utilizes
local advertising media and public relations activities and establishes programs
to enhance public awareness of USM, such as providing telephones and service for
public events and emergency uses.
CUSTOMERS AND SYSTEM USAGE
Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their offices such
as people in the construction, real estate, wholesale and retail distribution
businesses and professionals. Most of USM's customers use in-vehicle cellular
telephones. However, more customers are selecting portable cellular telephones
as these units become more compact and fully featured as well as more
attractively priced.
USM's cellular systems are used most extensively during normal business
hours between 7:00 am and 6:00 pm. On average, the local retail customers in
USM's majority-owned and managed systems used their cellular systems
approximately 95 minutes per unit each month and generated retail revenue of
approximately $47 per month during 1994, compared to 103 minutes and $49 per
month in 1993. Revenue generated by roamers, together with local, toll and other
revenues, brought USM's total average monthly service revenue per customer unit
in majority-owned and managed markets to $80 during 1994. Average monthly
service revenue per customer unit decreased approximately 6% during 1994,
reflecting both the decline in average local minutes per customer unit and
slower growth in roaming revenues. USM anticipates that average monthly service
revenue per customer unit will continue to decline as its distribution channels
provide additional customers who generate fewer local minutes of use and as
roaming revenues grow more slowly.
Roaming is a service offered by USM which allows a customer to place or
receive a call in a cellular service area away from the customer's home market
area. USM has entered into "roaming agreements" with operators of other cellular
systems covering virtually all systems in the United States and Canada. These
agreements offer customers the opportunity to roam in these systems. These
reciprocal agreements automatically pre-register the customers of USM's systems
in the other carriers' systems. Also, a customer of a participating system
roaming (i.e. travelling) in a USM market where this arrangement is in effect is
able to make and receive calls on USM's system. The charge for this service is
typically at premium rates and is billed by USM to the customer's home system,
which then bills the customer. USM has entered into agreements with other
cellular carriers to transfer roaming usage at agreed-upon rates. In some
instances, based on competitive factors, USM may charge a lower amount to its
customers than the amount actually charged to USM by another cellular carrier
for roaming.
18
The following table summarizes certain information about customers and
market penetration in USM's managed operations.
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Majority-owned and managed markets:
Cellular markets in operation (1)............... 130 116 92 67 32
Total population of markets in service (000s)... 21,314 19,383 15,014 11,481 6,314
Customer Units:
at beginning of period (2).................... 261,000 150,800 97,000 57,300 36,100
additions during period (2)................... 250,000 165,300 88,600 59,800 31,800
disconnects during period (2)................. 90,000 55,100 34,800 20,100 10,600
at end of period (2).......................... 421,000 261,000 150,800 97,000 57,300
Market penetration at end of period (3)(4)...... 1.98% 1.35% 1.00% 0.84% 0.91%
Consolidated revenues............................. $ 332,404 $ 214,310 $139,929 $84,956 $54,621
Depreciation expense.............................. 39,520 25,665 16,606 8,814 4,363
Amortization expense.............................. 25,934 19,362 13,033 10,455 7,287
Operating income (loss)........................... 17,385 (8,656) (12,705) (16,831) (9,141)
Construction expenditures......................... 158,453 94,088 58,832 66,037 21,189
Identifiable assets............................... $1,584,142 $1,275,569 $858,795 $612,981 $293,368
<FN>
---------
(1) Represents the number of markets in which USM owned at least a 50% interest
and which it managed, including its reseller operation in 1990-1992. The
revenues and expenses of these cellular markets are included in USM's
consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service for the respective years.
(4) The decrease from 1990 to 1991 is due to the addition of 32 majority-owned
and managed RSAs in 1991. Market penetration for majority-owned and managed
MSAs was 1.48% in 1991 and 1.07% in 1990.
19
The following table summarizes, by operating cluster, the total population,
USM's customer units and penetration for USM's majority-owned and managed
markets that were operational as of December 31, 1994.
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
--------------------------------------------------------------------------- ---------- --------- -----------
Iowa....................................................................... 1,710,000 43,000 2.51%
Wisconsin/Illinois/Minnesota............................................... 1,821,000 29,600 1.63%
Missouri................................................................... 976,000 12,800 1.31%
Eastern North Carolina/Virginia/South Carolina............................. 2,454,000 36,600 1.49%
West Virginia/Pennsylvania/Maryland........................................ 1,143,000 17,000 1.49%
Indiana/Kentucky........................................................... 1,061,000 24,700 2.33%
Oregon/California.......................................................... 823,000 13,500 1.64%
Washington/Oregon.......................................................... 701,000 12,300 1.75%
Oklahoma/Missouri/Kansas................................................... 1,146,000 51,500 4.49%
Texas/Oklahoma............................................................. 1,126,000 25,700 2.28%
Maine/New Hampshire/Vermont................................................ 1,472,000 29,200 1.98%
Eastern Tennessee/Western North Carolina................................... 1,693,000 41,500 2.45%
Northern Florida/Georgia................................................... 1,117,000 21,500 1.92%
Southwestern Texas......................................................... 798,000 11,800 1.48%
Other Operations........................................................... 3,273,000 50,300 1.54%
---------- --------- ---
21,314,000 421,000 1.98%
---------- --------- ---
---------- --------- ---
CELLULAR TELEPHONES AND INSTALLATION
There are a number of different types of cellular telephones, all of which
are currently compatible with cellular systems nationwide. USM offers a full
range of vehicle-mounted, transportable and hand-held portable cellular
telephones. Features offered in some of the cellular telephones include
hands-free calling, repeat dialing, horn alert and others.
USM has established service and/or installation facilities in many of its
local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow USM to improve its service by
promptly assisting customers who experience equipment problems.
USM negotiates volume discounts from its cellular telephone suppliers. USM
discounts cellular telephones in most markets to meet competition or to
stimulate sales by reducing the cost of becoming a cellular customer. In these
instances, where permitted by law, customers are generally required to sign an
extended service contract with USM. USM also cooperates with cellular equipment
manufacturers in local advertising and promotion of cellular equipment.
PRODUCTS AND SERVICES
USM's customers are able to choose from a variety of packaged pricing plans
which are designed to fit different calling patterns. USM's customer bills
typically show separate charges for custom-calling features, airtime in excess
of the packaged amount, and toll calls. Custom-calling features provided by USM
include wide-area call delivery, call forwarding, call waiting, three-way
calling and no-answer transfer. USM also offers a voice message service in many
of its markets. This service, which functions like a sophisticated answering
machine, allows customers to receive messages from callers when they are not
available to take calls.
REGULATION
The construction, operation and transfer of cellular systems in the United
States are regulated to varying degrees by the FCC pursuant to the
Communications Act. The FCC has promulgated regulations governing construction
and operation of cellular systems, and licensing (including renewal of licenses)
and technical standards for the provision of cellular telephone service.
For licensing purposes, the FCC divided the United States into separate
geographic markets (MSAs and RSAs). In each market, the allocated cellular
frequencies are divided into two equal blocks. During the application process,
the FCC reserved one block of frequencies for nonwireline applicants and
20
another block for wireline applicants. Subject to FCC approval, a cellular
system may be sold to either a wireline or nonwireline entity, but no entity
which controls a cellular system may own an interest in another cellular system
in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the USM's application
for approval of the proposed transfer.
When the first cell of a cellular system has been constructed, the licensee
is required to notify the FCC that construction has been completed. Immediately
upon this notification, but not before, FCC rules authorize the licensee to
offer commercial service to the public. The licensee is then said to have
"operating authority." Initial operating licenses are granted for ten-year
periods. The FCC must be notified each time an additional cell is constructed
which enlarges the service area of a given market.
The FCC's rules also generally require persons or entities holding cellular
construction permits or licenses to coordinate their proposed frequency usage
with other cellular users and licensees in order to avoid electrical
interference between adjacent systems. The height and power of base stations in
the cellular system are regulated by FCC rules, as are the types of signals
emitted by these stations. In addition to regulation by the FCC, cellular
systems are subject to certain Federal Aviation Administration regulations with
respect to the siting and construction of cellular transmitter towers and
antennas.
In a series of actions, most recently on July 7, 1994, the FCC has
established standards for conducting comparative renewal proceedings between a
cellular licensee seeking renewal of its license and challengers filing
competing applications. The FCC: (i) established criteria for comparing the
renewal applicant to challengers, including the standards under which a "renewal
expectancy" will be granted to the applicant seeking license renewal; (ii)
established basic qualifications standards for challengers; and (iii) provided
procedures for preventing possible abuses in the comparative renewal process.
The FCC has concluded that it will award a renewal expectancy if the licensee
has (i) provided "substantial" performance, which is defined as "sound,
favorable and substantially above a level of mediocre service just minimally
justifying renewal," and (ii) complied with FCC rules, policies and the
Communications Act. If a renewal expectancy is awarded to an existing licensee,
its license is renewed and competing applications are not considered. USM's
Tulsa and Knoxville renewal applications filed in 1994 were unopposed and USM
expects its licenses in these markets to be renewed. The next USM renewal
applications are due to be filed in 1996. See "Legal Proceedings -- La Star and
Wisconsin RSA 8 Applications" for a discussion of certain FCC proceedings which
have set aside the Company's licensing authority in a Wisconsin market pending
the outcome of an FCC hearing.
USM conducts and plans to conduct its operations in accordance with all
relevant FCC rules and regulations and anticipates being able to qualify for a
renewal expectancy, if applicable. Accordingly, USM believes that current
regulations will have no significant effect on its operations and financial
condition. However, changes in the regulation of cellular operators or their
activities and of other mobile service providers could have a material adverse
effect on USM's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and nonwireline entities and by third parties.
Accordingly, many unserved area applications have been filed by USM and others.
USM's strategy with respect to system construction in its markets has been and
will be to build cells covering areas within such markets that USM considers
economically feasible to serve or might conceivably wish to serve and to do so
within the five-year period following issuance of the license.
USM is also subject to state and local regulation in some instances. In
1981, the FCC preempted the states from exercising jurisdiction in the areas of
licensing, technical standards and market structure. However, certain states
require cellular system operators to go through a state certification process to
serve communities within their borders. All such certificates can be revoked for
cause. In addition, certain state authorities regulate several aspects of a
cellular operator's business, including the resale of intra-state long-distance
service to its customers, the technical arrangements and charges for
interconnection with the landline network and the transfer of interests in
cellular systems. The siting and construction of the cellular facilities,
including transmitter towers, antennas and equipment shelters may
21
also be subject to state or local zoning, land use and other local regulations.
Public utility or public service commissions (or certain of the commissioners)
in several states have expressed an interest in examining whether the cellular
industry should be more closely regulated by such states.
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. USM is not aware of
any scientific information or credible evidence linking the usage of portable
cellular telephones with cancer. The FCC currently has a rulemaking proceeding
pending to update the guidelines and methods it uses for evaluating RF emissions
in radio equipment, including cellular telephones. While the proposal would
impose more restrictive standards on RF emissions from low-power devices such as
portable cellular telephones, it is anticipated that all cellular telephones
currently marketed and in use will comply with those standards.
COMPETITION
USM's only competitor for cellular telephone service in each market is the
licensee of the second cellular system in that market. Competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered, and responsiveness of
customer service. The competing entities in many of the markets in which USM has
an interest have financial resources which are substantially greater than those
of USM and its partners in such markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, conventional mobile
telephone and SMR systems, both of which are able to connect with the landline
telephone network. USM believes that conventional mobile telephone systems and
conventional SMR systems are competitively disadvantaged because of
technological limitations on the capacity of such systems. The FCC has recently
given approval, through waivers of its rules, to ESMR, an enhanced SMR system.
ESMR systems may have cells and frequency reuse like cellular, thereby
potentially eliminating any current technological limitation. The first ESMR
systems were implemented in 1993 in Los Angeles. Although less directly a
substitute for cellular service, wireless data services and one-way paging
service (and in the future, two-way paging services) may be adequate for those
who do not need full two-way voice service.
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia to provide such
service have been formed. Such a system is designed primarily to serve the
communications needs of remote locations and a mobile satellite system could
provide viable competition for land-based cellular systems in such areas. It is
also possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.
PCS may prove to be competitive with cellular service in the future. PCS
providers are expected to offer digital, wireless communications services. PCS
trials are in process throughout the United States. PCS is not anticipated to be
a significant source of competition in USM's markets in the near future, but may
become a significant source of competition in USM's markets once PCS systems
have been built and developed. Similar technological advances or regulatory
changes in the future may make available other alternatives to cellular service,
thereby creating additional sources of competition.
TELEPHONE OPERATIONS
The Company's telephone operations are conducted through TDS Telecom and 96
telephone subsidiaries. These telephone companies, ranging in size from less
than 500 to more than 40,000 access lines, serve 392,500 access lines in 29
states.
The Company provides modern, high-quality local and long-distance telephone
service. Local service is provided by the Company's operating telephone
subsidiaries. Long-distance or toll service is
22
provided through connections with long-distance carriers, primarily AT&T and the
Regional Bell Operating Companies ("RBOCs"). The Company anticipates that it
will need to make arrangements with AT&T, the RBOCs and other large companies in
order to offer certain software-intensive services such as information gateway
services. There is no assurance that the Company will be able to obtain such
arrangements or that such arrangements, if obtained, will be on terms favorable
to the Company.
Future growth in telephone operations is expected to be derived from the
acquisition of additional telephone companies, from providing service to new or
presently unserved establishments, from business expansion in the areas served
by the Company, from upgrading existing customers to higher grades of service,
from increased usage of the network through both local and long-distance calling
and from providing additional services made possible by advances in technology.
The following table summarizes certain information regarding the Company's
telephone operations.
YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Telephone Operations
Access lines*.......................................... 392,500 356,200 321,700 304,000 278,700
% Residential........................................ 81.3 82.0 83.1 83.8 84.3
% Business (nonresidential).......................... 18.7 18.0 16.9 16.2 15.7
% Single-party....................................... 99.8 99.5 99.1 98.8 98.3
Total revenues......................................... $ 306,341 $ 268,122 $ 238,095 $ 211,232 $ 194,101
% Local service...................................... 26.8 26.9 27.4 29.0 28.9
% Network access and long-distance................... 60.0 59.3 57.9 57.0 57.2
Depreciation and amortization expense.................. $ 68,878 $ 59,562 $ 51,946 $ 43,425 $ 38,281
Operating income....................................... 91,606 79,110 72,217 65,242 62,707
Construction expenditures.............................. 117,867 82,233 67,357 67,856 70,308
Total identifiable assets.............................. $ 984,563 $ 829,489 $ 723,855 $ 674,712 $ 567,498
<FN>
---------
* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
TELEPHONE ACQUISITIONS
TDS pursues an active program of acquiring operating telephone companies.
Since January 1, 1990, TDS has acquired 23 telephone companies serving a total
of 64,800 access lines for an aggregate consideration totalling $220.0 million.
The consideration consisted of $55.1 million in cash and notes, 210,000
Preferred Shares and 3.8 million Common Shares of the Company.
At December 31, 1994, the Company had agreements, awaiting regulatory or
other approvals, to acquire four telephone companies which serve 12,100 access
lines and which own minority cellular interests representing approximately
45,000 population equivalents. These acquisitions are expected to be completed
for an aggregate consideration of approximately $40.7 million, consisting of
approximately 897,000 Common Shares of the Company and $250,000 in cash.
The Company continually evaluates acquisition opportunities. Telephone
holding companies and others actively compete for the acquisition of telephone
companies and such acquisitions are subject to the consent or approval of
regulatory agencies in most states and, in some cases, to federal waivers that
may affect the form of regulation or amount of interstate cost recovery of
acquired telephone exchanges. While management believes that it will be
successful in making additional acquisitions, there can be no assurance that the
Company will be able to negotiate additional acquisitions on terms acceptable to
it or that regulatory approvals, where required, will be received.
The Company maintains shelf registration of its Common Shares and Preferred
Shares under the Securities Act of 1933 for issuance specifically in connection
with acquisitions.
It is the Company's policy to preserve, insofar as possible, the local
management of each telephone company it acquires. The Company provides the
telephone subsidiaries with centralized purchasing and general management and
other services, at cost plus a reasonable rate of return on invested capital.
23
These services afford the subsidiaries expertise in the following areas:
finance, accounting and treasury services; marketing; customer service; traffic;
engineering and construction; accounting and customer billing; rate
administration; credit and collection; and the development of administrative and
procedural practices.
CONSTRUCTION AND DEVELOPMENT PROGRAM
The Company's aggressive schedule to upgrade its central office and outside
plant facilities continued in 1994 as it prepared for the provisioning of new
services. The Company has made significant investments in new switching
equipment pursuant to its strategic relationships with AT&T and Siemens
Stromberg-Carlson to provide all of its customers state of the art calling
capabilities such as advanced calling services, Integrated Services Digital
Network ("ISDN"), and Signaling System 7 ("SS7") by the year 2000. The AT&T and
Siemens Stromberg-Carlson alliances should give the Company leading edge
equipment and technical expertise that will help to direct it in its campaign to
be the first to its customers with multimedia services.
In its effort to bring new services to its customers, the Company deployed
new technology as part of a 1994 primary objective that will continue to remain
fundamental in 1995. By the end of 1994, the Company had deployed 18 host and 14
remote AT&T 5ESS and Siemens Stromberg-Carlson EWSD premier switches covering 26
exchanges and equipping 112,000 lines. By the end of 1995, an additional 17
hosts and 34 remotes serving 54 more exchanges and 93,000 additional lines will
have been converted. At the end of 1995, less than 3 years into its 8 year
switch conversion plan, the Company will have converted approximately half of
its access lines to its new switching platform ahead of schedule. The Company
also plans to increase its lines equipped with capabilities for CLASS services
(call waiting, call forwarding, abbreviated dialing and 3-way calling), ISDN and
SS7 to 240,700 lines, 212,800 lines, and 265,300 lines, respectively, at the end
of 1995; as compared to the 134,600 lines, 109,200 lines, and 159,100 lines,
respectively, equipped at the end of 1994. This surge of technology deployment
will permit TDS Telecom to increase its deployment of the CLASS services, ISDN,
and SS7 to 56%, 49%, and 61% of its customers, respectively, by the end of 1995
as compared to 34%, 28%, and 41% of its customers, respectively, at the end of
1994. By the end of 1995, virtually all of the Company's switches will be
digital.
In the mid 1980s, the Company initiated a long-term program to design its
cable and fiber distribution networks on a digital serving area ("DSA") basis to
accommodate ISDN service and at the same time, improve network reliability. The
Company continued to aggressively deploy its DSA design in 1994 and expects to
continue this program for the next several years until its distribution network
is fully capable of accommodating high speed digital signals. In 1994, 370 route
miles of fiber optic cable, primarily used for local service distribution, were
installed. During the year, the Company's first self-healing fiber rings were
constructed in Michigan and Indiana. This advanced technology and network design
significantly increases network capabilities for new services, lowers costs and
increases service reliability. In 1995, the Company will continue to install
advanced technology, including the deployment of a network management center,
that is expected to increase operating efficiencies through systems integration,
better workforce management, and improved business processes, all leading to
increased customer satisfaction.
The Company estimates that the project and routine capital upgrades to its
network will be $110 million in 1995 as compared to $117.9 million in 1994,
$82.2 million in 1993, $67.4 million in 1992, $67.9 million in 1991 and $70.3
million in 1990. The Company continues to finance its construction and plant
development programs with internally generated cash supplemented by long-term
financing from the federal government's Rural Utilities Service program.
FEDERAL FINANCING AND HIGH COST SUPPORT PROGRAMS
TDS Telecom's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Utilities Service ("RUS"),
previously named the Rural Electrification Administration, the Rural Telephone
Bank ("RTB") and the Federal Financing Bank ("FFB"), agencies of the United
States of America. The RUS has made primarily 35-year loans to telephone
companies since 1949, at interest rates of 2% and 5%, for the purpose of
improving telephone service in rural areas. The RUS is authorized to make
hardship loans at a 5% interest rate and cost of money loans at a rate not
greater than 7%. The RTB, established in 1971, makes loans at interest rates
based on its average cost of
24
money (6.15% and 6.40% for its fiscal year ended September 30, 1994), and in
some cases makes loans concurrently with RUS loans. In addition, the RUS
guarantees loans made to telephone companies by the FFB at the federal cost of
money (7.897% for a 35-year note at December 31, 1994).
Substantially all of the Company's telephone plant is pledged or is subject
to mortgages to secure obligations of the operating telephone companies to the
RUS, RTB and FFB. The amount of dividends on common stock that may be paid by
the operating telephone companies is limited by certain financial requirements
set forth in the mortgages. Of the $364.3 million of underlying retained
earnings of the telephone subsidiaries at December 31, 1994, $110.2 million was
available for the payment of dividends on the subsidiaries' common stock.
At December 31, 1994, the Company's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $110.6 million, at a weighted average annual interest rate of
6.01%, to finance specific construction activities in 1995 and future years.
These loan commitments are generally issued for five-year periods and may be
extended under certain circumstances. The Company's operating telephone
companies intend to make further applications for additional loans from the RUS,
RTB and FFB as their needs arise. There is no assurance that these applications
will be accepted or what the terms or interest rates of any future loan
commitments will be. If funds were unavailable through the RUS, RTB and FFB
programs in the future and the subsidiaries were to borrow from conventional
lenders at market rates, their cost of new loans might increase significantly.
In that event, the Company would expect to seek higher local service rates to
cover higher interest expense in order to maintain a reasonable balance between
service to customers and local service rates.
A number of the telephone subsidiaries recover a proportion of their costs
via interstate support mechanisms. Probable modification of those mechanisms is
expected. As an interim measure, the interstate Universal Service Fund ("USF")
has been capped and indexed for years 1995 and 1996 pending regulatory
proceedings. Accordingly, the FCC has undertaken an extensive review of support
mechanisms, including USF, which could involve the development of new mechanisms
and changes in eligibility criteria. In addition, Congress is expected to
introduce bills in 1995 to address similar issues. There is no assurance that
cost recovery through direct and indirect interstate mechanisms will remain at
current levels. Some telephone subsidiaries are in states where support and rate
structures are under reevaluation or have been changed. There is no assurance
that the states will continue to provide for cost recovery from current sources.
The Company would expect to seek higher local service rates to recover costs for
which current interstate or intrastate recovery may become unavailable.
REGULATION
Operating telephone companies, in most instances, are regulated by state
regulatory agencies with respect to local rates, intrastate toll rates,
intrastate access charges billed to intrastate interexchange carriers, service
areas, service standards, accounting and related matters. In a number of states,
construction plans, borrowing, depreciation rates, affiliated charge
transactions and certain other financial transactions are also subject to
regulatory approval. The Company has sought and will continue to seek
appropriate increases in local and other service rates and changes in rate
structure to achieve reasonable rates and earnings. The Company is also
proactive in maintaining current revenue streams in light of increasing earnings
review activity at the state level. Although still operating in a regulated
environment, the Company is taking steps to prepare for eventual competition.
For example, with the onset of local competition, the Company is setting pricing
and policy directives to align rate structures more appropriate in a competitive
environment.
The FCC regulates interstate toll rates, interstate access charges paid by
interexchange carriers to local exchange carriers and other matters relating to
interstate telephone service. The FCC also regulates the use of radio
frequencies in telephone operations. The Company's telephone subsidiaries concur
in the National Exchange Carrier Association ("NECA") common line and traffic
sensitive tariffs and participate in the access revenue pools administered by
NECA for interstate access services. Where applicable, the Company's
subsidiaries also participate in intrastate access tariffs and toll-pooling
arrangements approved by state regulatory authorities for intrastate intra- and
inter-LATA (Local Access Transport Area) services. Such interstate and
intrastate arrangements are intended to compensate
25
LECs, such as the Company's operating telephone companies, for the costs,
including a fair rate of return, of facilities furnished in originating and
terminating interstate and intrastate long-distance services.
Various aspects of federal and state telephone regulation have, in recent
years, been subject to re-examination and ongoing modification. For example,
toll revenue pooling arrangements that are the source of substantial revenues to
local exchange companies continue to be replaced with access-charge-based
arrangements. In these cases, access charges are typically priced to result in
revenue flows similar to those realized in the toll-pooling process. To the
extent they are not, the Company may seek adjustments in other rates. Some of
the Company's high cost rural companies now recover a greater portion of their
costs from interstate sources than do urban companies. The FCC is conducting an
inquiry into this subject which could lead to a reduction of this source of
revenue.
On September 19, 1990, the FCC approved a mandatory price cap plan on
interstate access rates for the seven RBOCs and GTE, leaving the plan optional
for all other local telephone operating companies. This followed a March 16,
1989 FCC decision allowing price cap regulation for AT&T's interstate services.
The price cap approach differs from traditional rate-of-return regulation by
focusing primarily on the prices of communications services. The intention of
price cap regulation is to focus on productivity and the approved plan for
telephone operating companies allows for the sharing with its customers of
profits, achieved by increased productivity, that exceed allowed returns.
Alternatives to rate-of-return regulation have also been adopted or proposed
primarily for the RBOCs in some of the states in which the Company's operating
subsidiaries do business.
On May 13, 1993, the FCC approved an alternative regulation plan for small
and mid-sized telephone operating companies not electing price caps. This plan
reduces regulatory filing burdens under a form of modified rate-of-return. The
Company's telephone subsidiaries have not elected the new FCC plan for 1995 and
will therefore, remain in the NECA pools for this period. Since approximately
one-third of the Company's telephone subsidiaries serve high-cost areas,
important averaging mechanisms associated with the NECA pooling process would be
lost if the Company elected either of the alternatives to rate-of-return
regulation.
On November 5, 1993, NECA filed with the FCC a Petition for Rulemaking
proposing rule revisions to allow incentive settlement options within the NECA
pools. The settlement options are designed to provide companies wishing to
remain in the NECA pools with incentives similar to those previously adopted by
the FCC but only available to non-NECA participants. This filing is still
pending with the FCC. Management has been involved in providing comments on this
plan and continues to evaluate opportunities under all forms of regulation.
COMPETITION
As a result of a series of FCC, court and state regulatory agencies'
decisions, competition has been introduced in certain sectors of the telephone
industry, including interstate and intrastate toll, switched and special access
services and customer premises equipment. Landline facilities-based competition
in intrastate intra-LATA markets is making greater inroads in more state
proceedings (and this trend is expected to continue). However, either through
legislation or the adoption of proposed rules, states have generally offered
additional protection to rural areas, such as in Tennessee, Vermont and
Wisconsin. On February 15, 1994, an FCC order became effective which gives
competitive access providers, interexchange carriers and others the right to
directly interconnect facilities in the central offices of tier one telephone
companies for the provision of interstate switched access transport services. In
reaching their decision that interconnection should not apply to small carriers,
the FCC recognized that the smaller carriers who operate in limited geographic
areas with limited subscriber bases would not be able to efficiently offer
interconnection services. Subsequently, the FCC's virtual collocation
requirements, which were part of the interconnection order were overturned by
the United States Circuit Court of Appeals. Less than seven percent of the
Company's consolidated telephone revenues are derived from switched access
transport services. Further, the rules do not apply to the Company's telephone
subsidiaries, but could lead to changes in other FCC rules and policies that
affect the way certain services are priced. Both Houses of Congress are likely
to consider, and may adopt legislation to open local exchange and other
telecommunications services to competition and apply expanded interconnection
requirements to some or all local exchange telephone companies. Technological
developments in
26
cellular telephone, digital microwave, coaxial cable, fiber optics and other
wireless and wired technologies may further permit the development of
alternatives to traditional landline service. The Company and many other members
of the local exchange carrier industry are seeking to maintain a strong
universally affordable public telecommunications network through regulatory
policies and programs that are sensitive to the needs of small communities and
rural areas serviced by many of the Company's telephone subsidiaries. The FCC
has initiated a Notice of Inquiry in Docket No. 80-286 on August 30, 1994 on the
future of the USF and other high cost assistance mechanisms and has also
requested every local exchange carrier to provide financial information in
conjunction with its Notice of Inquiry.
Certain providers and users of toll service may seek to bypass the LEC's
switching services and local distribution facilities, particularly if services
are not strategically priced. There are three primary ways today by which users
of toll service may bypass the Company's switching services. First, users may
construct and operate or lease facilities to transmit their traffic to an
interexchange carrier. Second, certain interexchange carriers provide services
which allow users to divert their traffic from the LEC's usage-sensitive
services to their flat-rate services. Third, users may choose to use cellular
telephone service to bypass the LEC's switching services. The Company's
telephone subsidiaries have experienced only a small loss of traffic to such
bypass. The Company and the exchange carrier industry are seeking to address
bypass by advocating adequate interstate and state cost recovery mechanisms for
high cost rural telephone service and flexible pricing, including reduced
pricing of access and toll services, where appropriate.
The FCC released other significant orders and proposed rulemakings during
1993 and 1994 which are intended to further promote competition in video and
voice communications and which may provide the Company with increased
communications opportunities. The Company actively monitors these proceedings
seeking to protect its interests, and continues to evaluate new business
opportunities that arise out of these regulatory decisions.
Consistent with the 1993 Federal District Court's decision that declared the
telephone/cable cross-ownership ban unconstitutional for Bell Atlantic, other
telephone operating companies have similarly filed lawsuits challenging the ban.
At this time, favorable summary judgment rulings that the FCC's ban on telephone
companies' provision of video programming violates the First Amendment rights of
the telephone companies to free speech have also been granted for U.S. West,
BellSouth and for the United States Telephone Association's small and mid-size
members. Cases filed by Ameritech and NYNEX are pending.
Because of legislation under consideration by each house of Congress and the
Administration's initiatives for the creation of a broadband interactive
national information infrastructure, the Company expects that there eventually
will be open entry in nearly every aspect of communications. The Company
believes, however, that consistent with open entry is the realization by
policymakers that high-cost support funds and similar cost-averaging methods
must continue to be employed to ensure that advanced services reach rural areas.
The Company plans to compete by providing high-quality advanced voice, video,
data and image services.
RADIO PAGING OPERATIONS
WIRELESS MESSAGING INDUSTRY
Paging is a wireless communications messaging technology which uses an
assigned radio frequency, licensed by the FCC, to contact a paging customer
within a geographic service area. Pagers are small, lightweight, easy-to-use,
battery-operated devices which receive messages by the broadcast of a radio
signal. To contact a customer, a message is initiated by placing a telephone
call to the customer's pager number. The telephone call is received by a
computerized paging switch which generates a signal sent to
microprocessor-controlled radio transmitters within the service area. These
radio transmitters are connected to the paging terminal either through land-line
or satellite. The transmitters broadcast a digital or analog signal that is
received by the pager and delivered as a digital display, alphanumeric text,
tone or voice message.
The paging industry started in 1949 when the FCC allocated certain radio
frequencies for exclusive use in providing one-way and two-way types of mobile
communications services. Until the 1980s, the
27
industry was highly fragmented with a large number of small, local operators.
During that decade, acquisitions of many firms by regional telephone companies
and others greatly consolidated the industry. The Company currently estimates
that the ten largest Radio Common Carrier ("RCC") paging companies, including
APP, serve approximately 50 percent of the estimated 24.5 million paging
subscribers in the United States, with no single provider serving more than 18
percent of the United States marketplace.
The FCC completed its narrowband PCS auction covering ten nationwide
licenses and thirty regional licenses allocated to certain radio spectrum
blocks. APP was the successful bidder for five regional licenses, providing
equivalent coverage to that of a nationwide license, each consisting of a 50 kHz
outbound channel paired with a 12.5 kHz return channel all on the same
frequency. The licenses will authorize APP to introduce two-way wireless
messaging communication services including acknowledgement paging, data and
telemetry services, wireless E-Mail and digitized voice messaging.
Additional innovations in technology combined with further reduced costs of
equipment are expected to continue to broaden the potential market size for
paging services and support the industry's rapid growth rate. Management also
believes that future developments in the wireless communications industry will
produce additional consolidations of smaller operators with larger, multi-market
paging companies.
APP provides one-way wireless communications messaging services in the
United States with operations concentrated in Florida and in the Mid-Atlantic
and Midwest regions. APP has experienced strong growth in the number of pagers
in service, increasing from 201,200 at the end of 1990 to 652,800 at year-end
1994, a compound annual growth rate of 34.2%
The following table summarizes certain information about APP's operations.
YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Pagers in service...................................... 652,800 460,900 322,200 236,800 201,200
Total revenues......................................... $92,065 $75,363 $54,716 $43,972 $38,021
Depreciation and amortization expense.................. 17,178 13,392 10,412 9,047 8,304
Operating (loss)....................................... (169) (721) (5,447) (7,750) (6,442)
Additions to property and equipment.................... 27,403 24,813 15,501 13,322 14,347
Identifiable assets.................................... $ 146,107 $ 74,923 $ 57,080 $ 41,726 $ 38,067
COMPANY STRATEGY
APP's business strategy is to promote above industry average growth in
customers, revenue and operating cash flow by providing the highest quality
service through one of the industry's most technologically advanced digital
transmission systems with a focus on strong customer service and competitive
pricing. APP stresses quality in every customer interaction and strives to
continuously improve the productivity and efficiency of its employees and its
communications systems.
On May 27, 1994, the FCC granted APP exclusive use of a paging channel on
929.3375 MHz throughout the United States subject to construction/buildout
requirements. APP notified the FCC, by letter dated January 23, 1995, that these
requirements had been met. APP believes this license, will enable the Company to
offer competitive regional and nationwide messaging services and has built the
systems required to utilize and retain an exclusive license.
On March 17, 1995 the FCC granted applications filed by the APP for SMR
licenses in five markets and dismissed the remainder of APP's pending SMR
applications. An SMR license consists of a 25 kHz outbound channel paired with a
25 kHz inbound channel. APP received channels in the following cities: five each
in Tucson and Prescott, Arizona; two in Dubuque, Iowa; one in Champaign,
Illinois and one in Eau Claire, Wisconsin. These licenses will provide
additional capacity to allow APP to offer some or all of a broader range of
innovative mobile data services, such as one- and two-way messaging, high
resolution graphics, wireless E-Mail and facsimile. Prior to making grants of
these applications, the FCC amended its rules to eliminate wireline eligibility
restrictions applicable to SMR licensing and ordered that all pending waiver
requests such as those filed by APP be dismissed as moot.
28
APP is a joint venture partner with Nexus Telecommunications Systems Ltd. of
Israel ("Nexus") in American Messaging Services, Inc., which was formed to
develop multiple applications and distribution channels for its proprietary
wireless technologies. As part of this arrangement, APP has the exclusive right
to market two-way lower-speed data messaging, vehicle location and inventory
management services using patented spread spectrum technology in the Western
Hemisphere. Management believes its alliance with Nexus has the potential to
result in advanced two-way messaging services.
Services which may require additional capacity, such as E-mail, will require
higher-speed networks to support the customer base. This, in turn, may require
more transmitter sites, more complex communication switches, and other
enhancements to APP's infrastructure.
Many of the services such as information services are currently offered in
several of APP's operations. The time-frame for new two-way services is
projected to be early 1996, but there can be no assurance at this early stage of
development of such services that APP will be willing or able to invest in some
or all of such services or that, if implemented, such services will be
commercially successful.
PAGING OPERATIONS
APP provides local, wide-area, regional and nationwide paging services to
customers through its operations centers. It offers local and regional paging
coverage throughout Florida, the Midwest (including all or parts of Illinois,
Indiana, Kentucky, Minnesota, Missouri and Wisconsin) the Mid-Atlantic
(including all or parts of Maryland, Pennsylvania, Virginia, and Washington,
D.C.) regions, and in the states of Oklahoma, Texas, Arizona and Utah.
Nationwide paging is offered through APP's alliance with nonaffiliated service
providers.
APP currently provides four types of pagers in all of its markets: digital
display, alphanumeric text display, voice and tone. A digital display pager
permits a caller to transmit to the customer a numeric message that may consist
of a telephone number, an account number or coded information. It has the memory
to store several numeric messages that can be recalled by the customer when
desired. Alphanumeric text display service allows customers to receive, store,
and display full text messages of between 80 and 160 characters, which are sent
from either a data entry device or an operator. In the case of voice service,
the notification is followed by a brief voice message. A tone pager notifies the
customer that a message has been received by emitting an audible beep,
displaying a flashing light or vibrating.
Since 1986, APP has made a limited number of selective acquisitions of
paging companies which had been providing service in the same areas as APP, or
in areas adjacent to APP's service areas. In 1994, APP obtained approximately
35,000 customers from its acquisition of Sunshine Beeper Company in Florida. In
total, APP has added 59,000 net customers through acquisitions since 1990. As
the industry continues to consolidate, APP expects to evaluate attractive
acquisition opportunities and continue to make selective acquisitions on an
ongoing basis.
MARKETING STRATEGY
APP directs its marketing efforts at value-oriented customers who appreciate
APP's technical reliability and high level of customer service. APP's marketing
strategy is designed to increase market share and operating cash flow by
achieving rapid growth at modest cost per net customer unit added. Continuing
quality improvements, including new services and products, help stimulate this
growth and also help control costs.
APP generates its revenues from (i) service usage billed on a flat-rate or
measured-service basis, (ii) pager rentals, (iii) pager warranties, maintenance
contracts and repair, (iv) loss protection, (v) voice mail usage on a flat rate
or measured service basis, (vi) activation fees, (vii) the sale of pager
accessories and (viii) service usage of value-added services such as text
dispatching, second telephone numbers or group calls. Service to end users is
provided directly by APP in most cases.
APP markets its services directly through its sales force complemented by
customer service representatives, and indirectly through third-party resellers
and retailers. APP's sales force and customer service representatives have the
responsibility to ensure that all customers and prospects as well as resellers
and retailers understand APP's competitive advantages: reliable wireless
networks, wide-area coverage, value-priced selection of pagers and ancillary
services, and responsive sales and customer service staff.
29
APP offers its services to third-party resellers under marketing agreements.
APP offers paging airtime in bulk quantities at wholesale rates to resellers who
then "re-sell" APP's airtime to end users at a markup. APP's cost of obtaining
customer units through resellers is substantially less than the cost of
obtaining customer units through direct sales or retail distribution channels.
Resellers incur the cost to acquire customers as well as to service, bill and
collect revenues from the customer. They also assume the cost of the paging unit
for those who rent rather than purchase. APP sells pagers to retailers at a
small mark-up or cost. Retail outlets then sell the pagers to the customers who
then purchase the services from APP. Resellers and retailers may also sell
services of other wireless communications companies which may compete with APP.
APP seeks to develop long-term and cooperative relationships with its resellers
and retailers.
COMPETITION
APP faces significant competition in all of its markets. A number of APP's
competitors, which include local, regional and national paging companies and
certain regional telephone companies, possess greater financial, technical and
other resources than APP. Moreover, certain competitors in the paging business
offer wider coverage in certain geographic areas than does APP and certain
competitors follow a low-price discounting strategy to expand market share. If
any of such companies were to devote additional resources to the paging business
or increase competitive pressure in APP's markets, APP's results of operations
could be adversely affected.
A number of technologies, including cellular, broadband and narrowband PCS,
SMR and others, are competitive forms of technology used in, or projected to be
used for, wireless one-way and two-way communications. Cellular telephone
technology provides an alternative communications system for customers who are
frequently away from fixed-wire communications systems (i.e., ordinary
telephones). APP believes that paging will remain one of the lowest-cost forms
of wireless messaging due to the low-cost infrastructure associated with paging
systems, as well as advances in technology that will provide for reduced paging
costs.
Future technological developments in the wireless telecommunications
industry and the enhancement of current technologies will likely create new
products and services that are competitive with the paging services currently
offered by APP. There can be no assurance that APP would not be adversely
affected by such technology changes.
GOVERNMENT REGULATION
APP's message paging operations are subject to regulation by the FCC under
the Communications Act. Currently, paging services are offered primarily over
radio frequencies that the FCC has allocated for either common carriage
(licensees are known as RCCs) or private carriage (licensees are known as
private carrier paging operators ("PCP")). An RCC license is an exclusive
license to a specific radio frequency in a particular locality or region and the
licensee is regulated as a common carrier. A PCP license may be designated by
the FCC as exclusive or non-exclusive, and may be subject to frequency sharing
and coordination procedures. These procedures are designed to avoid interference
with the operation of communications by other carriers using the same frequency.
PCP licensees are private carriers, not subject to common carrier regulation.
The FCC has granted APP licenses to use the radio frequencies required to
conduct its paging operations and these licenses define the technical parameters
under which APP is authorized to use those frequencies. APP primarily provides
paging services directly to customers over its own transmission facilities, and
is currently regulated as an RCC for some of its current services. APP also
holds PCP licenses.
The FCC licenses granted to APP are issued for up to ten years in the case
of both RCC and PCP licenses, at the end of which time renewal applications must
be approved by the FCC. Most of APP's current licenses expire between 1997 and
2001. FCC renewals are generally granted as long as APP is in compliance with
FCC regulations. Although APP is unaware of any circumstances which would
prevent the approval of any pending or future renewal applications, no assurance
can be given that APP's licenses will be renewed by the FCC in the future.
Moreover, although revocation and involuntary modification of licenses are
extraordinary regulatory measures, the FCC has the authority to restrict the
operation of licensed facilities or revoke or modify licenses. No license of APP
has ever been revoked or
30
modified involuntarily. See "Legal Proceedings -- La Star and Wisconsin RSA 8
Applications" for a discussion of certain FCC proceedings which have set aside
the Company's licensing authority in a Wisconsin market pending the outcome of
an FCC hearing.
The Communications Act requires licensees such as APP to obtain prior
approval from the FCC for the assignment or transfer of control of any
construction permit or station license, or any rights thereunder. The
Communications Act also requires prior approval by the FCC of acquisitions of
other paging companies by APP. The FCC has approved all transfers of control for
which APP has sought approval. APP also routinely applies for FCC authority to
use frequencies, modify the technical parameters of existing licenses, expand
its service territory and provide new services. Although there can be no
assurance that any future requests for approval or applications filed by APP
will be approved or acted upon in a timely manner by the FCC, or that the FCC
will grant the relief requested, APP has no reason to believe that any such
requests, applications or relief will not be approved or granted.
OTHER SUBSIDIARIES
Subsidiaries of the Company provide data processing and related services
(TDS Computing Services, Inc.); graphic communications services (Suttle Press,
Inc.); and telemessaging services (Integrated Communications Services, Inc.).
EMPLOYEES
The Company enjoys satisfactory employee relations. As of December 31, 1994,
5,322 persons were employed by the Company, 126 of whom are represented by
unions.
--------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The property of TDS consists principally of switching and cell site
equipment related to cellular telephone operations; telephone lines, central
office equipment, telephone instruments and related equipment, and land and
buildings related to telephone operations; and radio pagers and transmitting
equipment related to radio paging operations. As of December 31, 1994, TDS's
gross property, plant and equipment of approximately $1.6 billion consisted of
the following:
Cellular telephone................................. 29.5 %
Telephone
Telephone lines.................................. 30.0
Central office equipment......................... 17.2
Telephone instruments and related equipment...... 1.3
Land and buildings............................... 3.2
Miscellaneous.................................... 6.2
Plant under construction......................... 3.3
-----
Total Telephone.............................. 61.2
Radio paging....................................... 5.2
Other.............................................. 4.1
-----
100.0 %
-----
-----
"Telephone lines" consists primarily of buried cable and also includes
aerial cable, poles, and wire. "Central office equipment" consists of switching
equipment, carrier equipment, and related facilities. "Telephone instruments and
related equipment" consists of equipment located on the subscribers' premises
and includes private branch exchanges. "Land and buildings" consists of land
owned in fee simple and improvements thereto. "Miscellaneous" consists of tools,
furnishings, fixtures, motor vehicles, work equipment, and plant held for future
use. "Plant under construction" includes property of the foregoing categories
which had not been placed in service because it was still under construction.
The plant and equipment of TDS is maintained in good operating condition and is
suitable and adequate for the Company's business operations. The properties of
the operating telephone subsidiaries and most of
31
the tangible assets of the cellular subsidiaries are subject to the lien of the
mortgages securing the funded debt of such companies. The Company owns
substantially all of its central office buildings, local administrative
buildings, warehouses, and storage facilities used in its telephone operations
and leases most of its offices and transmitter sites used in its cellular and
paging businesses. All of the Company's telephone lines and cell and transmitter
sites are located either on private or public property. Locations on private
land are by virtue of easements or other arrangements.
--------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain landline or cellular telephone systems. The
more significant proceedings involving the Company are described in the
following paragraphs.
LA STAR AND WISCONSIN RSA 8 APPLICATIONS. USM indirectly owns 49% of La
Star Cellular Telephone Company ("La Star"), which was an applicant for a
construction permit for a cellular system in the New Orleans MSA. In June 1992,
the FCC affirmed an Administrative Law Judge's order which had granted the
application of another applicant and dismissed La Star's application. The basis
for the FCC's action was its finding that USM improperly controlled La Star. In
a footnote to its decision, the FCC stated that questions regarding the conduct
of USM in that proceeding may be revisited in future proceedings. As a result of
that footnote, FCC authorizations in uncontested FCC proceedings have been
granted to TDS and its subsidiaries subject to any subsequent action the FCC
might take concerning its findings and conclusions in the La Star decision.
La Star, TDS and USM appealed the FCC's decision in the La Star proceeding.
On March 29, 1994, the United States Court of Appeals for the District of
Columbia Circuit vacated the FCC's decision in the La Star proceeding and
remanded the matter to the FCC for further proceedings. On remand, the FCC
affirmed the dismissal of the La Star application but did not address the
subject matter of its footnote in the original La Star decision. As a result,
the Wisconsin RSA 8 case, discussed below, now constitutes the only FCC
expression calling for conditions on authorizations to TDS and its subsidiaries.
On February 1, 1994, in a proceeding involving a license originally issued
to TDS for Wisconsin RSA 8, the FCC instituted a hearing to determine whether in
the La Star case USM had misrepresented facts to, lacked candor in its dealings
with or attempted to mislead the FCC, and, if so, whether TDS possesses the
requisite character qualifications to hold that Wisconsin license. The FCC
stated in its decision that, pending resolution of the issues in the Wisconsin
proceeding, subsequent authorizations to TDS and its subsidiaries would be
conditioned on the outcome of that proceeding. TDS was granted interim authority
to continue to operate that Wisconsin system pending completion of the hearing.
Following extensive discovery by the FCC and other parties, TDS and USM have
reached preliminary and definitive settlement agreements with parties to the
proceeding contemplating a summary decision finding TDS and its affiliates fully
qualified to be FCC licensees. Pending the negotiation of a definitive
settlement agreement with a group of Wisconsin telephone companies who are
parties to the proceeding, the hearing has been postponed. Final settlement will
also be subject to the action of the judge presiding in the proceeding.
TOWNES TELECOMMUNICATIONS, INC., ET. AL. V. TDS, ET AL. Plaintiffs Townes
Telecommunications, Inc., Tatum Telephone Company and Tatum Cellular Telephone
Company filed a suit on September 4, 1991 in the District Court of Rusk County,
Texas, against both TDS and USM as defendants. Plaintiffs made a number of
allegations, including usurpation, breach of fiduciary duty, civil conspiracy,
breach of contract, tortious interference and other claims, and sought a variety
of remedies, including unspecified damages not to exceed $33 million and as much
as $200 million in punitive damages.
The case went to trial on April 25, 1994. On May 5, 1994, the jury returned
a verdict in favor of TDS and USM on all issues. The plaintiffs filed an appeal
of the case on September 12, 1994. The parties have executed an agreement which
settles all matters related to this litigation and this case has been dismissed
with prejudice on February 14, 1995. The settlement agreement requires
plaintiffs to purchase
32
a minority cellular interest from the Company at a negotiated purchase price
which the Company believes approximates fair market value, and does not require
the payment of any money by the Company.
--------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1994.
--------------------------------------------------------------------------------
PART II
--------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"TDS Stock and Dividend Information" and "Market Price per Common Share by
Quarter."
--------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Selected Consolidated Financial Data," except for ratios of earnings to fixed
charges, which are incorporated herein by reference from Exhibit 12 to this
Annual Report on Form 10-K.
--------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
--------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"Consolidated Statements of Income," "Consolidated Statements of Cash Flows,"
"Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders'
Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly
Income Information (Unaudited)," and "Report of Independent Public Accountants."
--------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
--------------------------------------------------------------------------------
PART III
--------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Exhibit 99 sections entitled "Election of
Directors" and "Executive Officers."
--------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Exhibit 99 section entitled "Executive
Compensation" and "1994 Long-Term Incentive Plan," except for the information
specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act
of 1934, as amended.
--------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Exhibit 99 sections entitled "Security
Ownership of Management" and "Principal Shareholders."
--------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Exhibit 99 section entitled "Certain
Relationships and Related Transactions."
34
--------------------------------------------------------------------------------
PART IV
--------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a)(1) Financial Statements
Consolidated Statements of Income.......................... Annual Report*
Consolidated Statements of Cash Flows...................... Annual Report*
Consolidated Balance Sheets................................ Annual Report*
Consolidated Statements of Common Stockholders' Equity..... Annual Report*
Notes to Consolidated Financial Statements................. Annual Report*
Consolidated Quarterly Income Information (Unaudited)...... Annual Report*
Report of Independent Public Accountants................... Annual Report*
<FN>
---------
* Incorporated by reference from Exhibit 13.
(2) Schedules
LOCATION
-----------
Report of Independent Public Accountants on Financial Statement Schedules..................................... page 38
I. Condensed Financial Information of Registrant-Balance Sheets as of December 31, 1994 and 1993 and
Statements of Income and Statements of Cash Flows for each of the Three Years in the Period Ended
December 31, 1994.................................................................................. page 39
II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31,
1994............................................................................................... page 43
Los Angeles SMSA, Nashville/Clarksville MSA, and Baton Rouge MSA Limited Partnership Combined Financial
Statements.................................................................................................. page 44
Compilation Report of Independent Public Accountants on Combined
Financial Statements............................................................................. page 45
Reports of Other Independent Accountants........................................................... page 46
Combined Statements of Operations (Unaudited)...................................................... page 51
Combined Balance Sheets (Unaudited)................................................................ page 52
Combined Statements of Cash Flows (Unaudited)...................................................... page 53
Combined Statements of Changes in Partners' Capital (Unaudited).................................... page 54
Notes to Unaudited Combined Financial Statements................................................... page 55
All other schedules have been omitted because they are not applicable or not required because the required
information is shown in the financial statements or notes thereto.
35
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a part
of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
EXHIBIT
NUMBER DESCRIPTION
---------- --------------------------------------------------------------------
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20,
1977, as amended May 22, 1981 and May 25, 1984 is hereby
incorporated by reference to the Company's Registration Statement on
Form S-2, No. 2-92307.
10.2 (a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21,
1980, as amended March 20, 1981 is hereby incorporated by reference
to an exhibit to the Company's Registration Statement on Form S-7,
No. 2-74615.
10.2 (b) Memorandum of Amendment to Supplemental Benefit Agreement dated May
28, 1991 is hereby incorporated by reference to Exhibit 10.2(b) to
the Company's Annual Report Form 10-K for the year ended December
31, 1991.
10.3 Stock Option Agreement, dated February 25, 1987, between the Company
and Murray L. Swanson is hereby incorporated by reference to an
exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988.
10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option
Agreement, dated March 14, 1988, between the Company and LeRoy T.
Carlson, Jr., is hereby incorporated by reference to an exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1988.
10.5 Stock Option and Stock Appreciation Rights Award Agreement dated
January 15, 1990 between the Company and James Barr III, is hereby
incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
10.6 (a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company
is hereby incorporated by reference to Exhibit A to the Company's
definitive Notice of Annual Meeting and Proxy Statement dated March
31, 1988.
10.6 (b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan
of the Company is hereby incorporated by reference to Exhibit
10.7(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.
10.6 (c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan
of the Company is hereby incorporated by reference to Exhibit
10.7(c) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.
10.7 1985 Incentive Stock Option Plan of the Company is hereby
incorporated by reference to Exhibit A to the Company's definitive
Notice of Annual Meeting and Proxy Statement dated April 24, 1986.
10.8 (a) Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is
hereby incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (Registration No. 33-57257).
10.8 (b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is
hereby incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (Registration No. 33-57257).
10.8 (c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form)
is hereby incorporated by reference to Exhibit 99.3 to the Company's
Registration Statement on Form S-8 (Registration No. 33-57257).
10.8 (d) Form of 1995 Performance Stock Option Agreement (Transferable Form)
is hereby incorporated by reference to Exhibit 99.4 to the Company
Registration statement on Form S-8 (Registration No. 33-57257).
36
10.8 (e) Form of 1995 Performance Stock Option Agreement (Nontransferable
Form) is hereby incorporated by reference to Exhibit 99.5 to the
Company's Registration Statement on Form S-8 (Registration No.
33-57257).
10.9 Supplemental Executive Retirement Plan of the Company.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1994.
No reports on Form 8-K were filed during the quarter ended December 31, 1994.
37
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of Directors of Telephone and Data Systems, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Telephone and Data Systems, Inc.
and Subsidiaries Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated February 7, 1995 (except
with respect to the matters discussed in Note 12 and Note 14, as to which the
date is March 14, 1995). Our report on the consolidated financial statements
includes an explanatory paragraph with respect to the change in the method of
accounting for postretirement benefits other than pensions as discussed in Note
1 of the Notes to Consolidated Financial Statements.
Our audits were made for the purpose of forming an opinion on those financial
statements taken as a whole. The financial statement schedules listed in Item
14(a)(2) are the responsibility of the Company's management and are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These financial statement
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 7, 1995
(except with respect to the matters
discussed in Note 12 and Note 14,
as to which the date is March 14, 1995)
38
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
--------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
BALANCE SHEETS
ASSETS
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1994 1993
----------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 291 $ 24,651
Temporary investments 184 57
Notes receivable from affiliates 189,820 119,786
Advances to affiliates 22,016 1,616
Accounts receivable
Due from subsidiaries--Income taxes 7,682 9,008
Due from subsidiaries--Other 8,624 9,618
Other 2,555 1,130
Other current assets 650 632
--------------------------------
231,822 166,498
----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARIES
Underlying book value 1,605,813 1,242,274
Cost in excess of underlying book value at date of acquisition 1,907 49,821
--------------------------------
1,607,720 1,292,095
----------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS
Minority interests in telephone and cellular companies and other investments 31,648 57,187
----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES
Debt issuance expenses 2,027 2,020
Development and acquisition expenses 599 1,036
Other 7,239 3,138
--------------------------------
9,865 6,194
----------------------------------------------------------------------------------------------------------------------------------
$ 1,881,055 $ 1,521,974
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
39
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
--------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1994 1993
----------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock $ 13,053 $ 3,339
Notes payable 97,629 6,000
Notes payable to affiliates 2,852 1,818
Advances from affiliates 345 348
Accounts payable
Due to subsidiaries--Federal income taxes 5,959 4,212
Due to subsidiaries--Other 1,395 472
Other 811 1,722
Accrued interest 9,234 8,078
Accrued taxes (2,124) 2,463
Other 3,427 1,257
--------------------------------
132,581 29,709
----------------------------------------------------------------------------------------------------------------------------------
DEFERRED LIABILITIES AND CREDITS
Investment tax credits (1,694) (2,117)
Income taxes 14,368 6,218
Postretirement benefits obligation other than pensions (Note D) 12,067 12,856
Other 3,903 3,526
--------------------------------
28,644 20,483
----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, excluding current portion (Note B) 203,764 205,032
----------------------------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion (Note A) 13,209 25,632
----------------------------------------------------------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES 29,819 16,833
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding
47,937,570 and 43,503,584 shares, respectively 47,938 43,504
Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and
outstanding 6,886,684 and 6,881,001 shares, respectively 6,887 6,881
Common Shares issuable, 41,908 and 304,328 shares, respectively 1,995 15,189
Capital in excess of par value 1,288,453 1,069,022
Retained earnings 127,765 89,689
--------------------------------
1,473,038 1,224,285
----------------------------------------------------------------------------------------------------------------------------------
$ 1,881,055 $ 1,521,974
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
40
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
--------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
STATEMENTS OF INCOME
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
Operating sales and service revenues $ 17,402 $ 17,179 $ 14,849
Cost of sales and expenses 18,189 17,109 14,896
----------------------------------------
Net operations (787) 70 (47)
Other income
Interest income received from affiliates 13,840 27,333 15,792
Other, net (1,507) (1,128) (2,969)
----------------------------------------
12,333 26,205 12,823
Interest expense (22,107) (18,934) (16,428)
Federal income tax credit (expense) (1,411) 2,602 (4,710)
----------------------------------------
Corporate operations (11,972) 9,943 (8,362)
Equity in net income of subsidiaries and other investments 71,793 23,953 46,882
----------------------------------------
Net income before extraordinary item and cumulative effect of accounting changes 59,821 33,896 38,520
Extraordinary item (Note C) -- -- (769)
Cumulative effect of accounting changes (Note D) -- -- (6,866)
----------------------------------------
Net income $ 59,821 $ 33,896 $ 30,885
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
Note A: The annual requirements for redemption of Redeemable Preferred Shares are $11.8
million, $11.8 million, $1.2 million, $79,000 and $79,000 for the years 1995 through
1999, respectively.
Note B: The annual requirements for principal payments on long-term debt are $1.3 million,
$419,000, $394,000, $476,000 and $372,000 for the years 1995 through 1999,
respectively.
Note C: During 1992 the Company retired at a premium $20.8 million of its Senior Notes. The
notes carried interest rates of 9.75% to 13.75% and were due in 1996 through 2004.
The transaction resulted in an extraordinary loss of $769,000, net of income tax
benefits of $491,000.
Note D: The Company implemented SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," effective January 1, 1992 and SFAS No. 112
"Employers' Accounting for Postemployment Benefits," effective January 1, 1994. See
Note 1 of Notes to Consolidated Financial Statements, included in the Annual Report,
for a discussion of the Company's postretirement benefit plans.
41
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
--------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
(DOLLARS IN THOUSANDS) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 59,821 $ 33,896 $ 30,885
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities
Extraordinary item -- -- 769
Cumulative effect of accounting change -- -- 6,866
Depreciation and amortization 1,080 2,547 1,568
Deferred taxes 8,572 4,563 3,459
Equity income (71,793) (23,953) (46,882)
Other noncash expense 691 6 3,156
Change in accounts receivable 1,859 1,076 (6,440)
Change in accounts payable 1,769 (4,603) 5,430
Change in accrued taxes (4,587) 2,463 428
Change in other assets and liabilities (1,236) 2,689 (447)
-------------------------------------------
(3,824) 18,684 (1,208)
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings (130) 91,601 7,235
Repayment of long-term debt (1,611) (11,935) (28,780)
Premium on retirement of long-term debt -- -- (1,117)
Change in notes payable 91,629 (40,140) 6,511
Change in notes payable to affiliates 1,034 (175) (5,727)
Change in advances from affiliates (3) -- (6,103)
Common stock issued 11,185 109,972 78,592
Redemption of preferred shares (644) (220) (407)
Dividends paid (20,906) (17,830) (13,902)
-------------------------------------------
80,554 131,273 36,302
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions
Value of assets acquired (215,658) (331,225) (154,569)
Common Shares issued 173,658 281,605 134,612
Preferred Shares issued 12,500 3,000 --
-------------------------------------------
Net cash paid for acquisitions (29,500) (46,620) (19,957)
Investments in subsidiaries (527) (126,108) (2,923)
Dividends from subsidiaries 17,373 16,266 21,544
Other investments (3,058) 1,424 (5,884)
Change in notes receivable from affiliates (64,850) 28,040 (28,460)
Change in advances to affiliates (20,400) 1,073 127
Change in temporary investments (128) 114 17
-------------------------------------------
(101,090) (125,811) (35,536)
-------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,360) 24,146 (442)
CASH AND CASH EQUIVALENTS--
Beginning of period 24,651 505 947
-------------------------------------------
End of period $ 291 $ 24,651 $ 505
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.
42
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------------------------------------------------
COLUMN A
DESCRIPTION COLUMN B COLUMN C-1 COLUMN C-2 COLUMN E
---------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER COLUMN D END OF
(DOLLARS IN THOUSANDS) PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ ------------ ----------- ------------
FOR THE YEAR ENDED DECEMBER 31, 1994
Deducted from deferred state tax asset:
For unrealized net operating losses $ (8,704) $ 327 $ (585) $ -- $ (8,962)
Deducted from accounts receivable:
For doubtful accounts (2,093) (9,710) -- 9,018 (2,785)
Deducted from marketable equity securities:
For unrealized loss (626) -- 626 -- --
FOR THE YEAR ENDED DECEMBER 31, 1993
Deducted from deferred state tax asset:
For unrealized net operating losses (1) (6,452) $ -- $ (2,252) $ -- $ (8,704)
Deducted from accounts receivable:
For doubtful accounts (1,608) (5,837) -- 5,352 (2,093)
Deducted from marketable equity securities:
For unrealized loss -- -- (626) -- (626)
FOR THE YEAR ENDED DECEMBER 31, 1992
Deducted from accounts receivable:
For doubtful accounts $ (1,200) $ (4,457) $ -- $ 4,049 $ (1,608)
-------------------------------------------------------------------------------------------------------------------------------
Note: (1) The beginning balance represents the implementation of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
on January 1, 1993.
43
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED FINANCIAL STATEMENTS
The following financial statements are the combined financial statements of
the cellular system partnerships listed below which are accounted for by the
Company following the equity method. The combined financial statements were
compiled from financial statements and other information obtained by the Company
as a limited partner of the cellular limited partnerships listed below. The
cellular system partnerships included in the combined financial statements, the
periods each partnership is included, and the Company's ownership percentage of
each cellular system partnership at December 31, 1994 are set forth in the
following table.
THE
PERIODS COMPANY'S
INCLUDED LIMITED
IN COMBINED PARTNERSHIP
CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST
------------------------------------------------------------------------------------------------------ ------------ -------------
Los Angeles SMSA Limited Partnership.................................................................. 1992-94 5.5%
Nashville/Clarksville MSA Limited Partnership......................................................... 1992-94 49.0%
Baton Rouge MSA Limited Partnership................................................................... 1992-94 52.0%
44
COMPILATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
TELEPHONE AND DATA SYSTEMS, INC.:
The accompanying combined balance sheets of the Los Angeles SMSA Limited
Partnership, the Nashville/Clarksville MSA Limited Partnership and the Baton
Rouge MSA Limited Partnership as of December 31, 1994 and 1993 and the related
combined statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1994, have been
prepared from the separate financial statements, which are not presented
separately herein, of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships, as described in Note 1. We have reviewed for
compilation only the accompanying combined financial statements, and, in our
opinion, those statements have been properly compiled from the amounts and notes
of the underlying separate financial statements of the Los Angeles SMSA,
Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, on the basis
described in Note 1.
The statements for the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships were audited by other auditors as set forth in
their reports included on pages 46 through 50. The report of the other auditors
of the Los Angeles SMSA Limited Partnership contains explanatory paragraphs with
respect to the uncertainties discussed in the second, third, fourth and fifth
paragraphs of Note 7. We have not been engaged to audit either the separate
financial statements of the aforementioned limited partnerships or the related
combined financial statements in accordance with generally accepted auditing
standards and to render an opinion as to the fair presentation of such financial
statements in accordance with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 17, 1995
45
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
LOS ANGELES SMSA LIMITED PARTNERSHIP:
We have audited the balance sheets of Los Angeles SMSA Limited Partnership
as of December 31, 1994 and 1993, and the related statements of operations,
partners' capital and cash flows for each of the three years in the period ended
December 31, 1994; such financial statements are not included separately herein.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Los Angeles SMSA Limited
Partnership as of December 31, 1994 and 1993, and results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the Partnership has been
named in two separate actions, now consolidated, and a separate complaint served
by cellular agents. The outcome of these matters is uncertain and, accordingly,
no accrual for these matters has been made in the financial statements.
In addition, as discussed in Note 9, four class action suits were filed
against the Partnership alleging violations of state and federal antitrust laws.
The outcome of these matters is uncertain and, accordingly, no accrual for these
matters has been made in the financial statements.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
February 17, 1995
46
REPORT OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1994, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1994, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 10, 1995
47
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1993, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1993, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1994
48
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1992, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1992, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1993
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1994, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1994, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 10, 1995
49
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1993, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1993, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1994
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1992, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1992, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1993
50
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Revenues................................................................... $ 640,798 $ 506,028 $ 400,738
Expenses
Selling, general and administrative...................................... 362,840 287,299 235,038
Depreciation and amortization............................................ 66,234 57,357 46,740
----------- ----------- -----------
Total expenses........................................................... 429,074 344,656 281,778
----------- ----------- -----------
Operating income........................................................... 211,724 161,372 118,960
Other income............................................................... 573 272 477
----------- ----------- -----------
Net Income................................................................. $ 212,297 $ 161,644 $ 119,437
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these combined financial
statements.
51
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(UNAUDITED)
ASSETS
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
Current Assets
Cash.................................................................................. $ 38 $ 27
Accounts receivable--customers, net................................................... 95,630 81,656
Accounts receivable--affiliates....................................................... 16,016 29,981
Notes receivable--affiliates.......................................................... 402 3,756
Other current assets.................................................................. 18,523 5,689
----------- -----------
130,609 121,109
Property, Plant and Equipment, net...................................................... 380,473 304,926
Other................................................................................... 1,640 1,631
----------- -----------
Total Assets............................................................................ $ 512,722 $ 427,666
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
Current Liabilities
Accounts payable--other............................................................... $ 58,210 $ 38,776
Accounts payable--affiliates.......................................................... 1,431 1,039
Notes payable......................................................................... 692 --
Customer deposits..................................................................... 4,060 2,996
Other current liabilities............................................................. 39,323 22,101
----------- -----------
103,716 64,912
----------- -----------
Deferred Rent........................................................................... 5,019 4,571
Capital Lease Obligation................................................................ 520 713
Partners' Capital....................................................................... 403,467 357,470
----------- -----------
Total Liabilities and Partners' Capital................................................. $ 512,722 $ 427,666
----------- -----------
----------- -----------
The accompanying notes are an integral part of these combined financial
statements.
52
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
DECEMBER 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................ $ 212,297 $ 161,644 $ 119,437
Add (Deduct) adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization....................................... 66,234 57,357 46,740
Deferred revenue and other credits.................................. 1,387 497 (3)
Loss on asset dispositions.......................................... 3,542 3,838 4,294
Change in prepaid expenses.......................................... (105) (22) 4
Change in accounts receivable....................................... (9) (37,422) (3,417)
Change in accounts payable and accrued expenses..................... 25,919 6,097 17,307
Change in other assets and liabilities.............................. (1,556) 4,942 3,967
------------ ------------ ------------
307,709 196,931 188,329
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable............................................. 692 -- (2,305)
Change in notes receivable.......................................... 3,354 (5) (3,751)
Principal payments on capital lease obligations..................... (800) (612) (442)
Capital contribution................................................ -- -- 2,474
Capital distribution................................................ (166,300) (111,461) (114,876)
------------ ------------ ------------
(163,054) (112,078) (118,900)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements...... (143,807) (86,011) (68,595)
(Increases) decreases in other assets............................... (44) 1,335 (856)
Change in deferred charges.......................................... (827) (202) (36)
Proceeds from sale of assets........................................ 34 26 61
------------ ------------ ------------
(144,644) (84,852) (69,426)
------------ ------------ ------------
NET INCREASE IN CASH.................................................... 11 1 3
CASH
Beginning of period................................................. 27 26 23
------------ ------------ ------------
End of period....................................................... $ 38 $ 27 $ 26
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these combined financial
statements.
53
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Balance at January 1, 1992...................................................... $ 300,252
Contributions................................................................. 2,474
Distributions................................................................. (114,876)
Net Income for the year ended December 31, 1992............................... 119,437
---------
Balance at December 31, 1992.................................................... 307,287
Distributions................................................................. (111,461)
Net Income for the year ended December 31, 1993............................... 161,644
---------
Balance at December 31, 1993.................................................... 357,470
Distributions................................................................. (166,300)
Net Income for the year ended December 31, 1994............................... 212,297
---------
Balance at December 31, 1994.................................................... $ 403,467
---------
---------
The accompanying notes are an integral part of these combined financial
statements.
54
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. BASIS OF COMBINATION:
The combined financial statements and notes thereto were compiled from the
individual financial statements of cellular limited partnerships listed below in
which United States Cellular Corporation (AMEX symbol "USM") has a
noncontrolling ownership interest and which it accounts for using the equity
method. The cellular partnerships, the period each partnership is included in
the combined financial statements and USM's ownership interest in each
partnership are set forth in the table below. The combined financial statements
and notes thereto present 100% of each partnership whereas USM's ownership
interest is shown in the table.
PERIOD INCLUDED LIMITED
IN COMBINED PARTNERSHIP
STATEMENTS INTEREST
--------------- -------------
Los Angeles SMSA Limited Partnership................................................................ 1992-94 5.5%
Nashville/Clarksville MSA Limited Partnership....................................................... 1992-94 49.0%
Baton Rouge MSA Limited Partnership................................................................. 1992-94 52.0%
Profits, losses and distributable cash are allocated to the partners based
upon respective partnership interests. Distributions are made quarterly at the
discretion of the General Partner for one of the Partnerships.
Of the partnerships included in the combined financial statements, the Los
Angeles SMSA Limited Partnership is the most significant, accounting for
approximately 89% of the combined total assets at December 31, 1994, and
substantially all of the combined net income for the year then ended.
USM's investment in and advances to Los Angeles SMSA Limited Partnership
totalled $17,675,000 as of December 31, 1994, of which $19,402,000 represents
its proportionate share of net assets of the Partnership. USM's investment in
and advances to the Nashville/Clarksville MSA Limited Partnership totalled
$17,360,000 as of December 31, 1994, which represents its proportionate share of
net assets. USM's investment in and advances to the Baton Rouge MSA Limited
Partnership totalled $10,660,000 as of December 31, 1994, $7,932,000 of which
represents its proportionate share of net assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR COMBINED ENTITIES:
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the following estimated lives:
Buildings.............................................. 10-15 years
Equipment.............................................. 3-10 years
Furniture and Fixtures................................. 5-10 years
Leasehold Improvements................................. 10 years
Property, Plant and Equipment consists of:
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
Land.................................................................................... $ 2,987 $ 1,819
Buildings and Leasehold Improvements.................................................... 100,312 79,704
Equipment............................................................................... 432,949 355,376
Furniture and Fixtures.................................................................. 33,602 19,734
Under Construction...................................................................... 55,176 32,052
----------- -----------
625,026 488,685
Less Accumulated Depreciation........................................................... 244,553 183,759
----------- -----------
$ 380,473 $ 304,926
----------- -----------
----------- -----------
55
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Included in buildings are costs relating to the acquisition of cell site
leases; such as legal, consulting, and title fees. Lease acquisition costs are
capitalized when incurred and amortized over the period of the lease. Costs
related to unsuccessful negotiations are expensed in the period the negotiations
are terminated.
Gains and losses on disposals are included in income at amounts equal to the
difference between net book value and proceeds received upon disposal.
During 1994, 1993 and 1992, one of the Partnerships recorded capital lease
additions of $687,000, $827,000 and $514,000, respectively.
Commitments for future equipment acquisitions amounted to $55,187,000 at
December 31, 1994.
On January 10, 1994, one of the Partnerships entered into an agreement with
its major supplier to purchase $77 million in equipment. At December 31, 1994,
approximately $11 million in equipment had been purchased by the Partnership
under the agreement.
OTHER ASSETS
Other assets consist primarily of the costs of acquiring the right to serve
certain customers previously served by resellers and are being amortized over
three years using the straight-line method. Accumulated amortization was
$5,656,000 and $4,806,000 at December 31, 1994 and 1993, respectively.
OTHER CURRENT ASSETS
Other current assets includes inventory consisting primarily of cellular
phones and accessories held for resale stated at average cost. Consistent with
industry practice, losses on sales of cellular phones are recognized in the
period in which sales are made as a cost of acquiring subscribers.
REVENUE RECOGNITION
Revenues from operations primarily consist of charges to customers for
monthly access charges, cellular airtime usage, and roamer charges. Revenues are
recognized as services are rendered. Unbilled revenues, resulting from cellular
service provided from the billing cycle date to the end of each month and from
other cellular carriers' customers using the partnership's cellular systems for
the last half of each month, are estimated and recorded as receivables. Unearned
monthly access charges and bundled service packages relating to the periods
after month-end are deferred and netted against accounts receivable and
recognized the following month when services are provided.
INCOME TAXES
No provisions have been made for federal or state income taxes since such
taxes, if any, are the responsibility of the individual partners.
3. LEASE COMMITMENTS:
Future minimum rental payments required under operating leases for real
estate that have initial or remaining noncancellable lease terms in excess of
one year as of December 31, 1994, are as follows:
(DOLLARS IN THOUSANDS)
1995.............................................................. $ 14,366
1996.............................................................. 13,836
1997.............................................................. 12,800
1998.............................................................. 12,240
1999.............................................................. 10,930
Thereafter........................................................ 20,916
---------
$ 85,088
---------
---------
56
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The initial lease terms generally range from 5 to 25 years with the majority
of them having initial terms of 10 years and providing for one renewal option of
5 years and for rental escalation. Included in selling, general and
administrative expense are rental costs of $17,750,000, $15,119,000 and
$10,938,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
One of the Partnerships leases office facilities under a ten-year lease
agreement which provides for free rent incentives for six months and rent
escalation over the ten-year period. The Partnership recognizes rent expense on
a straight-line basis and recorded the related deferred rent as a noncurrent
liability to be amortized as an adjustment to rental costs over the life of the
lease.
4. CAPITAL LEASE OBLIGATION:
One of the Partnerships leases equipment under capital lease agreements. At
December 31, 1994 and 1993, respectively, the amount of such equipment included
in property, plant and equipment is $3,645,000 and $3,324,000 less accumulated
amortization of $2,356,000 and $1,914,000. Future minimum annual lease payments
on noncancellable capital leases are as follows:
(DOLLARS IN THOUSANDS)
1995............................................................... $ 829
1996............................................................... 452
1997............................................................... 88
---------
Total future minimum lease payments................................ 1,369
Less amounts representing interest............................... 80
---------
Present value of net future minimum lease payments................. 1,289
Less current portion............................................. 769
---------
Lease obligation, noncurrent....................................... $ 520
---------
---------
5. RELATED PARTY TRANSACTIONS:
Certain affiliates of these cellular limited partnerships provide services
for the system operations, legal, financial, management and administration of
these entities. These affiliates are reimbursed for both direct and allocated
costs (totaling $57.6 million in 1994, $57.1 million in 1993 and $52.2 million
in 1992) related to providing these services. In addition, certain affiliates
have established a credit facility with certain partnerships to provide working
capital to the partnership. One of the partnerships participates in a
centralized cash management arrangement with its general partner. At December
31, 1994 and 1993, the interest-bearing balance amounted to $16,016,000 and
$29,981,000, respectively. Effective January 1, 1989, the general partner pays
or charges the Partnership monthly interest, computed using the general
partner's average borrowing rate, on the amounts due to or from the Partnership.
Interest earned in 1994, 1993 and 1992 was $1,480,000, $1,294,000 and
$1,396,000, respectively.
6. REGULATORY INVESTIGATIONS:
On December 21, 1993, the California Public Utilities Commission ("CPUC")
adopted a new Order Instituting Investigation into the regulation of mobile
telephone service and wireless communications, Order Number I.93-12-007. The
investigation proposes a regulatory program which would encompass all forms of
mobile telephone service.
On August 22, 1994, the CPUC issued an interim Decision that imposes a
methodology in which existing cellular carriers be subject to rate cap
regulation and other regulations, and requiring carriers, upon request, to
permit resellers to operate reseller switches interconnected to the cellular
carrier's facilities, to unbundle cellular access charges to resellers on a
market basis and to subsidize resellers' roaming revenues. The Decision further
authorized the CPUC to file a petition with the Federal Communications
Commission ("FCC") to extend the CPUC's jurisdiction over cellular carriers for
at least 18 months. Application for Rehearing and Suspension has been filed by
various carriers and is
57
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
pending with the CPUC. Currently, one of the Partnerships is unable to quantify
the precise impact of this Order on its future operations, but that impact may
be material to one of the Partnerships under certain circumstances.
In 1993, Congress amended Section 332 of the Communications Act in order to,
among other things, mandate a general federal preemption of state regulation of
entry and rates for cellular service providers. Congress established a mechanism
for states to petition for permission to continue whatever state rate regulation
actually existed as of June 1, 1993 for a period of time. It also established a
mechanism for those states that wanted to petition for the right to establish
new or modified rate regulations. On August 8, 1994, the CPUC filed a petition
with the FCC seeking to retain regulatory authority over cellular service rates
in California. In September 1994, opposition to this petition was filed. This
matter is pending with the FCC.
In January 1992, the CPUC commenced a separate investigation of all cellular
companies operating in the State to determine their compliance with General
Order number 159 (G.O. 159). This investigation addresses whether cellular
utilities have complied with local, state or federal regulations governing the
approval and construction of cellular sites in the State. The CPUC may advise
other agencies of violations in their jurisdictions. Currently, certain carriers
have agreed to monetary settlements as a result of this investigation.
One of the Partnerships has prepared and filed the information requested by
the CPUC. The CPUC will review the information provided by one of the
Partnerships and, if violations of G.O. 159 are found, it may assess penalties
against one of the Partnerships. The outcome of this investigation is uncertain
and, accordingly, no accrual for this matter has been made.
7. CONTINGENCIES AND COMMITMENTS:
One of the Partnerships filed for its 10-year license renewal for the Los
Angeles market on August 30, 1993. The Partnership had been operating with FCC
authority while the renewal application was pending. In January 1995, the
Partnership's license was renewed for a 10-year period.
In two separate actions filed, on October 7, 1993, and February 15, 1994,
now consolidated, two agents of the competing carrier have named one of the
Partnerships as a defendant. The general allegations include violations of
California Unfair Practices Act and price fixing. At a recent mandatory
settlement conference, plaintiffs asked for $6 million from all defendants to
settle the above claims ($2.5 million from one of the defendants, including the
Partnership). The proposed settlement offer has not been accepted. The ultimate
outcome of both of these actions is uncertain at this time. Accordingly, no
accrual for these contingencies has been made. The Partnership intends to defend
its position vigorously.
In May 1994, several former and current agents of the competing carrier have
named one of the Partnerships in only one cause of action. This cause of action
alleges a conspiracy with the competing carrier to fix the prices of cellular
service in violation of state antitrust laws. The plaintiffs are seeking damages
in excess of $100,000 for each of the plaintiff agents. The outcome of this
matter is uncertain and accordingly, the Partnership has not recorded an
accrual. The Partnership intends to defend its position vigorously.
On November 24, 1993, October 17, 1994 and November 30, 1994, three separate
class action (not yet certified) suits were filed against one of the
Partnerships alleging conspiracy with a competing carrier to fix the price of
cellular service in violation of state and federal antitrust laws. The
plaintiffs are seeking injunctive relief and substantial monetary damages in
excess of $100 million before trebling. The outcome of this matter is uncertain
and, accordingly, the Partnership has not recorded an accrual. The Partnership
intends to defend its position vigorously.
58
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
On July 18, 1994, a partner in one of the Partnerships was served with a
class action (not yet certified) suit on behalf of the Partnership's authorized
agents. The complaint alleges "predatory practices" and seeks damages in excess
of $1.6 million per agent, plus statutory treble damages. The outcome of this
matter is uncertain and, accordingly, the Partnership has not recorded an
accrual. The Partnership intends to defend its position vigorously.
In January 1995, the United States Department of Justice asserted that one
of the partners' parent company, including the Partnership, is a "successor" to
a Bell Operating Company and bound by Section II of the Modification of Final
Judgment entered in 1984 in the AT&T divestiture case. Section II imposes
certain restrictions relating to interexchange telecommunications and
telecommunications equipment manufacturing, among other things. A Complaint in
Intervention has been filed and is still pending. A standstill agreement has
been entered into which enables one of the partners' parent company, including
the Partnership, to operate as is. In the event of an adverse order in the
Complaint in Intervention proceeding, management does not expect that the impact
would be material to the Partnership's current operations. The outcome of this
matter is uncertain and, accordingly, the Partnership has not recorded an
accrual. The Partnership intends to defend its position vigorously.
One of the Partnerships is a party to various other lawsuits arising in the
ordinary course of business. In the opinion of management, based on a review of
such litigation with legal counsel, any losses resulting from these actions are
not expected to materially impact the financial condition of the Partnership.
Two of the Partnerships provide cellular service and sell cellular
telephones to diversified groups of consumers within concentrated geographical
areas. The general partner performs credit evaluations of the Partnerships'
customers and generally does not require collateral. Receivables are generally
due within 30 days. Credit losses related to customers have been within
management's expectations.
One of the Partnerships purchases substantially all of its equipment from
one supplier.
The General Partner of two of the Partnerships entered into agreements with
an equipment vendor on behalf of the Partnerships to replace the Partnerships'
cellular equipment with new cellular technology which will support both analog
and digital voice transmissions. Prior to replacement the Partnerships are
renting certain cellular equipment in order to meet demands relating to current
market growth.
59
[LOGO]
TELEPHONE AND DATA SYSTEMS, INC.
30 North LaSalle Street
Chicago, Illinois 60602
312/630-1900
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELEPHONE AND DATA SYSTEMS, INC.
By: /S/ LEROY T. CARLSON
------------------------------------------
LeRoy T. Carlson,
CHAIRMAN
By: /S/ LEROY T. CARLSON, JR.
------------------------------------------
LeRoy T. Carlson, Jr.,
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /S/ MURRAY L. SWANSON
------------------------------------------
Murray L. Swanson,
EXECUTIVE VICE PRESIDENT-FINANCE
(CHIEF FINANCIAL OFFICER)
By: /S/ GREGORY J. WILKINSON
------------------------------------------
Gregory J. Wilkinson,
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Dated March 24, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------------------------------------------------------- ----------- ---------------------
/S/ LEROY T. CARLSON DIRECTOR March 24, 1995
-----------------------------------------------
LeRoy T. Carlson
/S/ LEROY T. CARLSON, JR. DIRECTOR March 24, 1995
-----------------------------------------------
LeRoy T. Carlson, Jr.
/S/ MURRAY L. SWANSON DIRECTOR March 24, 1995
-----------------------------------------------
Murray L. Swanson
/S/ RUDOLPH E. HORNACEK DIRECTOR March 24, 1995
-----------------------------------------------
Rudolph E. Hornacek
/S/ JAMES BARR III DIRECTOR March 24, 1995
-----------------------------------------------
James Barr III
/S/ LESTER O. JOHNSON DIRECTOR March 24, 1995
-----------------------------------------------
Lester O. Johnson
/S/ DONALD C. NEBERGALL DIRECTOR March 24, 1995
-----------------------------------------------
Donald C. Nebergall
/S/ HERBERT S. WANDER DIRECTOR March 24, 1995
-----------------------------------------------
Herbert S. Wander
/S/ WALTER C.D. CARLSON DIRECTOR March 24, 1995
-----------------------------------------------
Walter C.D. Carlson
/S/ DONALD R. BROWN DIRECTOR March 24, 1995
-----------------------------------------------
Donald R. Brown
/S/ ROBERT J. COLLINS DIRECTOR March 24, 1995
-----------------------------------------------
Robert J. Collins
--------------------------------------------------------------------------------
INDEX TO EXHIBITS
--------------------------------------------------------------------------------
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------------ ------------------------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report
on Form 8-A/A-2 dated December 20, 1994.
3.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2
dated December 20, 1994.
4.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report
on Form 8-A/A-2 dated December 20, 1994.
4.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2
dated December 20, 1994.
4.3 The Indenture and Supplemental Indentures for the Company's Series A, B, C, D, E and F Subordinated Debentures are
not being filed as exhibits because the total authorized subordinated debentures do not exceed 10% of the total
assets of the Company and its Subsidiaries. The Company agrees to furnish a copy of such Indentures and
Supplemental Indentures if so requested by the Commission.
4.4 The Indenture between the Company and Harris Trust and Savings Bank, Trustee, dated February 1, 1991, under which
the Company's Medium-Term Notes are issuable, is hereby incorporated by reference to the Company's Current Report
on Form 8-K filed on February 19, 1991.
9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by reference to an exhibit to
Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-12943.
9.1(b) Amendment dated as of May 9, 1991 to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated
by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is
hereby incorporated by reference to Exhibit 9.1(c) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May 25, 1984 is
hereby incorporated by reference to the Company's Registration Statement on Form S-2, No. 2-92307.
10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981, is hereby
incorporated by reference to an exhibit to the Company's Registration Statement on Form S-7, No. 2-74615.
10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated as of May 28, 1991, is hereby incorporated by
reference to Exhibit 10.2(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson, is hereby incorporated
by reference to an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
10.4 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between the
Company and LeRoy T. Carlson, Jr., is hereby incorporated by reference to an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988.
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------------ ------------------------------------------------------------------------------------------------------------------
10.5 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company and James
Barr III, is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991.
10.6(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by reference to
Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated March 31, 1988.
10.6(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by
reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
10.6(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by
reference to Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
10.7 1985 Incentive Stock Option Plan of the Company, is hereby incorporated by reference to Exhibit A to the Company's
definitive Notice of Annual Meeting and Proxy Statement dated April 24, 1986.
10.8(a) Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1
to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.8(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.8(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to
Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.8(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.4 to the Company Registration statement on Form S-8 (Registration No. 33-57257).
10.8(c) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to
Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).
10.9 Supplemental Executive Retirement Plan of the Company.
11 Statement regarding computation of per share earnings.
12 Statements regarding computation of ratios.
13 Incorporated portions of 1994 Annual Report to Security Holders.
21 List of Subsidiaries of the Company.
23.1 Consent of independent public accountants.
23.2 Consent of independent accountants.
27 Financial Data Schedules
99 Incorporated portions of items as expected to be included in the 1995 Proxy Statement.