MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Telephone and Data Systems, Inc. ("TDS" or the "Company") provides high-quality
telecommunications services to over 1.9 million consolidated cellular telephone,
local telephone and radio paging customer units in 37 states and the District of
Columbia. The accompanying financial statements present the results of
operations of the Company's three primary businesses: United States Cellular
Corporation [AMEX: "USM"], TDS Telecommunications Corporation ("TDS Telecom"),
and American Paging, Inc. [AMEX: "APP"], as well as its developing personal
communications services business, American Portable Telecom, Inc. ("American
Portable") and TDS and its service subsidiaries.
TDS's long-term business development strategy is to expand its operations
through internal growth and acquisitions, and to explore and develop
telecommunications businesses that management believes utilize TDS's expertise
in customer-based telecommunications.
CONSOLIDATED
TDS reported net income available to common of $102.0 million, or $1.74 per
share, in 1995, compared to $58.0 million, or $1.07 per share, in 1994 and $31.5
million, or $.67 per share, in 1993. Consolidated operating results for 1995 and
1994 primarily reflect:
/ / rapid growth in cellular customer units resulting in substantial
increases in revenue, operating income and operating cash flows;
/ / steady growth in telephone access lines and revenues;
/ / slower growth in pagers served and higher operating costs coupled with
a restructuring charge in the paging business unit resulting in a
sharp decline in paging operating income for 1995;
/ / significant gains and cash proceeds from sales and trades of non-
strategic cellular interests and other investments in 1995; and
/ / increased interest expense to finance continuing development of core
cellular and telephone operations and expansion into personal
communications services.
Net income available to common for 1995 was boosted by significant gains from
the sales of non-strategic cellular interests and other investments. Excluding
these gains, along with the related impact on income taxes and minority
interest, net income available to common would have been $61.4 million, or $1.05
per share, in 1995, compared to $52.2 million, or $.96 per share, in 1994 and
$29.2 million, or $.62 per share, in 1993.
YEAR ENDED DECEMBER 31,
1995 1994 1993
-----------------------------------------------
(Dollars in millions, except per share amounts)
NET INCOME AVAILABLE TO COMMON
As Reported $ 102.0 $ 58.0 $ 31.5
Less Effects of Gains 40.6 5.8 2.3
--------------------------------------------
Excluding Gains $ 61.4 $ 52.2 $ 29.2
--------------------------------------------
--------------------------------------------
EARNINGS PER SHARE
As Reported $ 1.74 $ 1.06 $ .67
Less Effects of Gains .69 .10 .05
--------------------------------------------
Excluding Gains $ 1.05 $ .96 $ .62
--------------------------------------------
--------------------------------------------
OPERATING REVENUES increased 31% ($223.6 million) during 1995 and 31% ($173.0
million) during 1994 primarily as a result of increases in customer units
served. Consolidated cellular telephone, telephone and radio paging customer
units increased 31% in 1995 and 36% in 1994 primarily through internal growth.
The rate of customer unit growth declined in 1995 due primarily to the slower
rate of growth of paging customer units.
Cellular telephone revenues increased $160.0 million in 1995 and $118.1 million
in 1994 on 69% and 61% increases in customer units and strong increases
in inbound roaming revenues. Telephone revenues increased $48.5 million in 1995
and $38.2 million in 1994 as a result of acquisitions, increased network usage,
recovery of increased costs of providing long-distance services and internal
access line growth of 5% in each year. Radio paging revenues increased $15.1
million in 1995 and $16.7 million in 1994 on 20% and 42% increases in paging
units in service.
OPERATING EXPENSES rose 32% ($200.4 million) in 1995 and 27% ($133.9 million) in
1994 due primarily to added expenses to serve the growing customer base.
Cellular telephone operating expenses increased $134.6 million during 1995 and
$92.1 million during 1994 due to the effects of additional marketing and selling
expenses incurred to add new customers as well as the costs of providing
services to the increased customer base. Telephone operating expenses increased
$41.9 million during 1995 and $25.7 million during 1994 due to the effects of
acquisitions and growth in internal operations. Paging operating expenses
increased $23.9 million in 1995 and $16.1 million in 1994 due to additional
costs to serve current customers and to add new customers as well as additional
1995 expenses to restructure certain business processes.
OPERATING INCOME increased 21% ($23.2 million) in 1995 and 56% ($39.1 million)
in 1994 due to improved cellular and telephone operating results offset somewhat
in 1995 by the sharp decline in paging operating results.
Cellular telephone operating income increased $25.4 million in 1995 and $26.0
million in 1994. Telephone operating income increased $6.6 million in 1995 and
$12.5 million in 1994. Paging operating loss increased $8.8 million in 1995
after declining $600,000 in 1994.
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------------
(Dollars in thousands)
Operating Income
Cellular telephone $ 42,755 $ 17,385 $ (8,656)
Telephone 98,240 91,606 79,110
Radio paging (8,997) (169) (721)
---------------------------------------------
$ 131,998 $ 108,822 $ 69,733
---------------------------------------------
---------------------------------------------
Operating Margins
Cellular telephone* 9.0% 5.5% (4.2%)
Telephone** 29.2% 30.8% 29.5%)
Radio paging* (9.7%) (.2%) (1.1%)
Consolidated 13.8% 14.9% 12.5%)
---------------------------------------------
---------------------------------------------
*Computed on Service Revenues
**Local Telephone Operating Margin
Management anticipates continued growth in consolidated customer units and
revenues as the business units continue their expansion and development
programs. The rate of revenue growth is expected to be somewhat slower as
cellular and paging revenue per unit continues to decline. Expenses should
increase driven by customer growth, although at a slower rate than revenues,
yielding continued growth in operating income and operating cash flow.
INVESTMENT AND OTHER INCOME totalled $103.9 million in 1995, $33.7 million in
1994 and $28.1 million in 1993.
CELLULAR INVESTMENT INCOME, the Company's share of income of cellular markets in
which the Company has a minority interest and follows the equity method of
accounting, increased 56% ($14.6 million) in 1995 and 66% ($10.3 million) in
1994 as income from the cellular markets increased. Cellular investment income
is net of amortization of license costs relating to these minority interests.
GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totalled $86.6 million
in 1995, $7.5 million in 1994 and $5.0 million in 1993 as the Company has sold
or traded non-strategic cellular interests and sold other investments.
PCS DEVELOPMENT COSTS totalled $7.8 million in 1995 and $1.7 million in 1994
representing expenses incurred by TDS and American Portable to participate in
the Federal Communications Commission ("FCC") auction process, to build American
Portable's management and operating teams and to develop American Portable's
strategic and operational plans for the future deployment of per-
sonal communications services ("PCS"). American Portable spent approximately
$289 million on the purchase of the PCS licenses. Amortization of the licenses
will begin upon commencement of operations in early 1997. The Company expects to
incur significant expenditures for the development of PCS activities during 1996
and 1997.
MINORITY SHARE OF INCOME includes (a) minority shareholders' share of USM's net
income (1995 and 1994) or loss (1993), (b) minority partners' share of income or
loss of majority-owned cellular markets, (c) minority shareholders' share of
income of majority-owned telephone companies, and (d) minority shareholders'
share of APP's loss in 1995 and 1994.
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------------
(Dollars in thousands)
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share $ (19,046) $ (2,740) $ 4,270
Minority
Partners Share (7,902) (5,152) (3,496)
---------------------------------------------
(26,948) (7,892) 774
Telephone
Subsidiaries (1,691) (1,420) (1,249)
American Paging 2,781 233 --
---------------------------------------------
$ (25,858) $ (9,079) $ (475)
---------------------------------------------
---------------------------------------------
INTEREST EXPENSE increased 23% ($9.6 million) in 1995 and 10% ($3.8 million) in
1994. USM sold $745 million principal amount at maturity of 6% zero coupon
convertible debt in June 1995, realizing approximately $221.5 million.
Amortization of the related bond discount, a non-cash item, increased interest
expense $7.4 million in 1995. USM has also financed certain equipment purchases
and construction costs under a vendor financing agreement. The average amount
outstanding under the vendor arrangement increased $54.0 million in 1995,
increasing interest expense $5.3 million. TDS Telecom interest expense increased
$1.4 million in 1995 and $900,000 in 1994 due primarily to additional interest
expense of acquired telephone companies.
TDS has used short-term debt supplemented by proceeds from the sale of Medium-
Term Notes to fund the acquisition of PCS licenses, to fund paging operations
and for general corporate purposes. Corporate interest expense increased $8.6
million in 1995 and $2.9 million in 1994. Average short-term debt increased
$89.2 million in 1995 and $18.2 million in 1994. The average interest rate
jumped to 6.4% in 1995 from 5.2% in 1994. TDS capitalized a total of $13.2
million of interest related to the development of PCS licenses in 1995. See
"Financial Resources and Liquidity" for a further discussion of short and long-
term debt.
INCOME TAX EXPENSE increased 99% ($40.3 million) in 1995 and 54% ($14.2 million)
in 1994, reflecting primarily the 83% and 68% increases in pretax income. The
effective income tax rates were 44% in 1995, 40% in 1994, and 44% in 1993. The
lower 1994 rate reflects deferred income taxes provided on the book/tax basis
difference related to certain telephone acquisitions and certain income excluded
due to the dividend exclusion rules.
NET INCOME AVAILABLE TO COMMON was $102.0 million in 1995, $58.0 million in 1994
and $31.5 million in 1993. The increase in 1995 from 1994 reflects the increase
in gain on the sales of cellular interests and other investments of
$34.8 million (after income taxes and minority shareholders' share), and the
continued improvement in operating results of the cellular business offset
somewhat by increased paging losses and PCS development expenses. The increase
in 1994 from 1993 reflects the significant improvement in operating results for
the cellular and telephone segments.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in American Portable's major markets will reduce the rate
of growth in TDS's operating and net income from levels which would otherwise be
achieved during the next few years.
EARNINGS PER COMMON SHARE were $1.74 in 1995, $1.06 in 1994 and $.67 in 1993.
The increases in earnings per share reflect the 76% and 84% increases in net
income available to common, offset somewhat by the 8% and 15% increases in
weighted average common shares outstanding in 1995 and 1994, respectively.
TELECOMMUNICATIONS ACT OF 1996. On February 8, 1996, the Telecommunications Act
of 1996 was signed into law. The new law is deregulatory and pro-competition but
also contains special pro-rural provisions which continue such principles as
universal service and toll rate averaging. All TDS Telecom companies fit the
definition of a rural telephone company. The new law will provide TDS Telecom
with some protection from competitors, while also providing opportunities to
grow its business. During the next 15 months, the FCC will be initiating and
managing various rulemaking proceedings to establish the necessary rules to
implement the law. State Commissions will also be involved in the implementation
of the law and FCC rules and will monitor the actions and progress of carriers
in their respective states. TDS Telecom will be actively participating in this
process with the goal that the pro-rural provisions of the law are translated
into effective rules.
CELLULAR TELEPHONE OPERATIONS
TDS provides cellular telephone service through United States Cellular
Corporation [AMEX: "USM"], an 80.8%-owned subsidiary. USM owns, operates and
invests in cellular markets.
Consolidated results of operations include 710,000 customer units in 137 markets
at the end of 1995 compared to 421,000 customer units in 130 markets at the end
of 1994 and 261,000 customer units in 116 markets at the end of 1993. USM
follows the equity method of accounting for its investments in minority-owned
and managed markets and the more significant minority-owned markets managed by
others. USM follows the cost method of accounting for its investments in
minority-owned markets managed by others which are being held for sale or
exchange. In the aggregate, USM had rights to interests in 201 cellular
telephone markets representing 24.5 million population equivalents at December
31, 1995.
Operating results for 1995 and 1994 primarily reflect the rapid customer
growth in USM's consolidated markets. Operating revenue increases were driven
by the 69% and 61% growth in consolidated customer units in 1995 and 1994,
respectively. Operating expenses increased due to increased marketing costs
related to the rapid customer growth, increased customer usage and the costs
associated with operating an increased number of cell sites. Operating
expenses increased at a slower rate than the increase in revenues due to
improving economies of scale and continued improvements in business
processes. Operating cash flow (operating income plus depreciation and
amortization) increased 60% to $132.2 million in 1995 from $82.8 million in
1994 and $36.4 million in 1993. Operating income more than doubled to $42.8
million in 1995 compared to $17.4 million in 1994 and an operating loss of
$8.7 million in 1993.
YEAR ENDED OR AT DECEMBER 31,
1995 1994 1993
-----------------------------------------
(Dollars in thousands, except per customer amounts)
Operating Revenues
Local service $ 289,518 $ 187,978 $ 117,610
Inbound roaming 148,020 104,009 70,109
Long-distance 35,228 22,796 13,965
Other 3,868 3,866 2,116
-----------------------------------------
Service Revenues 476,634 318,649 203,800
Equipment sales 15,761 13,755 10,510
-----------------------------------------
492,395 332,404 214,310
-----------------------------------------
Operating Expenses
System operations 70,442 46,869 34,301
Marketing and selling 102,361 69,072 43,478
Cost of
equipment sold 54,948 39,431 25,688
General and
administrative 132,431 94,193 74,472
Depreciation 57,302 39,520 25,665
Amortization 32,156 25,934 19,362
-----------------------------------------
449,640 315,019 222,966
-----------------------------------------
Operating
Income (Loss) $ 42,755 $ 17,385 $ (8,656)
-----------------------------------------
-----------------------------------------
Cellular telephone
revenues as a percent
of total revenues 52% 45% 38%
Additions to property,
plant and equipment $ 218,506 $ 158,453 $ 94,088
Identifiable assets $ 1,890,621 $ 1,584,142 $ 1,275,569
-----------------------------------------
-----------------------------------------
Consolidated Markets:
Customers 710,000 421,000 261,000
Market penetration 3.18% 1.98% 1.35%
Cell sites in service 1,116 790 522
Average monthly
service revenue
per customer $ 72.48 $ 79.74 $ 84.83
Churn rate per month 2.1% 2.3% 2.3%
Marketing cost per
gross customer
addition $ 361 $ 408 $ 414
-----------------------------------------
-----------------------------------------
OPERATING REVENUES increased 48% ($160.0 million) in 1995 and 55% ($118.1
million) in 1994. The revenue increases in 1995 and 1994 were primarily
attributable to increases in the number of local retail customers, growth in
inbound roaming revenues and the effect of acquisitions. Acquisitions increased
operating revenues 13% ($44.2 million) in 1995 and 12% ($25.5 million) in 1994.
Average monthly revenue per customer was $72 in 1995, $80 in 1994 and $85 in
1993. The decline in average monthly revenue per customer reflects the industry-
wide
trend of newer customers tending to use fewer minutes per month, per minute
price decreases, incentives for using lower-priced off-peak minutes and the
declining contribution of inbound roaming revenue per customer.
LOCAL SERVICE REVENUE, from local customers' usage of USM's systems, increased
54% ($101.5 million) in 1995 and 60% ($70.4 million) in 1994. The revenue
increases were primarily the result of the 69% and 61% customer growth,
respectively, in consolidated markets.
Local minutes of use averaged 95 per month in 1995 and 1994 and 103 in 1993.
Average monthly local retail revenue per customer was $44 in 1995, $47 in 1994
and $49 in 1993. The decline in average local revenue per customer in 1995 was
primarily a result of USM's use of incentive programs to increase lower-priced
weekend and off-peak usage. The 1994 decline was primarily related to the
decrease in average minutes of use per customer. The industry trend of declining
average monthly minutes of use and average monthly retail revenue per customer
is believed to be related to the tendency of early customers in a market to be
the heaviest users during peak business hours. Newer customers are a result of
continued penetration of the consumer market, which tends to include fewer peak
business hour usage customers. USM believes local retail revenue per customer
will continue to decrease due to the usage patterns of incrementally added
customers.
INBOUND ROAMING REVENUE (charges to customers of other systems who use USM's
cellular systems when roaming) increased 42% ($44.0 million) in 1995 and 48%
($33.9 million) in 1994. The increase is attributable to an increase in the
number of customers from other systems using USM's systems as well as an
increased number of cell sites within those systems offset somewhat by a
reduction in the average price per minute. Average monthly inbound roaming
revenue per customer was $23, $26 and $29 in 1995, 1994 and 1993, respectively.
LONG-DISTANCE AND OTHER REVENUE increased 47% ($12.4 million) in 1995 and 66%
($10.6 million) in 1994 as the volume of long-distance calls billed by USM
increased. Average monthly long-distance and other revenue per customer was $5,
$7 and $7 in 1995, 1994 and 1993, respectively.
EQUIPMENT SALES REVENUE reflects the sale of cellular telephone units. The
average revenue per telephone unit sold was $53 in 1995, $90 in 1994 and $127 in
1993. The decline in average revenue per unit reflects USM's decision to reduce
sales prices on cellular telephones to increase the number of customers, to
maintain its market position and to meet competitive prices, as well as to pass
through reduced manufacturers' prices.
OPERATING EXPENSES increased 43% ($134.6 million) in 1995 and 41% ($92.1
million) in 1994. The increases were primarily due to increased marketing costs
related to increased customer activations, a larger customer base, acquisitions
and increased depreciation and amortization expense related to increases in
fixed assets and license costs. Acquisitions increased operating expenses 13%
($40.7 million) in 1995 and 14% ($30.9 million) in 1994.
SYSTEM OPERATIONS EXPENSES increased 50% ($23.6 million) in 1995 and 37% ($12.6
million) in 1994 as a result of increases in customer usage expenses and costs
associated with operating the increased number of cell sites.
Customer usage expenses represent charges from other telecommunications service
providers for local intercon-
nection to the landline network, toll charges and roaming expenses from USM's
customers' use of systems other than their local systems, offset somewhat by
pass-through roaming revenue. Customer usage expenses grew 62% ($13.4 million)
in 1995 and 19% ($3.5 million) in 1994 as minutes used on USM's systems
increased, primarily related to the 69% increase in customers and increased
inbound roaming usage.
Maintenance, utility and cell site expenses grew 40% ($10.2 million) in 1995 and
56% ($9.1 million) in 1994 reflecting the 41% and 51% growth in the number of
cell sites, respectively. The number of cell sites operated increased to 1,116
in 1995 from 790 in 1994 and 522 in 1993.
MARKETING AND SELLING EXPENSES increased 48% ($33.3 million) in 1995 and 59%
($25.6 million) in 1994. Marketing and selling expenses consist primarily of
personnel costs, commissions, retail office expenses, advertising and
promotional expenses. These expenses grew in 1995 and 1994 due to the increased
number of gross customer activations. COST OF EQUIPMENT SOLD reflects the cost
of increased unit sales discussed above, offset somewhat by falling
manufacturers' prices per unit. The average cost of a telephone unit sold was
$186 in 1995, $258 in 1994 and $309 in 1993. Cost per gross customer addition
(marketing and selling expenses and cost of equipment sold less equipment
revenues divided by gross customer additions) decreased to $361 in 1995 from
$408 in 1994 and $414 in 1993.
GENERAL AND ADMINISTRATIVE EXPENSES increased 41% ($38.2 million) in 1995 and
26% ($19.7 million) in 1994. These expenses include the cost of operating USM's
local business offices and its corporate expenses. The increases include the
effects of an increase in expenses required to serve the growing customer base
in existing markets and an expansion of both local administrative office and
corporate staff, necessitated by growth in USM's business and the acquisition of
additional operations. USM is using an ongoing clustering strategy to combine
local operations wherever feasible in order to gain operational efficiencies and
reduce its administrative expenses.
DEPRECIATION EXPENSE increased 45% ($17.8 million) in 1995 and 54% ($13.9
million) in 1994, reflecting increases in average fixed asset balances of 48%
and 54%, respectively. AMORTIZATION EXPENSE, primarily amortization of
license costs, increased 24% ($6.2 million) in 1995 and 34% ($6.6 million) in
1994 due to increases in license costs.
OPERATING INCOME was $42.8 million in 1995 and $17.4 million in 1994, compared
to an operating loss of $8.7 million in 1993. Operating margin on service
revenues improved to 9.0% in 1995 from 5.5% in 1994 and (4.2%) in 1993. The
improvement in 1995 and 1994 was primarily due to the growth in the customer
base and the increase in roaming revenue.
The Company expects service revenues to continue to grow in 1996 as customers
are added to USM's markets and as it realizes a full year of revenue from
customers and additional retail and roaming revenue from cell sites added in
1995. However, management anticipates that average monthly revenue per customer
will continue to decrease as local retail revenue per minute of use declines and
as the growth rate of the Company's customer base exceeds the growth rate of
inbound roaming revenue, diluting the roaming contribution per customer. The
Company also expects expenses to continue to increase in 1996 as it incurs a
full year of expenses for markets and cell sites added in 1995 and it incurs
expenses associated with customer and system growth.
Additionally, management believes there exists a seasonality at USM in both
service revenues, which tend to increase more slowly in the first and fourth
quarters, and operating expenses, which tend to be higher in the fourth quarter
due to increased marketing activities and customer growth. This seasonality may
cause operating income to vary from quarter to quarter.
TELEPHONE OPERATIONS
TDS manages its local landline telephone service through its wholly
owned subsidiary TDS Telecommunications Corporation ("TDS Telecom").
TDS Telecom operates 100 telephone companies which serve 425,900
access lines in 28 states. It also operates a small, long-distance company.
TDS Telecom expands its operations through internal access line growth and
acquisitions. During the last three years, a total of 50,900 access lines
have been added through internal growth and 53,300 access lines through
acquisitions.
Operating results for 1995 and 1994 primarily reflect increases in access lines
of 9% in 1995 and 10% in 1994 due to internal growth and acquisitions. Operating
cash flow increased 9% to $175.6 million in 1995 compared to an increase of 16%
to $160.5 million in 1994. The rate of growth of operating cash flow slowed in
1995 due to the effects of earnings pressures from regulatory agencies
and long-distance providers and increased operating expenses. TDS Telecom
continues to provide steadily growing operating cash flow and earnings to
support its construction activities.
Year Ended or at December 31,
1995 1994 1993
---------------------------------------------------
(Dollars in thousands, except per customer amounts)
Local Telephone Operations
Operating Revenues
Local service $ 94,964 $ 81,986 $ 72,191
Network access and
long-distance 195,575 174,178 159,111
Miscellaneous 41,625 40,399 36,820
---------------------------------------------------
332,164 296,563 268,122
---------------------------------------------------
Operating Expenses
Network operations 54,086 45,033 42,524
Depreciation 69,890 64,060 56,024
Amortization 4,898 3,894 3,538
Customer operations 47,322 42,618 39,416
Corporate and other 59,084 49,706 47,510
---------------------------------------------------
235,280 205,311 189,012
---------------------------------------------------
Local Telephone
Operating Income 96,884 91,252 79,110
---------------------------------------------------
Long-distance Operations
Revenues 22,677 9,778 --
Expenses 21,321 9,424 --
---------------------------------------------------
Long-distance
Operating Income 1,356 354 --
---------------------------------------------------
Operating Income $ 98,240 $ 91,606 $ 79,110
---------------------------------------------------
---------------------------------------------------
Telephone revenues
as a percent of
total revenues 37% 42% 48%
Additions to property,
plant and equipment $ 101,139 $ 117,867 $ 82,233
Identifiable assets 1,058,241 984,563 829,489
Telephone plant
in service
per access line $ 2,356 $ 2,283 $ 2,205
---------------------------------------------------
---------------------------------------------------
Companies 100 96 94
Access lines 425,900 392,500 356,200
Growth in access lines
from prior year-end:
Acquisitions 13,500 19,700 20,100
Internal growth 19,900 16,600 14,400
Average monthly
revenue per
access line $ 66.80 $ 66.60 $ 65.30
---------------------------------------------------
---------------------------------------------------
OPERATING REVENUES from local telephone operations increased 12% ($35.6 million)
in 1995 and 11% ($28.4 million) in 1994. The increases in revenues were due to
the effects of acquisitions, increased network usage, internal access line
growth and the recovery of increased costs of providing long-distance services.
Acquisitions increased local telephone revenues 6% ($16.8 million) in 1995 and
4% ($9.7 million) in 1994.
Excluding the effects of acquisitions, local telephone revenues increased 6%
($18.8 million) in 1995 and 7% ($18.8 million) in 1994.
LOCAL SERVICE REVENUES increased 10% ($8.4 million) in 1995 and 11% ($8.1
million) in 1994, excluding the effects of acquisitions. Internal growth in
access lines and sales of custom-calling and other features increased local ser-
vice revenues approximately $5.5 million in 1995 and $4.8
million in 1994. Certain extended community calling ("ECC") revenues previously
reported as network access revenues and changes in settlement plans increased
local service revenues approximately $3.4 million in 1995 and $1.6 million in
1994.
NETWORK ACCESS AND LONG-DISTANCE REVENUES increased 6% ($10.5 million) in 1995
and 5% ($8.5 million) in 1994, excluding the effects of acquisitions. Recovery
of increased costs of providing access to long-distance carriers increased
revenues $4.5 million in 1995 and $4.1 million in 1994. Settlements received
from toll pools relating to prior years' activity increased these revenues by
$1.7 million in 1995, while a $3.4 million decrease in these revenues resulted
from the reclassification of ECC revenues to local service revenues. Changes in
FCC-mandated cost separations rules increased revenues $1.3 million in 1994. The
remainder of the revenue increase in 1995 and 1994 was primarily due to
increased minutes of use, increases in access lines served and changes
in rates of return.
MISCELLANEOUS REVENUES, excluding the effects of acquisitions, remained
relatively unchanged in 1995 and increased 6% ($2.2 million) in 1994.
OPERATING EXPENSES from local telephone operations increased 15% ($30.0 million)
in 1995 and 9% ($16.3 million) in 1994. The effects of acquisitions increased
expenses 7% ($13.8 million) in 1995 and 4% ($7.2 million) in 1994.
NETWORK OPERATIONS EXPENSE INCREASED 14% ($6.3 million) in 1995 and 1%
($500,000) in 1994, net of acquisitions. Network operations expense consists of
costs to maintain the high-quality telecommunications networks which
provide advanced telecommunications services. The increase in 1995 includes a
$2.0 million charge for additional routine maintenance activity and write-offs
of equipment. The remaining increase in 1995 and the increase in 1994 were
primarily due to salary and work force changes.
CUSTOMER OPERATIONS EXPENSE increased 5% ($2.2 million) in 1995 and 5% ($2.0
million) in 1994, net of acquisitions. Customer operations expense includes
costs for marketing, sales, product management, as well as expenses for
establishing and servicing customer accounts. The increases were due primarily
to salary and workforce changes.
CORPORATE AND OTHER EXPENSES increased 10% ($5.2 million) in 1995 and 1%
($500,000) in 1994, net of acquisitions. Corporate and other expenses consist of
costs incurred for executive administration and management, accounting, human
resource management, information management, legal services and property and
other non-income taxes. The increase in 1995 relates to increased property and
non-income taxes and marketing, advertising and start-up costs for non-regulated
activities as well as salary and work force changes.
DEPRECIATION AND AMORTIZATION EXPENSE increased 4% ($2.5 million) in 1995 and
10% ($6.0 million) in 1994, excluding the effects of acquisitions. The increase
in depreciation expense is primarily due to growth in plant and equipment. Lump-
sum depreciation adjustments and increases in certain depreciation rates
increased these expenses 4% ($2.4 million) in 1994. The composite depreciation
rate was 7.1% in 1995, 7.5% in 1994 and 7.3% in 1993.
LONG-DISTANCE OPERATIONS represents revenues and expenses from a small, long-
distance operation acquired in August 1994.
OPERATING INCOME from telephone operations increased 7% ($6.6 million) in 1995
and 16% ($12.5 million) in 1994. The effects of acquisitions increased operating
income 4% ($3.8 million) in 1995 and 4% ($2.8 million) in 1994. The local
telephone operating margin, excluding long-distance operations, was 29.2% in
1995, 30.8% in 1994 and 29.5% in 1993. The reduction in operating margin in 1995
was caused by earnings pressures from regulatory agencies and long-distance
providers and increased operating expenses.
Management expects TDS Telecom's revenues, operating income and operating cash
flow to continue to increase modestly in 1996 from steady growth in operations.
Continued pressures on revenue sources, however, may cause operating margins to
be somewhat reduced in future periods.
TDS Telecom is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." As of December 31, 1995, all seven Bell Companies and a few major
independent local exchange carriers have discontinued the application of SFAS 71
for external reporting purposes. Criteria that would give rise to the
discontinuance of SFAS No. 71 at TDS Telecom include: 1) increasing competition
that would restrict TDS Telecom's ability to establish prices to recover
specific costs, and 2) a significant change in the manner in which rates are set
by regulators from cost-based regulation to another form of regulation. These
criteria are reviewed on a state-by-state basis to determine whether continued
application of SFAS No. 71 is appropriate. The Company has no current plans to
change its method of accounting.
In analyzing the effect of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore any adjustments to accumulated
depreciation would be immaterial. The net effect of a write-off of regulatory
assets and liabilities would also be immaterial.
RADIO PAGING OPERATIONS
TDS manages its radio paging business through American Paging, Inc. [AMEX:
"APP"], an 82.3%-owned sub-sidiary. APP provides wireless messaging
communications through 38 sales and service operating centers in 14 states and
the District of Columbia. At December 31, 1995, APP served 784,500 customers
through its digital radio transmission systems covering an area with a total
population of approximately 75 million. During the last three years, APP has
added 385,600 customers through internal growth and 76,700 customers through
acquisitions.
During 1995, American Paging announced a plan to restructure key operating areas
which began in the third quarter and will extend into 1996. Upon completion of
the plan, APP is targeting increased sales through the direct channel, an
improved customer mix, a lower level of administrative costs and improved
customer service. As a part of the plan, APP is consolidating its 17 service
operating centers into a single center. APP recorded restructuring charges of
$2.9 million in the last half of 1995.
American Paging experienced a slowing of growth in customers during the last
half of 1995 as a result of disruptions due to staff reductions, the
announcement of the consolidation of administrative offices and the realignment
of its sales force which was done to place greater emphasis on the direct
distribution channel. As a result, combined with the restructuring charges,
operating cash flow decreased 8% to $15.7 million in 1995 compared to an
increase of 34% to $17.0 million in 1994. APP expects slower unit and revenue
growth through the next several quarters as a result of refocusing the sales
force and retraining customer service representatives. The slower revenue growth
along with the additional costs of the restructuring activities
may result in operating losses for the next several quarters.
Year Ended December 31,
1995 1994 1993
---------------------------------------------------
(Dollars in thousands)
Service Operations
Revenues $ 93,034 $ 77,520 $ 64,384
---------------------------------------------------
Costs and expenses
Cost of services 24,062 19,347 15,837
Selling and
advertising 15,988 13,249 11,131
General and
administrative 37,308 27,947 24,783
Depreciation 20,659 14,537 11,182
Amortization 4,033 2,641 2,210
---------------------------------------------------
102,050 77,721 65,143
---------------------------------------------------
Service
Operating (Loss) (9,016) (201) (759)
---------------------------------------------------
Equipment Sales
Revenues 14,116 14,545 10,979
Cost of equip-
ment sold 14,097 14,513 10,941
---------------------------------------------------
Equipment Sales
Income 19 32 38
---------------------------------------------------
Operating (Loss) $ (8,997) $ (169) $ (721)
---------------------------------------------------
---------------------------------------------------
Year Ended or at December 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands, except per unit amounts)
Radio paging revenues
as a percent of
total revenues 11% 13% 14%
Additions to property
and equipment $ 28,994 $ 27,403 $ 24,813
Identifiable assets $ 159,170 $ 146,107 $ 74,923
----------------------------------------
----------------------------------------
Pagers in service 784,500 652,800 460,900
Average monthly service
revenue per unit $ 10.57 $ 11.92 $ 13.65
Transmitters in service 1,018 943 685
Churn rate per month 2.5% 2.6% 2.9%
Marketing cost per
gross customer
unit addition $ 50 $ 41 $ 42
----------------------------------------
----------------------------------------
SERVICE REVENUES increased 20% ($15.5 million) in 1995 and 20% ($13.1 million)
in 1994, primarily as a result of growth in the number of pagers in service.
Pagers in service increased 20% (131,700, including 28,400 from acquisitions) in
1995 and 42% (191,900, including 37,600 from an acquisition) in 1994.
Average monthly service revenue per unit declined 11% to $10.57 in 1995 and 13%
to $11.92 in 1994. The decline in average revenue per unit reflects the shift
during 1993 to lower revenue producing reseller channels as well as competitive
pressures. APP refocused its marketing strategy in mid-1995 to the higher
revenue producing direct distribution channel. Reseller units comprised 49% of
net unit sales in 1995, 53% in 1994 and 39% in 1993. Average revenue per
reseller unit is approximately 30% of the average revenue per direct unit.
SERVICE OPERATING EXPENSES increased 31% ($24.3 million) in 1995 and 19% ($12.6
million) in 1994 primarily due to additional costs to serve the expanded
customer base, add new customers, increase system capacity and geographic
coverage, and the added 1995 restructuring expenses.
COST OF SERVICES increased 24% ($4.7 million) in 1995 and 22% ($3.5 million) in
1994 due to additional costs to provide service to the increased customer base,
and the costs of maintaining, upgrading and expanding systems to improve system
reliability and coverage.
SELLING AND ADVERTISING EXPENSE increased 21% ($2.7 million) in 1995 and 19%
($2.1 million) in 1994 due to the increased number of sales personnel and
advertising expenses. The cost per gross customer addition, excluding customers
added through acquisitions, was $50 in 1995 compared to $41 in 1994 and $42 in
1993.
GENERAL AND ADMINISTRATIVE EXPENSE increased 33% ($9.4 million) in 1995 and 13%
($3.2 million) in 1994 due to increases in administrative personnel costs, bad
debt expenses and general office expenses to support the growing customer base.
Costs related to the restructuring of operations, including costs associated
with closing excess office space and employee severance and related costs,
increased expenses $2.1 million in 1995.
DEPRECIATION AND AMORTIZATION charges increased 44% ($7.5 million) in 1995 and
28% ($3.8 million) in 1994, reflecting increased investment in pagers and
related equipment, and the effects of acquisitions. Based on a study of useful
lives, APP shortened the estimated useful lives of pagers and
transmitters beginning July 1, 1994. This change increased depreciation expense
by approximately $1.7 million in 1995 and $1.5 million in 1994. During 1995, an
$800,000 charge was incurred to write off certain assets expected
to be retired as a result of the restructuring.
OPERATING LOSS was $9.0 million in 1995, $200,000 in 1994 and $700,000 in 1993.
BROADBAND PERSONAL
COMMUNICATIONS SERVICES
TDS manages its broadband personal communications services business through
American Portable Telecom, Inc. ("American Portable"), a wholly owned
subsidiary. American Portable's licenses cover the Major Trading Areas of
Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus and account for approximately 27.3 million population equivalents.
American Portable filed a registration statement on February 20, 1996 for an
initial public offering of approximately 16% of its Common Shares.
Management anticipates that the construction of the cell sites will begin in the
second quarter of 1996, following the completion of detailed engineering and
site acquisition activities. Marketing and selling activities along with
commercial operations are anticipated to commence in early 1997.
PCS DEVELOPMENT COSTS include expenses incurred by TDS and American Portable to
participate in the FCC auction process, to build American Portable's management
and operating teams and to develop American Portable's strategic and operational
plans for the future deployment of personal communications services. American
Portable expects to incur significant expenditures for the development of PCS
activities during 1996.
YEAR ENDED OR AT DECEMBER 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands)
Additions to property
and equipment $ 12,025 $ -- $ --
Identifiable assets $ 318,265 $ 20,473 $ --
----------------------------------------
----------------------------------------
PARENT AND SERVICE COMPANY OPERATIONS
OTHER (EXPENSE) INCOME, NET includes the gross income of TDS's computer,
printing and other service companies and costs of corporate operations.
YEAR ENDED OR AT DECEMBER 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands)
Additions to property
and equipment $ 9,964 $ 7,754 $ 7,386
Identifiable assets $ 42,786 $ 54,841 $ 79,202
----------------------------------------
----------------------------------------
INFLATION
Management believes that inflation affects TDS's business to no greater
extent than the general economy.
ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standard Board issued SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in
March 1995, which became effective in January 1996. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
any entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management is currently analyzing the impact of this statement, but
does not anticipate that the effect on results of operations and financial
position will be material.
FINANCIAL RESOURCES AND LIQUIDITY
TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid
growth has caused expenditures for construction, expansion and acquisition
programs to exceed internally generated cash flow in recent years. Accordingly,
TDS has obtained substantial funds from external sources to finance construction
of cellular telephone systems and to fund acquisitions during the
past three years. Although the steady internal cash flow from TDS Telecom and
increasing internal cash flow from USM have reduced the need for external
financing, the development and construction activities of American Portable will
require substantial additional funds from external sources.
CASH FLOWS FROM OPERATING ACTIVITIES TDS is generating substantial internal
funds from the rapid growth in customer units and revenues. Operating cash flow
(operating income plus depreciation and amortization) increased 24% to $323.5
million in 1995, and 39% to $260.3 million in 1994. The increases represent
primarily the 60% ($49.4 million) and 127% ($46.5 million) increases,
respectively, from the cellular telephone operations. Cash flows from other
operating activities (investment and other income, interest and income tax
expense, and changes in working capital and other assets and
liabilities) required $111.9 million in 1995, $35.6 million
in 1994 and $27.5 million in 1993.
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------------
(Dollars in thousands)
Operating cash flow
Cellular telephone $ 132,213 $ 82,839 $ 36,371
Telephone 175,594 160,484 138,672
Radio paging 15,695 17,009 12,671
----------------------------------------
323,502 260,332 187,714
Other operating
activities (111,893) (35,646) (27,518)
----------------------------------------
$ 211,609 $ 224,686 $ 160,196
----------------------------------------
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES TDS's long-term strategy is to provide a
strong yet flexible financial foundation for each of its principal subsidiaries.
TDS targets a consolidated ratio of equity to total capital in the range of 55%
to 65%. Consolidated equity capital declined to 55% of total capitalization at
December 31, 1995, compared to 62% at the beginning of 1993, primarily as a
result of significant increases in debt and minority interest.
TDS uses short-term debt to finance its cellular telephone and radio paging
operations, for acquisitions and for general corporate purposes. TDS takes
advantage of attractive opportunities to retire short-term debt with the
proceeds from long-term debt and equity sales and sales of non-strategic
assets.
In 1995, USM received approximately $221.5 million on the sale of 20-year 6%
zero coupon convertible debt. In 1995 and 1993, TDS sold $39.2 million and $92.5
million of Medium-Term Notes, respectively. In 1994, TDS sold Common Shares for
cash totalling $4.9 million and APP received $45.6 million in an initial public
offering of Common Shares. In 1993, TDS sold Common Shares for cash totalling
$65.6 million and USM received $36.8 million from the sale of Common Shares to
parties other than TDS pursuant to a rights offering. The sale of non-strategic
cellular assets and other investments provided $197.6 million in net proceeds in
1995, $6.0 million in 1994 and $6.8 million in 1993.
USM and TDS Telecom have also used long-term debt to finance their construction
and development activities. USM financed cellular system equipment and
construction costs totalling $52.5 million in 1995 and $18.0 million in 1994
under vendor financing arrangements. Loans under these programs bear interest at
2.25% to 2.3% over the 90-day Commercial Paper Rate (5.58% at December 31, 1995)
and have terms of seven to eight years. TDS Telecom telephone subsidiaries
borrowed $12.0 million in 1995, $16.8 million in 1994 and $28.2 million in 1993
under the Rural Utility Service and the Rural Telephone Bank long-term federal
government loan programs. Financing under these programs comprises 97% of total
outstanding telephone subsidiary long-term debt at an average annual interest
rate of 5.34%.
CASH FLOWS FROM INVESTING ACTIVITIES TDS makes substantial investments each year
to acquire, construct, operate and maintain modern high-quality communications
networks and facilities that exceed its customers expectations as a basis for
creating long-term value for shareowners. In recent years, rapid changes in
technology and new opportunities have required substantial investments in
revenue enhancing and cost reducing upgrades of the Company's networks.
Cash expenditures for property, plant and equipment additions totalled $366.2
million in 1995, $321.4 million in 1994 and $198.7 million in 1993. The
acquisition and development of broadband and narrowband PCS licenses required
$326.0 million in 1995 and $31.6 million in 1994. Cash used for acquisitions,
excluding cash acquired, totalled $53.8 million in 1995, $37.6 million in 1994
and $51.6 million in 1993.
PROPERTY, PLANT AND EQUIPMENT
The primary purpose of TDS's construction and expansion program is to provide
for normal growth, to upgrade service, to expand into new communication areas,
and to take advantage of service-enhancing and cost-reducing technological
developments. The following table summarizes the Company's investments in its
communications networks and related facilities during the past three years.
YEAR ENDED DECEMBER 31,
1995 1994 1993
-------------------------------------------------
(Dollars in thousands)
Cellular telephone
Cell sites and
equipment $ 153,434 $ 127,253 $ 66,037
Switching
equipment 19,678 4,533 7,419
Other 43,464 36,428 14,021
-------------------------------------------------
216,576 168,214 87,477
-------------------------------------------------
Telephone
Central office 38,697 46,618 29,584
Outside plant 55,569 52,629 38,877
Other 10,106 16,236 12,357
-------------------------------------------------
104,372 115,483 80,818
-------------------------------------------------
Radio paging
Pagers 15,582 15,641 12,201
Terminals and
transmitters 6,353 11,056 6,653
Other 5,134 2,954 3,782
-------------------------------------------------
27,069 29,651 22,636
-------------------------------------------------
Other 18,219 8,087 7,812
-------------------------------------------------
$ 366,236 $ 321,435 $ 198,743
-------------------------------------------------
-------------------------------------------------
USM constructed 292 cell sites in 1995, 225 in 1994 and 138 in 1993. TDS Telecom
installed 39 digital switches in 1995, 32 in 1994 and 54 in 1993, and made
substantial improvements in outside plant facilities during each year. In
addition to substantial expenditures for pagers in the past three years, APP
added 75 net new transmitters in 1995, 258 in 1994 and 153 in 1993 in order to
improve signal quality and expand the coverage areas of its paging systems.
The Company's expected property, plant and equipment additions reflect the
Company's construction and expansion programs and are anticipated to aggregate
approximately $434 million for 1996 excluding PCS construction and development
expenditures discussed below.
/ / The cellular capital additions budget totals approximately $240
million for 1996, including about $100 million for new cell sites, $80
million for enhancements to existing systems and about $40 million for
various information systems initiatives.
/ / The telephone capital additions budget totals approximately $125
million in 1996, including about $50 million for new digital switches
and other switching facilities and $50 million for improvements to
outside plant facilities.
/ / The radio paging property and equipment additions are anticipated to
total about $54 million in 1996, including $14 million for systems and
transmitters, $18 million for pagers, $14 million for information
systems initiatives and restructuring activities, and $8 million for
narrowband PCS activities.
/ / Other fixed asset expenditures are estimated to total $15 million in
1996.
The Company will finance the additions primarily with internally generated cash,
supplemented by short-term bank financing, long-term financing obtained under
federal government programs at TDS Telecom, and proceeds from the sale of non-
strategic cellular interests.
PCS DEVELOPMENT American Portable plans to construct networks in its six primary
Major Trading Areas. Management anticipates the construction of the cell sites
will begin in the second quarter of 1996, following the completion of detailed
engineering and site acquisition activities. Marketing and selling activities
along with commercial operations are anticipated to commence in early 1997.
American Portable anticipates construction, development and introduction of PCS
networks and services will require substantial capital and operating
expenditures over the next several years. While construction (including
microwave relocation), and other start-up activities may be
impacted by many factors, American Portable estimates that the aggregate
funds required through December 31, 1998 will total approximately $830
million ($420 million in 1996, $340 million in 1997 and $70 million in 1998).
This amount includes an estimated $585 million of capital expenditures for
construction of the PCS networks ($370 million in 1996, $205 million in 1997
and $10 million in 1998) and $245 million of estimated working capital
requirements.
TDS expects American Portable's 1996 capital expenditures and expenditures for
start-up and development activities to aggregate approximately $420 million.
These expenditures will be financed using a variety of resources, including but
not limited to, borrowings from TDS's short-term bank lines of credit, vendor
financing and equity investors in American Portable. American Portable filed a
registration statement on February 20, 1996 for an initial public offering
covering 11.0 million, or approximately 16%, of its Common Shares. At the
midpoint of the $15-$18 per share preliminary price range, completion of the
offering would yield net proceeds of approximately $170 million.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in American Portable's major markets will reduce the rate
of growth in TDS's operating and net income from levels which would otherwise be
achieved during the next few years.
ACQUISITIONS
TDS seeks to acquire cellular telephone, telephone and paging companies which
add value to the organization. The table below summarizes interests acquired at
the respective dates of acquisition during the last three years and the
aggregate consideration paid.
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------------
Cellular interests
acquired
Population equivalents
(millions) 1.6 1.3 3.8
Units (consolidated) 34,000 18,000 23,600
Telephone
interests acquired
Companies 5 3 4
Access lines 13,500 19,700 20,100
Paging units acquired 28,400 37,600 10,700
Consideration (millions)
Cash $ 47.8 $ 40.4 $ 58.8
TDS Common Shares 127.8 173.7 281.6
TDS Preferred Shares -- 12.5 3.0
USM Common Shares 12.8 1.4 7.7
Subsidiary
preferred stock -- -- 2.9
Other -- 1.4 --
--------------------------------------------
Total Consideration $ 188.4 $ 229.4 $ 354.0
--------------------------------------------
--------------------------------------------
TDS has entered into definitive agreements at December 31, 1995, to acquire a
controlling interest in one cellular market, a minority interest in one market,
and one telephone company for an aggregate consideration of approximately $73
million, primarily TDS Common Shares. The two cellular interests to be acquired
by TDS are expected to be assigned to USM, and at that time USM will reimburse
TDS for TDS's consideration delivered and costs incurred in such acquisitions in
the form of USM Common Shares, notes payable or cash.
The Company is currently negotiating agreements for the acquisition of
additional cellular, telephone and paging companies.
TDS and USM continue to assess the makeup of cellular holdings in order to
maximize the benefits derived from clustering USM's markets. As the number of
opportunities for acquisitions of cellular interests has decreased and as USM's
clusters have grown to realize greater economies of scale, USM's focus has
shifted toward exchanges and sales of non-strategic interests.
During 1995, USM sold its majority interests in six markets and its minority
interests in six markets. These sales, along with sales of various marketable
securities and certain other investments by the Company, generated aggregate
cash proceeds of $199.6 million.
At December 31, 1995, USM had agreements pending to exchange a controlling
interest in one market for a controlling interest in another market, to sell
controlling interests in certain other markets and to settle litigation related
to an investment interest sold in 1995. Pursuant to the agreements, USM will
receive $150 million in cash and $20 million of notes receivable due in three
years. All of the pending agreements discussed above are expected to be
completed during 1996. Certain of these transactions will generate substantial
gains for book and tax purposes.
LIQUIDITY
Management believes TDS has sufficient internal and external resources to
finance the anticipated requirements of its business development, construction
and acquisition programs.
The Company is generating substantial internal funds. Operating cash flow
(operating income plus depreciation and amortization) increased to $323.5
million in 1995 from $260.3 million in 1994 and $187.7 million in 1993.
Operating cash flow was 88% of property, plant and equipment additions in 1995,
81% in 1994 and 94% in 1993.
TDS Telecom plans to continue financing its telephone construction program
primarily using internally generated cash supplemented by long-term financing
from federal government programs. The TDS Telecom telephone
subsidiaries had $147 million in unadvanced loan funds
from federal government programs at year-end to finance the telephone
construction program. These loan commitments have a weighted average annual
interest rate of 6.3%.
USM plans to finance its cellular construction program using primarily
internally generated cash supplemented by proceeds from the sales of non-
strategic cellular interests.
American Portable plans to finance its 1996 construction and development
expenditures primarily from the proceeds of the initial public offering, vendor
financing and borrowings from TDS's short-term line of credit.
TDS and its subsidiaries have cash and temporary investments totalling $80.9
million and longer-term investments totalling $25.2 million at December 31,
1995. These investments are primarily the result of telephone operations'
internally generated cash. While certain regulated telephone subsidiaries' debt
agreements place limits on intercompany dividend payments, these restrictions
are not expected to affect the Company's ability to meet its cash obligations.
TDS and its subsidiaries also have access to a variety of external capital
sources. TDS and its subsidiaries had $468 million of bank lines of credit for
general corporate purposes at December 31, 1995, $443 million of which were
committed. Unused amounts of such lines totalled $287 million, $262 million of
which were committed. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.
TDS has a universal shelf registration statement which may be used from time to
time to issue debt securities and/or Common Shares for cash. As of December 31,
1995, $238.4 million remained unused on the universal shelf.
TDS and USM have shelf registration statements covering the issuance of
equity for acquisitions. TDS's shelf registration statement for acquisitions
had 2.7 million Common Shares and 249,000 Preferred Shares unissued and
unreserved at December 31, 1995. USM's shelf registration statement for
acquisitions had 6.4 million Common Shares and 200,000 shares of Preferred
Stock unissued and unreserved at December 31, 1995. In addition, the Company
has issued Common Shares for acquisitions pursuant to registration statements
filed specifically for particular acquisitions.
Management believes TDS's internal cash flows and funds available from cash and
cash investments provide substantial financial flexibility. TDS also has
substantial lines of credit and longer-term financing commitments to help meet
its short- and long-term financing needs. Moreover, TDS and its subsidiaries
have access to public and private capital markets and anticipate issuing debt
and equity securities when capital requirements (including acquisitions),
financial market conditions and other factors warrant.
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------
YEAR ENDED OR AT DECEMBER 31,
1995 1994 1993 1992 1991
-------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Operating Revenues $ 954,386 $ 730,810 $ 557,795 $ 432,740 $ 340,160
Operating Income 131,998 108,822 69,733 54,065 40,661
Net Income Before
Extraordinary Item and Cumulative
Effect of Accounting Changes 103,978 60,544 33,896 38,520 21,113
Extraordinary Item -- -- -- (769) --
Cumulative Effect of
Accounting Changes -- (723) -- (6,866) (5,035)
Net Income 103,978 59,821 33,896 30,885 16,078
Net Income Available to Common $ 102,044 $ 58,012 $ 31,510 $ 28,648 $ 14,390
Weighted Average
Common Shares (000s) 58,356 54,197 47,266 39,074 33,036
Earnings per Common Share:
Before Extraordinary Item and
Cumulative Effect of
Accounting Changes $ 1.74 $ 1.07 $ .67 $ .91 $ .59
Extraordinary Item -- -- -- (.02) --
Cumulative Effect of
Accounting Changes -- (.01) -- (.17) (.15)
Net Income $ 1.74 $ 1.06 $ .67 $ .72 $ .44
Pretax Profit on Revenues 19.4% 13.9% 10.8% 15.8% 10.6%
Effective Income Tax Rate
(Before Extraordinary Item
and Cumulative Effect
of Accounting Changes) 43.8% 40.2% 43.9% 43.6% 41.4%
Dividends per Common
and Series A Common Share $ .38 $ .36 $ .34 $ .32 $ .30
Cash and Cash Equivalents
and Temporary Investments $ 80,851 $ 44,566 $ 73,385 $ 58,145 $ 53,346
Property, Plant and Equipment (Net) 2,471,835 2,153,575 1,738,298 1,275,516 997,187
Total Assets 3,469,082 2,790,127 2,259,182 1,696,486 1,368,145
Notes Payable 184,320 98,608 6,309 46,816 41,283
Long-term Debt (including
current portion) 894,584 562,164 537,566 426,885 395,960
Redeemable Preferred Shares
(including current portion) 15,093 25,001 27,367 27,967 28,779
Common Stockholders' Equity 1,684,365 1,473,038 1,224,285 877,419 645,290
Construction Expenditures $ 370,628 $ 311,477 $ 208,520 $ 162,245 $ 154,574
Current Ratio .6 .5 1.1 .9 .9
Common Equity per Share $ 29.01 $ 26.85 $ 24.15 $ 21.27 $ 18.42
-------------------------------------------------------------
-------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
------------------------------------------------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Cellular telephone $492,395 $332,404 $214,310
Telephone 354,841 306,341 268,122
Radio paging 107,150 92,065 75,363
--------------------------------------
954,386 730,810 557,795
--------------------------------------
OPERATING EXPENSES
Cellular telephone 449,640 315,019 222,966
Telephone 256,601 214,735 189,012
Radio paging 116,147 92,234 76,084
--------------------------------------
822,388 621,988 488,062
--------------------------------------
OPERATING INCOME 131,998 108,822 69,733
--------------------------------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income 13,024 10,612 8,082
Cellular investment income,
net of license cost amortization 40,666 26,018 15,704
Gain on sale of cellular interests
and other investments 86,625 7,457 4,970
PCS development costs (7,829) (1,709) (65)
Other (expense) income, net (2,771) 387 (90)
Minority share of income (25,858) (9,079) (475)
--------------------------------------
103,857 33,686 28,126
--------------------------------------
INCOME BEFORE INTEREST AND INCOME TAXES 235,855 142,508 97,859
Interest expense 50,848 41,251 37,466
--------------------------------------
INCOME BEFORE INCOME TAXES 185,007 101,257 60,393
Income Tax Expense 81,029 40,713 26,497
--------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 103,978 60,544 33,896
Cumulative effect of Accounting Change --- (723) ---
--------------------------------------
NET INCOME 103,978 59,821 33,896
Preferred Dividend Requirement (1,934) (1,809) (2,386)
--------------------------------------
NET INCOME AVAILABLE TO COMMON $102,044 $ 58,012 $ 31,510
--------------------------------------
--------------------------------------
WEIGHTED AVERAGE COMMON SHARES (000S) 58,356 54,197 47,266
EARNINGS PER COMMON SHARE:
Before Cumulative Effect of Accounting Change $ 1.74 $ 1.07 .67
Cumulative Effect of Accounting Change --- (.01) ---
--------------------------------------
Net Income $ 1.74 $ 1.06 $ .67
--------------------------------------
DIVIDENDS PER COMMON --------------------------------------
AND SERIES A COMMON SHARE $ .38 $ .36 $ .34
--------------------------------------
--------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $103,978 $59,821 $33,896
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Cumulative effect of accounting changes -- 723 --
Depreciation and amortization 201,063 161,796 127,509
Deferred taxes 19,603 14,529 5,846
Investment income (43,188) (30,083) (20,015)
Minority share of income 25,858 9,079 475
Gain on sale of cellular interests
and other investments (86,625) (7,457) (4,970)
Noncash interest expense 12,761 26 1,061
Other noncash expense 7,388 5,384 4,275
Change in accounts receivable (33,346) (22,401) (11,262)
Change in accounts payable (3,188) 31,714 11,308
Change in accrued taxes (2,638) (4,638) 4,661
Change in other assets and liabilities 9,943 6,193 7,412
----------------------------------------------
211,609 224,686 $ 160,196
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 334,323 36,916 122,275
Repayment of long-term debt (30,734) (33,710) (37,969)
Change in notes payable 80,351 92,318 (40,533)
Common stock issued 6,921 11,185 69,644
Minority partner capital
contributions (distributions) 1,411 12,504 (1,528)
Redemption of preferred shares (638) (9) (220)
Dividends paid (23,972) (20,906) (17,830)
Sale of stock by subsidiaries 1,812 45,714 37,154
----------------------------------------------
369,474 144,012 130,993
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (366,236) (321,435) (198,743)
Investments in PCS licenses (326,035) (31,604) ---
Investments in and advances
to cellular minority partnerships (20,509) (24,444) (14,595)
Distributions from partnerships 9,062 17,375 11,943
Proceeds from investment sales 197,558 6,000 6,750
Other investments 2,503 (18,370) (43,211)
Acquisitions, excluding cash acquired (53,770) (37,552) (51,579)
Change in temporary investments 6,727 10,399 13,102
----------------------------------------------
(550,700) (399,631) (276,333)
----------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 30,383 (30,933) 14,856
CASH AND CASH EQUIVALENTS
Beginning of period 24,733 55,666 40,810
----------------------------------------------
End of period $55,116 $24,733 $55,666
----------------------------------------------
----------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED BALANCE SHEETS--ASSETS
- --------------------
DECEMBER 31,
1995 1994
------------------------------
(DOLLARS IN THOUSANDS)
CURRENT ASSETS
Cash and cash equivalents $ 55,116 $ 24,733
Temporary investments 25,735 19,833
Construction funds 1,588 1,309
Accounts receivable
Due from customers, less allowance
of $5,104 and $2,785, respectively 77,148 52,897
Other, principally connecting companies 68,196 57,369
Materials and supplies, at average cost 20,738 17,106
Other 12,689 12,671
------------------------------
261,210 185,918
------------------------------
INVESTMENTS
Cellular limited partnership interests 158,559 111,733
Cellular license acquisition costs, net of amortization 110,091 94,470
Broadband PCS license acquisition costs 301,196 20,400
Narrowband PCS license acquisition costs 55,365 54,101
Marketable equity securities 346 25,604
Marketable non-equity securities 24,871 71,314
Other 62,537 60,806
------------------------------
712,965 438,428
------------------------------
PROPERTY, PLANT AND EQUIPMENT
Cellular Telephone
In service and under construction 701,083 479,457
License acquisition costs 1,058,316 979,492
------------------------------
1,759,399 1,458,949
Less accumulated depreciation and amortization 240,237 169,112
------------------------------
1,519,162 1,289,837
------------------------------
Telephone
In service and under construction,
substantially at original cost 1,099,714 995,601
Less accumulated depreciation 442,699 386,487
------------------------------
657,015 609,114
Franchise and other costs in excess of the underlying
book value of subsidiaries, net of amortization 168,607 151,107
------------------------------
825,622 760,221
------------------------------
Radio Paging
In service 136,801 110,779
Less accumulated depreciation and amortization 56,667 39,962
------------------------------
80,134 70,817
------------------------------
Other
In service and under construction 87,935 66,832
Less accumulated depreciation and amortization 41,018 34,132
------------------------------
46,917 32,700
------------------------------
2,471,835 2,153,575
------------------------------
OTHER ASSETS AND DEFERRED CHARGES 23,072 12,206
------------------------------
$3,469,082 $2,790,127
------------------------------
------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------
DECEMBER 31,
1995 1994
------------------------------
(DOLLARS IN THOUSANDS)
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares $ 49,233 $ 37,447
Notes payable 184,320 98,608
Accounts payable 122,886 112,967
Due to FCC - PCS licenses -- 42,897
Advance billings and customer deposits 27,706 20,898
Accrued interest 11,573 10,054
Accrued taxes 2,525 3,894
Other 29,481 19,419
------------------------------
427,724 346,184
------------------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 103,206 80,274
Postretirement benefits obligation other than pensions 12,146 14,379
Other 22,943 24,423
------------------------------
138,295 119,076
------------------------------
LONG-TERM DEBT, excluding current portion 858,857 536,509
------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion 1,587 13,209
------------------------------
MINORITY INTEREST in subsidiaries 328,544 272,292
------------------------------
NONREDEEMABLE PREFERRED SHARES 29,710 29,819
------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share;
authorized 100,000,000 shares; issued and outstanding
51,137,426 and 47,937,570 shares, respectively 51,137 47,938
Series A Common Shares, par value $1 per share;
authorized 25,000,000 shares; issued and outstanding
6,893,101 and 6,886,684 shares, respectively 6,893 6,887
Common Shares issuable, 31,431 and 41,908
shares, respectively 1,496 1,995
Capital in excess of par value 1,417,513 1,288,453
Retained earnings 207,326 127,765
------------------------------
1,684,365 1,473,038
------------------------------
$3,469,082 $2,790,127
------------------------------
------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
- --------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------------------
(DOLLARS IN THOUSANDS)
COMMON SHARES
Balance beginning of period $ 47,938 $ 43,504 $ 34,383
Add
Acquisitions 2,960 4,041 7,477
Employee stock ownership plans 81 89 158
Dividend reinvestment plan 105 86 26
Sales of Common Shares -- 100 1,320
Conversion of Preferred Shares 41 116 140
Conversion of Series A Common Shares 12 2 --
--------------------------------------------------
Balance end of period $ 51,137 $ 47,938 $ 43,504
--------------------------------------------------
--------------------------------------------------
SERIES A COMMON SHARES
Balance beginning of period $ 6,887 $ 6,881 $ 6,864
Add (Deduct)
Dividend reinvestment plan 18 8 17
Conversion to Common Shares (12) (2) --
--------------------------------------------------
Balance end of period $ 6,893 $ 6,887 $ 6,881
--------------------------------------------------
--------------------------------------------------
COMMON SHARES ISSUABLE
Balance beginning of period $ 1,995 $ 15,189 $ --
Add (Deduct)
Acquisitions -- 1,995 15,189
Shares issued pursuant
to acquisition agreements (499) (15,189) --
--------------------------------------------------
Balance at end of period $ 1,496 $ 1,995 $ 15,189
--------------------------------------------------
--------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE
Balance beginning of period $1,288,453 $1,069,022 $ 761,706
Add (Deduct)
Acquisitions 125,886 182,812 299,146
Employee stock ownership plans 2,294 2,848 2,578
Dividend reinvestment plans 4,700 3,819 1,835
Sales of Common Shares -- 4,924 64,271
Capital stock expense (124) (53) (333)
Conversion of Preferred Shares (3,127) 1,324 1,972
Gain (loss) on sale of subsidiary stock 714 21,184 (62,153)
Net unrealized (loss) gain on
marketable equity securities (2,090) 2,100 --
Income tax effects of capital stock transactions 807 473 --
--------------------------------------------------
Balance at end of period $1,417,513 $1,288,453 $1,069,022
--------------------------------------------------
--------------------------------------------------
RETAINED EARNINGS
Balance beginning of period $ 127,765 $ 89,689 $ 74,466
Add net income 103,978 59,821 33,896
Deduct
Dividends
Common and Series A Common Shares 21,910 19,287 16,287
Preferred Shares 2,507 2,458 2,386
--------------------------------------------------
Balance at end of period $ 207,326 $ 127,765 $ 89,689
--------------------------------------------------
--------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accounting policies of Telephone and Data Systems, Inc. and its subsidiaries
("TDS" or the "Company") conform to generally accepted accounting principles.
The accounting records of the telephone subsidiaries are maintained in
accordance with the uniform systems of accounts prescribed by the regulatory
bodies under whose jurisdiction the subsidiaries operate.
NATURE OF OPERATIONS
TDS is a diversified telecommunications company which, at December 31, 1995,
provided high-quality telecommunications services to 1,920,400 consolidated
cellular telephone, telephone and radio paging customers in 37 states and the
District of Columbia. The Company conducts substantially all of its cellular
operations through its 80.8%-owned subsidiary, United States Cellular
Corporation [AMEX:USM], its telephone operations through its wholly owned
subsidiary, TDS Telecommunications Corporation ("TDS Telecom"), and its radio
paging operations through its 82.3%-owned subsidiary, American Paging, Inc.
[AMEX:APP]. The Company is developing its Personal Communications Services
("PCS") operations through its wholly owned subsidiary American Portable
Telecom, Inc. ("American Portable"). (See Note 17 - American Portable Initial
Public Offering.)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TDS, its majority-
owned subsidiaries since acquisition and the cellular telephone partnerships in
which TDS has a majority general partnership interest. All material intercompany
items have been eliminated. Certain amounts reported in prior years have been
reclassified to conform to current period presentation.
TDS includes as investments in subsidiaries the value of the consideration given
and all direct and incremental costs relating to acquisitions accounted for as
purchases. All costs relating to unsuccessful negotiations for acquisitions are
expensed.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as temporary investments. Temporary investments are stated at cost, which
approximates market.
Cash and cash equivalents and temporary investments consist of the following:
DECEMBER 31,
1995 1994
--------------------------
(Dollars in thousands)
General funds $ 55,116 $ 21,544
Government agency securities 12,021 11,475
Certificates of deposit 13,714 11,547
--------------------------
$ 80,851 $ 44,566
--------------------------
--------------------------
INVESTMENTS
Investments in cellular limited partnership interests consist of amounts
invested in cellular entities in which TDS holds a minority interest. The
Company follows the equity method of accounting, which recognizes TDS's
proportionate share of the income and losses accruing to it under the terms of
its partnership or shareholder agreements, for its long-term investments ($146.1
million and $97.9 million at December 31, 1995 and 1994, respectively). Income
and losses from these entities are reflected in the consolidated income
statements on a pretax basis. At December 31, 1995, the cumulative share of
income from minority cellular investments accounted for under the equity method
was $127.4 million, of which $64.3 million was undistributed. The cost method of
accounting is followed for those minority interests which TDS is holding for
sale or exchange ($12.5 million and $13.8 million at December 31, 1995 and 1994,
respectively).
Cellular license acquisition costs consist of costs incurred in acquiring
Federal Communications Commission ("FCC") licenses or minority interests which
have been awarded FCC licenses to provide cellular service. These costs include
amounts paid to license applicants and owners of interests in cellular entities
awarded licenses; amounts paid for legal, engineering, and consulting services;
amounts incurred by TDS in acquiring these interests; and goodwill. These costs
are capitalized and amortized through charges to expense over 40 years upon
commencement of operations. Amortization amounted to $2.0 million, $2.0 million
and $1.6 million in 1995, 1994 and 1993, respectively. Accumulated amortization
of cellular license costs was $7.0 million and $7.2 million at December 31, 1995
and 1994, respectively. Included in
cellular license costs is approximately $3.1 million of goodwill which resulted
from various acquisitions structured to be tax-free.
Broadband and Narrowband PCS license acquisition costs consist of costs incurred
in acquiring PCS licenses and capitalized interest. These costs will be
amortized through charges to expense upon commencement of operations.
At December 31, 1995, investment in Broadband and Narrowband PCS licenses
consist of the following:
Broadband Narrowband
PCS Licenses PCS Licenses
--------------------------------
(Dollars in thousands)
License acquisition costs $ 289,194 $ 53,622
Professional services -- 531
Capitalized interest 12,002 1,212
-------------------------------
$ 301,196 $ 55,365
-------------------------------
-------------------------------
Other investments consist of the following:
DECEMBER 31,
1995 1994
--------------------------
(Dollars in thousands)
Minority telephone and
paging interests $ 30,422 $ 31,012
Long-term notes receivable 16,419 14,589
Rural Telephone Bank Stock,
at cost 6,350 5,951
Other 9,346 9,254
----------------------------
$ 62,537 $ 60,806
----------------------------
----------------------------
The equity method of accounting is followed for minority telephone and paging
interests in which TDS holds common stock ownership of at least 20% or can
influence the policies of the affiliated company. At December 31, 1995, the
cumulative share of income from minority telephone and paging investments
accounted for under the equity method was $7.4 million, of which $5.9 was
undistributed. Amortization of excess cost relating to minority telephone
interests totalled $407,000, $532,000 and $545,000 in 1995, 1994 and 1993,
respectively.
REVENUE RECOGNITION
TDS's revenues are recognized when earned. Telephone network access and long-
distance services are furnished jointly with other companies, primarily AT&T and
the Bell Operating Companies. Compensation for interstate access services is
based on tariffed access charges to interstate long-distance carriers as filed
by the National Exchange Carrier Association with the FCC on behalf of TDS. Such
compensation amounted to 33%, 31% and 31% of telephone revenues in 1995, 1994
and 1993, respectively. Compensation for intrastate toll and access services is
based on tariffed access charges, cost separation studies, nationwide average
schedules or special settlement arrangements with intrastate long-distance
carriers. Network access and long-distance revenues based on cost separation
studies represent estimates pending completion and acceptance of final cost
studies. Management believes that recorded amounts represent reasonable
estimates of the final amounts.
EARNINGS PER COMMON SHARE
Earnings per Common Share were computed by dividing Net Income Available to
Common, less a minority income adjustment, by the weighted average number of
Common Shares, Series A Common Shares and dilutive common equivalent shares
outstanding during the year. The minority income adjustment, $271,000 and
$411,000 in 1995 and 1994, respectively, reflects the additional minority share
of USM's income computed as if all of USM's issuable securities were
outstanding. Dilutive common stock equivalents consist of Common Shares issuable
upon conversion of dilutive series of Preferred Shares and Common Share options.
The calculation of Earnings per Common Share assuming full dilution had no
effect.
Preferred dividend requirements include all dividends paid on Preferred Shares
which are not dilutive common stock equivalents. For the year ended December 31,
1995, the preferred dividend requirement on all outstanding Preferred Shares was
$1.9 million.
SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures for interest and income taxes
paid, acquisitions and other noncash transactions. TDS paid interest of $49.4
million, $39.9 million and $34.4 million, and income taxes of $60.5 million,
$27.6 million and $17.3 million, during 1995, 1994 and 1993, respectively.
TDS has acquired operating telephone and paging companies, certain cellular
licenses and operating companies and certain other assets since January 1, 1993.
In conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------------
(Dollars in thousands)
Property, plant
and equipment $ 81,789 $ 89,092 $ 78,252
Cellular licenses 129,510 169,845 312,656
Minority interest (1,941) (259) (14,115)
Increase (decrease)
in equity method
investment in
cellular interests 977 (15,586) (4,690)
Long-term debt (9,254) (21,571) (23,930)
Deferred credits (538) (6,225) (5,300)
Other assets and
liabilities, excluding
cash and cash
equivalents (6,143) 9,808 3,821
Common Shares
issued and issuable (127,836) (173,658) (281,553)
Preferred Shares issued (12,500) (3,000)
USM Common Shares
issued and issuable (12,794) (1,394) (7,653)
Subsidiary preferred
stock issued -- -- (2,909)
-------------------------------------------
Decrease in cash due
to acquisitions $ 53,770 $ 37,552 $ 51,579
------------------------------------------
------------------------------------------
TDS issued Common Shares aggregating $940,000, $1.4 million and $2.1 million in
1995, 1994 and 1993, respectively, for TDS Preferred Shares converted into
Common Shares. TDS issued Common Shares in 1993 aggregating $40.3 million for
certain cellular acquisitions completed in prior years.
ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," in March 1995, which became effective in January 1996. SFAS No.
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by any entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. Management is
currently analyzing the impact of this statement, but does not anticipate that
the effect on results of operations and financial position will be material.
NOTE 2
INCOME TAXES
TDS files a consolidated federal income tax return. Income tax provisions
charged to net income before the cumulative effect of an accounting change are
summarized as follows:
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------
(Dollars in thousands)
Current:
Federal $44,690 $20,921 $15,562
State 16,736 4,873 4,521
Deferred:
Federal 19,253 13,440 6,696
State 2,386 2,963 1,510
Amortization of
deferred investment
tax credits (2,036) (1,484) (1,792)
---------------------------
Total income tax
expense $81,029 $40,713 $26,497
---------------------------
---------------------------
Investment tax credits resulting from investments in telephone plant and
equipment have been deferred and are being amortized over the service lives of
the related property.
The statutory federal income tax rate is reconciled to TDS's effective income
tax rate before the cumulative effect of an accounting change below.
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 6.9 5.1 6.2
Amortization of license
acquisition costs and costs
in excess of book value 2.4 3.5 4.8
Acquisition-related tax
basis adjustment -- (2.7) (.3)
Dividend exclusion (.1) (1.8) --
Amortization of deferred
investment tax credits (1.0) (1.5) (3.0)
Effects of corporations not
included in consolidated
federal tax return 2.1 1.4 1.9
Deferred tax rate differential -- -- (.7)
Other differences, net (1.5) 1.2 --
-----------------------------------
Effective income tax rate 43.8% 40.2% 43.9%
-----------------------------------
-----------------------------------
The total income tax expense for the year ended December 31, 1994, including the
cumulative effect of an accounting change was $40.3 million. The effective
income tax rate including the cumulative effect of an accounting change was
40.3% in 1994.
Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax bases.
The Company's current net deferred tax assets totalled $3.2 million and $3.5
million as of December 31, 1995 and 1994, respectively. The net current
deferred tax asset primarily represents the deferred tax effects of unearned
revenues.
The temporary differences that gave rise to the noncurrent deferred tax assets
and liabilities as of December 31, 1995 and 1994, are as follows:
DECEMBER 31,
1995 1994
-------------------------------
(Dollars in thousands)
Deferred Tax Asset:
Alternative minimum
tax credit carryforward $ 10,316 $ 22,834
State operating loss
carryforwards 10,537 9,956
Postretirement benefits 4,502 4,940
Other 9,075 10,799
--------------------------
34,430 48,529
Less valuation allowance (10,061) (8,962)
--------------------------
Net Deferred Tax Asset 24,369 39,567
--------------------------
Deferred Tax Liability:
Property, plant and equipment 83,131 76,173
Partnership investments 20,047 12,830
Marketable equity securities 2,572 8,217
Minority share of USM income (1,500) 4,916
Effects of corporations not
included in consolidated
federal tax return 3,642 4,172
Licenses 16,001 12,329
Other 3,682 1,204
--------------------------
Total Deferred Tax Liability 127,575 119,841
--------------------------
Net Deferred Income
Tax Liability $ 103,206 $80,274
-------------------------------
-------------------------------
At December 31, 1995, TDS had $10.3 million of federal alternative minimum tax
credit carryforward available to offset regular income tax payable in future
years. In addition, TDS had $173.5 million of state net operating loss
carryforward at December 31, 1995, expiring between 1996 and 2010, which
generated a $10.5 million deferred tax asset. A valuation allowance was
established for the state operating loss carryforwards since it is more likely
than not that a portion will expire before such carryforwards can be utilized.
TDS's telephone subsidiaries have recorded additional deferred income tax
liabilities related primarily to temporary differences not deferred under rate-
making policy. A corresponding regulatory asset or liability has been
established to offset these deferred income tax adjustments. The unamortized
regulated asset and liability balances as of December 31, 1995, are $5.0 million
and $5.8 million, respectively. These amounts are being amortized over the lives
of the related temporary differences.
NOTE 3
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
effective January 1, 1994. Information regarding the Company's securities is
summarized below.
DECEMBER 31,
1995 1994
-------------------------
(Dollars in thousands)
Available-for-sale
Equity Securities
Aggregate Fair Value $ 346 $25,604
Amortized Cost Basis 336 22,229
Gross Unrealized
Holding Gains 10 3,379
Gross Unrealized
Holding Losses -- 4
Held-to-maturity
U.S. Treasury and other
U.S. government corporations
and agencies
Aggregate Fair Value
Current 12,293 10,981
Noncurrent 25,200 67,120
Amortized Cost Basis
Current 12,337 11,061
Noncurrent 24,871 71,314
Gross Unrealized
Holding Gains 343 --
Gross Unrealized
Holding Losses $ 58 $4,274
--------------------------
--------------------------
The Company's debt securities classified as held-to-maturity have contractual
maturities at December 31, 1995 as follows:
Aggregate Amortized
Fair Value Cost Basis
--------------------------
(Dollars in thousands)
Within one year $ 12,293 $ 12,337
Over one year through five years $ 25,200 $ 24,871
-------------------------------
-------------------------------
The Company's net unrealized holding gain on available-for-sale securities,
$10,000 in 1995 and $2.1 million (net of income taxes of $1.3 million) in 1994,
has been included as an increase to Common Stockholders' Equity.
Realized gains and losses are determined on the basis of specific
identification. For 1995, proceeds from the sale of available-for-sale
securities totalled $57.6 million and gross realized gains totalled $3.9
million. For 1994, proceeds from the sale of available-for-sale securities
totalled $835,000 and gross realized losses totalled $165,000.
On December 21, 1995, as a result of the one-time reassessment allowed by the
FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities," issued in November 1995,
the Company reclassified securities classified as held to maturity with an
amortized cost basis of $31.5 million to available-for-sale. These securities
were subsequently sold with no realized gain or loss. No sales or transfers of
securities classified as held-to-maturity occurred during 1994.
NOTE 4
BUSINESS SEGMENT INFORMATION
TDS's operations are classified into four principal segments: Cellular
Telephone, Telephone, Radio Paging and PCS operations. See Management's
Discussion and Analysis of Results of Operations and Financial Condition,
specifically "Results of Operations" for certain required financial information
regarding TDS's business segments.
NOTE 5
PROPERTY, PLANT AND EQUIPMENT
CELLULAR TELEPHONE property and equipment is stated at cost. Costs incurred in
acquiring FCC licenses or interests in entities which have filed for or have
been awarded FCC licenses to provide cellular service have been capitalized.
These costs include amounts paid for legal, engineering, and consulting
services; amounts paid to license applicants and owners of interests in cellular
entities awarded licenses; amounts incurred by TDS in acquiring these interests;
and goodwill. These costs are amortized on a straight-line basis over 40 years
upon commencement of operations. Amortization amounted to $25.8 million, $22.2
million and $17.3 million in 1995, 1994 and 1993, respectively. Accumulated
amortization of these cellular license costs was $83.6 million and $65.5 million
at December 31, 1995 and 1994, respectively. Included in cellular license costs
is approximately $359.7 million of goodwill which resulted from various
acquisitions structured to be tax-free.
TELEPHONE plant in service and under construction is stated at the original cost
of construction including the capitalized costs of certain taxes, payroll-
related expenses, and an allowance for funds used during construction ("AFUDC").
AFUDC, a noncash item of nonoperating income, totalled $682,000, $1.7 million
and $698,000 in 1995, 1994 and 1993, respectively. The composite weighted
average rates were 9.3%, 10.4%, and 9.2% in 1995, 1994 and 1993, respectively.
The amount of such allowance has varied principally as a result of changes in
the level of construction work in progress and in the cost of capital.
Renewals and betterments of units of property are added to telephone plant in
service. The original cost of depreciable property retired is removed from plant
in service and, together with removal cost less any salvage realized, is charged
to accumulated depreciation. Repairs and renewals of minor items of property are
included in plant operations expense. No gain or loss is recognized on ordinary
retirements of depreciable telephone property.
Telephone franchise and other costs include the costs in excess of the
underlying book value of acquired telephone companies. Costs in excess of the
underlying book value relating to acquisitions initiated before November 1,
1970, aggregating $6.5 million, are not being amortized. Costs aggregating
$186.9 million at December 31, 1995, relating to acquisitions since November 1,
1970, are being amortized on a straight-line basis over a 40-year period.
Amortization amounted to $4.4 million, $3.3 million and $3.0 million in 1995,
1994 and 1993, respectively. Accumulated amortization of excess cost was $24.7
million and $20.3 million at December 31, 1995 and 1994, respectively. Included
in excess cost is approximately $142 million of goodwill which resulted from
various acquisitions structured to be tax-free.
RADIO PAGING property and equipment is stated at cost. Costs relating to the
acquisition and development of radio paging licenses have been capitalized and
are being amortized over five to 25 years upon commencement of operations.
OTHER property and equipment is stated at cost. Certain costs relating to the
development of computer software for internal use are capitalized and are
amortized over the estimated five-year life of the software.
DEPRECIATION is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, are as follows:
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------
Cellular Telephone 10.0% 10.5% 10.5%
Telephone 7.1 7.5 7.3
Radio Paging 22.1 23.1 18.0
----------------------------------
Other 9.7 12.8 12.9
----------------------------------
----------------------------------
NOTE 6
ACQUISITIONS AND SALES
During 1995, 1994 and 1993, TDS and its subsidiaries completed the following
business combinations.
Consideration
----------------------------------
TDS and USM
Common Stock,
Cash, TDS
Notes and Preferred Shares,
Long-term and Subsidiary
Debt Preferred Stock
---------------------------------
(Dollars in thousands)
Acquisitions During 1995
Cellular interests $ 41,885 $ 94,542
Majority interests in five
telephone companies 250 46,087
Paging interests 5,656 --
Acquisitions During 1994
Cellular interests $ 29,599 $ 110,732
Majority interests in three
telephone companies 7,386 71,945
Paging interests 4,875 4,875
Acquisitions During 1993
Cellular interests $ 19,538 $ 262,346
Majority interests in four
telephone companies 34,396 32,281
Paging interest 4,896 --
--------------------------------
--------------------------------
Assuming that these acquisitions had taken place on January 1, 1994, unaudited
pro forma results of operations from continuing operations would have been as
follows:
YEAR ENDED DECEMBER 31,
1995 1994
---------------------------------
(Dollars in thousands,
except per share amounts)
Operating revenues $ 979,694 $ 836,560
Net income before cumulative
effect of an accounting change 90,604 38,048
Earnings per share before
cumulative effect of
an accounting change $ 1.50 $ .61
--------------------------------
--------------------------------
SALES OF CELLULAR AND OTHER INVESTMENTS
The $86.6 million gain in 1995 reflects the sales and exchanges of non-strategic
and other investments. USM sold its majority interests in six markets and its
minority interests in six markets during 1995. These sales, along with the sales
of marketable equity securities and certain other investments by TDS, generated
cash proceeds of $199.6 million.
The $7.5 million gain in 1994 reflects the sale and exchange of minority-owned
cellular and telephone interests. The cellular gain represents the excess of
the fair market value of the cellular interests traded over the book value of
such interests. The Company also sold its minority interest in a telephone
company for preferred shares of the telephone company having a face value of
$5.9 million and $6.0 million in cash.
The $5.0 million gain in 1993 reflects primarily the sales of two minority
cellular interests. USM received $6.8 million cash consideration on the sales.
NOTE 7
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash and Cash Equivalents, Temporary Investments and
Short-term Debt approximate fair value due to the short-term nature of these
instruments.
The carrying value and estimated fair value of the Company's long-term debt was
$894.6 million and $932.6 million, respectively, at December 31, 1995, and
$562.2 million and $497.7 million, respectively, at December 31, 1994. The fair
value was estimated using discounted cash flow analysis based on the Company's
current incremental borrowing rates for similar types
of borrowing arrangements.
At December 31, 1995 and 1994, the carrying value of the Company's Redeemable
Preferred Shares, $15.1 million, and $25.0 million, respectively, was
approximately equal to its fair value. The fair value was estimated using
discounted cash flow analysis based on the Company's current dividend yield on
issues of its non-convertible preferred shares and, for convertible series, the
net present value of the common stock to be issued upon conversion (valued at
quoted market prices).
It was not practicable to estimate the fair value of the Company's cost method
investments in other companies because of the lack of quoted market prices. The
carrying amounts at December 31, 1995 and 1994 represent the original cost of
the investments, which management believes is not impaired.
NOTE 8
NOTES PAYABLE
TDS has used short-term debt to finance its investments in cellular telephone
and radio paging operations, for acquisitions, and for general corporate
purposes. Long-term debt and equity financing from time to time have retired
such short-term debt. Proceeds from a USM convertible debt offering reduced
$131.4 million of short-term debt in 1995. Proceeds from an APP initial public
offering (see Note 10-Sale of Stock by Subsidiaries) and TDS's sales of Common
Shares retired $21.2 million of short-term debt in 1994.
TDS and its subsidiaries had $467.9 million of bank lines of credit for general
corporate purposes at December 31, 1995, $442.9 million of which were committed.
Unused amounts of such lines totalled $287.0 million, $262.0 million of which
were committed. These line-of-credit agreements provide for borrowings at
negotiated rates up to the prime rate.
Information concerning notes payable is shown in the table below.
DECEMBER 31,
1995 1994 1993
-------------------------------------
(Dollars in thousands)
Balance
at end of period $184,320 $ 98,608 $ 6,309
Weighted average
interest rate at
end of period 6.3% 6.5% 3.6%
Maximum amount
outstanding during
the period $184,320 $106,077 $ 49,851
Average amount
outstanding during
the period (1) $139,671 $ 50,499 $ 32,270
Weighted average
interest rate during
the period (1) 6.4% 5.2% 3.9%
----------------------------------
----------------------------------
(1) The average was computed based on month-end balances.
NOTE 9
LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1994 is
as follows:
DECEMBER 31,
1995 1994
-----------------------
(Dollars in thousands)
Telephone and Data Systems, Inc.
(Parent)
Medium-term notes, 8% to 10%,
due through 2025 $239,200 $200,000
Purchase contracts, 8% to 14%,
due through 2003 2,896 3,116
Subordinated debentures, 8%
to 14.5%, due through 2008 780 1,909
-----------------------
242,876 205,025
Less current portion 418 1,261
-----------------------
Total parent debt 242,458 203,764
-----------------------
Subsidiaries
RUS, RTB and FFB Mortgage
Notes, due through 2031
0% to 2% 26,350 29,060
4% to 6% 172,231 168,027
6.04% to 9% 84,464 75,546
9.5% to 11% 1,233 1,153
-----------------------
284,278 273,786
6% zero coupon convertible
debentures matures at
June 15, 2015 745,000 --
Unamortized discount (509,250) --
-----------------------
235,750
Vendor financing,
approximating 90-day
Commercial Paper
plus 2.25% or 2.307%
due through 2002 119,998 69,265
Other long-term notes, 4.6%
to 10.5%, due through 2005 11,682 14,089
-----------------------
651,708 357,140
Less current portion 35,309 24,395
-----------------------
Total subsidiaries' debt 616,399 332,745
-----------------------
Total long-term debt $858,857 $536,509
-----------------------
-----------------------
The Company sold $39.2 million of senior unsecured debt securities in 1995 under
its Medium-Term Note Program. The proceeds were used principally to retire
short-term debt, as well as for working capital and general corporate purposes.
The mortgage notes issued under certain loan agreements with the Rural Utilities
Service ("RUS"), Rural Telephone Bank ("RTB") and Federal Financing Bank
("FFB"), agencies of the United States of America, are to be repaid in equal
monthly or quarterly installments covering principal and interest beginning six
months to three years after dates of issue and expiring through 2031.
Substantially all telephone plant is pledged under RUS and RTB mortgage notes
and various other obligations of the subsidiaries.
USM sold $745 million principal amount at maturity of zero coupon 6% yield to
maturity convertible debt in June 1995 with proceeds to the Company of $221.5
million. This 20-year fixed rate debt, in the form of Liquid Yield Option TM
Notes ("LYONsTM") (TMTrademark of Merrill Lynch & Co., Inc.), is subordinated to
all senior indebtedness of USM. Each LYON is convertible at the option of the
holder at any time at a conversion rate of 9.475 USM Common Shares per LYON.
Upon conversion, USM may elect to deliver its Common Shares or cash equal to the
market value of the Common Shares. Beginning June 15, 2000, the LYONs may be
redeemed at any time for cash at the option of USM at the issue price plus
accrued original issue discount through the date of redemption. USM will
purchase LYONs, at the option of the holder, as of June 15, 2000, at the issue
price plus accrued original issue discount through that date. USM will have the
option of purchasing such LYONs with cash, USM Common Shares or TDS common
equity securities, or any combination thereof. No LYONs have been converted as
of December 31, 1995.
USM has financing arrangements with an equipment vendor for cellular system
equipment and construction costs. The borrowings are collateralized by a secured
interest in some or all of the assets of USM's operating subsidiaries.
Borrowings have terms of seven years at interest rates of 2.25% or 2.307% over
the 90-day Commercial Paper Rate (5.58% at December 31, 1995).
The annual requirements for principal payments on long-term debt are
approximately $35.7 million, $36.2 million, $36.4 million, $34.2 million and
$28.5 million for the years 1996 through 2000, respectively.
NOTE 10
MINORITY INTERESTS IN SUBSIDIARIES
The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.
DECEMBER 31,
1995 1994
------------------------
(Dollars in thousands)
USM
USM shareholders' share $259,719 $213,892
USM subsidiaries'
partners share 45,303 33,552
------------------------
305,022 247,444
TDS Telecom telephone
subsidiaries' share 17,108 16,047
APP shareholders' share 6,280 8,928
Other 134 (127)
-------------------------
$328,544 $272,292
-------------------------
-------------------------
SALE OF STOCK BY SUBSIDIARIES
USM has issued Common Shares during 1995, 1994 and 1993 in connection with
acquisitions, employee stock purchase plans, and in 1993 pursuant to a rights
offering. APP has issued Common Shares during 1995 in connection with employee
stock purchase plans, and in 1994 issued 3.5 million Common Shares in an initial
public offering (at a price of $14 per share). The initial public offering
reduced TDS's ownership percentage from 100% to 82.5%. The USM and APP Common
Share transactions were recorded at fair market values which were either less
than or in excess of TDS's book value investment in USM and APP. TDS adjusted
its book value investment as a result of these issues and increased or
(decreased) capital in excess of par value ($545,000), $22.8 million and ($62.2
million) in 1995, 1994 and 1993, respectively.
NOTE 11
PREFERRED SHARES
All issued TDS Cumulative Voting Preferred Shares have a stated value of $100
per share. The 5,000,000 authorized Preferred Shares are issuable in series by
the Board of Directors who establish the terms of the issue. Those issues which
contain mandatory redemption features or which are redeemable at the option of
the holder are classified as Redeemable Preferred Shares. Those issues which are
not redeemable or which are redeemable at the option of TDS are classified as
Nonredeemable Preferred Shares.
REDEEMABLE PREFERRED SHARES
Redeemable Preferred Shares include outstanding series of TDS Cumulative Voting
Preferred Shares with mandatory redemption features or are redeemable at the
option of the holder. At December 31, 1995, 150,929 shares of Redeemable
Preferred Shares were outstanding. Dividends on certain series are payable in
additional shares of that series. All other dividends are payable in cash.
The various series of Redeemable Preferred Shares are redeemable 1) at the
option of the holder at $100 per share plus accrued and unpaid dividends or 2)
at the option of the holder into (at TDS's option) a specified number of USM
Common Shares, a number of TDS Common Shares having a market value equal to the
specified number of USM Common Shares, or a combination of USM and TDS Common
Shares. The annual requirements for redemption of Redeemable Preferred Shares
are $13.5 million, $1.3 million, $79,000, $79,000 and $78,000 for the years 1996
through 2000, respectively.
The following is a schedule of the Redeemable Preferred
Shares' activity.
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------
(Dollars in thousands)
Balance, beginning
of period $25,001 $27,367 $27,967
Add:
Stock dividends 546 839 834
Less:
Redemption of preferred (9,608) (644) (220)
Conversion of preferred -- (1,361) (14)
Expiration of
redemption feature (839) (1,200) (1,200)
Change in
redemption feature (7) -- --
---------------------------------
15,093 25,001 27,367
Less current portion 13,506 11,792 1,735
---------------------------------
Balance, end of period $ 1,587 $13,209 $25,632
---------------------------------
---------------------------------
NONREDEEMABLE PREFERRED SHARES
Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. At
December 31, 1995, 297,104 shares of Nonredeemable Preferred Shares were
outstanding. Outstanding Nonredeemable Preferred Shares are generally redeemable
at the option of TDS at $100 per share, plus accrued and unpaid dividends. At
December 31, 1995, certain series of Preferred Shares are convertible into TDS
Common Shares. (See Note 12 - Convertible Preferred Shares)
The following is a schedule of the Nonredeemable Preferred Shares activity.
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------
(Dollars in thousands)
Balance, beginning
of period $29,819 $16,833 $14,233
Add:
Acquisitions -- 12,500 3,000
Reclassification
from Redeemable
Preferred Shares 839 1,200 1,200
Less:
Conversion of preferred (948) (714) (1,600)
--------------------------------------
Balance, end of period $29,710 $29,819 $16,833
--------------------------------------
--------------------------------------
NOTE 12
COMMON STOCK ACQUISITIONS
During 1995, 1994 and 1993, TDS issued 3.0 million Common Shares, 4.0 million
Common Shares and 7.5 million Common Shares, respectively, for the acquisition
of cellular and telephone interests.
COMMON SHARES ISSUABLE
A cellular acquisition agreement requires TDS to deliver 10,477 Common Shares in
1996, 1997 and 1998.
EMPLOYEE AND SHAREHOLDER STOCK PLANS
The following table summarizes Common and Series A Common Shares issued for the
employee stock ownership plans and dividend reinvestment plans described below.
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------
Common Shares
Employee stock
purchase plan 18,010 34,171 31,065
Tax-deferred
savings plan 40,624 30,764 29,760
Employee stock
options and stock
appreciation rights 22,015 25,107 96,877
Dividend
reinvestment plan 105,001 85,754 26,070
-------------------------------------
185,650 175,796 183,772
-------------------------------------
-------------------------------------
Series A Common Shares
Dividend
reinvestment plan 17,855 7,783 17,182
-------------------------------------
-------------------------------------
EMPLOYEE STOCK PURCHASE PLAN. TDS has reserved 72,823 Common Shares for sale to
the employees of TDS and its subsidiaries at the lower of $44.73 per share or
the year-end closing price ($39.50 per share at December 31, 1995) in connection
with the 1993 Employee Stock Purchase Plan.
TAX-DEFERRED SAVINGS PLAN. TDS has reserved 147,181 Common Shares for issue
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, USM Common Shares, APP Common Shares or five nonaffiliated funds.
Employer matching contributions, equal to 20% of employee contributions up to a
certain limit, are made in TDS Common Shares.
EMPLOYEE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. TDS has reserved 1,327,221
Common Shares for options granted and to be granted to key employees. TDS has
established certain plans that provide for the grant of stock options and stock
appreciation rights to officers and employees. The options are exercisable over
a specified period not in excess of ten years. The options expire from 1996 to
2004, or the date of the employee's termination of employment, if earlier. The
following table summarizes the status of the plans.
Weighted
Number Average
Stock Options of Shares Option Prices
------------------------------
Outstanding January 1, 1993
(177,001 exercisable) 424,974 $ 13.01
Granted 11,125 $ 35.54
Exercised (133,414) $ 9.62
------------------------------
Outstanding December 31, 1993
(107,661 exercisable) 302,685 $ 15.35
Granted 221,275 $ 47.59
Exercised (25,876) $ 5.30
Cancelled (12,487) $ 27.47
------------------------------
Outstanding December 31, 1994
(172,689 exercisable) 485,597 $ 30.25
Granted 49,125 $ 38.28
Exercised (26,101) $ 5.52
Cancelled (3,046) $ 43.32
------------------------------
Outstanding December 31, 1995
(238,125 exercisable) 505,575 $ 32.30
------------------------------
------------------------------
Stock appreciation rights ('SARs') allow the grantee to receive an amount in
cash or Common Shares, or a combination thereof, equivalent to the difference
between the exercise price and the fair market value of the Common Shares on the
exercise date. The following table summarizes the SARs outstanding at $4.43 to
$36.60 per share. These rights expire March 1997, or the date of the employee's
termination of employment, if earlier.
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------
Outstanding beginning
of period 12,096 9,100 22,076
Granted 8,174 7,796 9,410
Exercised (4,236) (4,800) (22,386)
----------------------------------
Outstanding end of period 16,034 12,096 9,100
----------------------------------
----------------------------------
Compensation expense, measured on the difference between the year-end market
price of the Common Shares and SAR prices, was $408,000, $218,000 and $664,000
in 1995, 1994 and 1993, respectively.
DIVIDEND REINVESTMENT PLANS. TDS has reserved 514,842 Common Shares for issue
under the Automatic Dividend Reinvestment and Stock Purchase Plan and 218,699
Series A Common Shares for issue under the Series A Common Share Automatic
Dividend Reinvestment Plan. These plans enable holders of TDS's Common Shares
and Preferred Shares to reinvest cash dividends in newly issued Common Shares
and holders of Series A Common Shares to reinvest cash dividends in newly issued
Series A Common Shares. The purchase price of the shares is 95% of the market
value, based on the average of the daily high and low sales prices for TDS's
Common Shares on the American Stock Exchange for the ten trading days preceding
the date on which the purchase is made.
CONVERTIBLE PREFERRED SHARES
TDS has reserved 2,245,123 Common Shares for the possible conversion of its
convertible Preferred Shares (See Note 11 - Nonredeemable Preferred Shares). TDS
issued 40,734, 115,542 and 139,689 Common Shares in 1995, 1994 and 1993,
respectively, for shares of TDS and subsidiary preferred stock converted.
SERIES A COMMON SHARES
The holders of Common Shares and the outstanding Preferred Shares are entitled
to one vote per share. The holders of Series A Common Shares are entitled to ten
votes per share. Series A Common Shares are convertible, on a share-for-share
basis, into Common Shares. TDS has reserved 6,893,101 Common Shares for possible
issuance upon such conversion.
PUBLIC OFFERING
TDS issued 100,000 and 1.3 million Common Shares for cash under its shelf
registration statements in 1994 and 1993, respectively. Proceeds aggregated $4.9
million and $65.6 million in 1994 and 1993, respectively.
NOTE 13
COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The primary purpose of TDS's construction and expansion program is to provide
for normal growth, to upgrade telephone service, to expand into new
communication areas, and to take advantage of service-enhancing and cost-
reducing technological developments. Property and equipment expenditures for
cellular telephone operations are estimated to be approximately $240 million
during 1996. Telephone construction expenditures are estimated to be
approximately $125 million during 1996. Radio paging fixed asset expenditures
are estimated to be approximately $54 million during 1996, including $8
million for narrowband PCS activities. Broadband PCS aggregate capital
requirements for 1996-1998 are estimated to total approximately $830 million,
with
$585 million for capital additions and $245 million for working capital, start-
up costs and market development activities. Other fixed asset expenditures are
estimated to be approximately $15 million during 1996.
PENDING ACQUISITIONS AND SALES
The Company has an ongoing acquisition program to acquire cellular telephone
interests and telephone companies. At December 31, 1995, TDS has entered into
definitive agreements to acquire a controlling interest in one cellular market,
a minority interest in one cellular market and one telephone company for an
aggregate consideration of approximately $73 million, primarily TDS Common
Shares. The two cellular interests to be acquired by TDS are expected to be
assigned to USM, and at that time, USM will reimburse TDS for TDS's
consideration delivered and costs incurred in such acquisitions in the form of
USM Common Shares, notes payable or cash.
At December 31, 1995, USM had agreements pending to exchange a controlling
interest in one market for a controlling interest in another market, to sell
controlling interests in seven other markets and one market partition and to
settle litigation related to an investment interest which was sold in 1995.
Pursuant to the agreements, USM will receive $150 million in cash and $20
million in notes receivable due in three years. All of the pending agreements
are expected to be completed during 1996. Certain of the sales and the
litigation settlement will generate substantial gains for book and tax purposes.
LEASE COMMITMENTS
TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 1995, 1994 and 1993, rent expense for term
leases was $13.6 million, $10.4 million and $7.8 million, respectively, and rent
expense under cancelable and short-term leases was $7.5 million, $6.5 million
and $5.4 million, respectively. At December 31, 1995, the aggregate minimum
rental commitments under noncancelable operating leases were as follows:
Minimum Future
Rental Payments
----------------------
(Dollars in thousands)
1996 $11,716
1997 10,280
1998 8,563
1999 7,253
2000 6,066
Thereafter $18,160
----------------------
----------------------
LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain cellular telephone systems and other
interests. Management does not believe that any of such proceedings should have
a material adverse impact on the financial position or results of operations of
the Company.
COLLECTIBILITY OF NOTE RECEIVABLE
As of December 31, 1995, USM loaned a total of $5.5 million to another cellular
company ("Cellular Co.") under a long-term financing agreement. Under the
agreement, USM will provide up to $6 million to finance Cellular Co.'s equipment
purchases and construction costs related to the operations in a cellular market.
Although interest payments are current, USM has no assurance that Cellular Co.
will have sufficient assets at the time the principal payment is due in June
2000 to repay the loans in full. No accrual has been made for this possibility
and the note is being carried on the balance sheet at the full loan amount as of
December 31, 1995.
STANDBY LETTER OF CREDIT
The Company has entered into a standby letter of credit agreement effective July
20, 1994 with a financial institution. This standby letter of credit, which will
not exceed $10.0 million, provides supplemental security in support of a bank
loan to an entity minority-owned by the Company. In the event of default under
the minority-owned entity's bank loan agreement, the bank may call upon the
Company's standby letter of credit to satisfy
any amounts still due under this loan agreement.
NOTE 14
RESTRICTION ON COMMON STOCK DIVIDENDS
Under TDS's loan agreements at December 31, 1995, all of the consolidated
retained earnings were available for the payment of cash dividends on shares of
TDS common stock.
Certain regulated telephone subsidiaries may not transfer funds to the parent in
the form of cash dividends, loans or advances until certain financial
requirements of their mortgages have been met. Of the $390.6 million underlying
retained earnings of all TDS subsidiaries at December 31, 1995, $169.1 million
was available for the payment of dividends on the subsidiaries common stock. Of
the $2.4 billion underlying net assets of the TDS subsidiaries at December 31,
1995, $1.8 billion was available for transfer to TDS.
NOTE 15
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The following summarizes the unaudited combined assets, liabilities and equity,
and the unaudited results of operations of the cellular and telephone companies
in which TDS's investments are accounted for by the
equity method.
DECEMBER 31,
1995 1994
------------------------------
(Dollars in thousands)
Assets
Current assets $ 266,967 $ 217,872
Due from affiliates 24,765 20,123
Property and other 937,609 631,222
------------------------------
$1,229,341 $ 869,217
------------------------------
------------------------------
Liabilities and Equity
Current liabilities $ 240,480 $ 194,728
Due to affiliates 31,501 32,034
Deferred credits 5,766 5,468
Long-term debt 40,220 38,984
Partners' capital
and stockholders' equity 911,374 598,003
------------------------------
$1,229,341 $ 869,217
------------------------------
------------------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------
(Dollars in thousands)
Results of Operations
Revenues $1,173,559 $ 892,530 $ 765,983
Costs and expenses (808,008) (652,918) (568,458)
Other income
(expense) 8,249 7,952 (8,045)
Interest expense (6,414) (5,650) (9,046)
Income taxes (4,670) (1,824) (3,596)
Cumulative effect of
accounting changes -- -- 432
--------------------------------------
Net income $ 362,716 $ 240,090 $ 177,270
--------------------------------------
--------------------------------------
NOTE 16
EMPLOYEE BENEFIT PLANS
PENSION PLAN
Telephone and Data Systems, Inc. Employees' Pension Trust I (the "TDS Plan"), a
qualified noncontributory defined contribution pension plan, provides pension
benefits for most of the employees of TDS, Inc., its telephone subsidiaries and
its service companies. Under this plan, pension benefits and costs are
calculated separately for each participant and are funded currently. Employees
of certain of the telephone subsidiaries not covered by the TDS Plan are covered
under other pension plans or receive direct pension payments. USM adopted the
United States Cellular Corporation Pension Plan (the "USM Plan") effective
January 1, 1994. The USM Plan, a qualified noncontributory defined contribution
pension plan, provides pension benefits for USM and American Portable employees.
Under the USM Plan, pension costs are calculated separately for each participant
and are funded currently.
TDS established the Telephone and Data Systems, Inc. Supplemental Executive
Retirement Plan (the "SERP") in 1994 to supplement the benefits under the TDS
Plan and the USM Plan. The SERP was established to offset the reduction of
benefits caused by the limitation on annual employee compensation under Internal
Revenue Service Code Section 401(a)(17). The SERP is a nonqualified deferred
compensation plan and is intended to be unfunded.
Total pension costs were $4.6 million, $4.8 million and $3.3 million in 1995,
1994 and 1993, respectively.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors two defined benefit postretirement plans that cover most of
the employees of TDS, Inc., its telephone subsidiaries and its service
companies. One plan provides medical benefits and the other plan provides life
insurance benefits. Both plans are contributory, with retiree contributions
adjusted annually. The accounting for the medical plan anticipates future cost
sharing changes to the written plan that are consistent with the Company's
intent to increase retiree contributions by the health care cost trend rate.
During 1992 the Company established a Medical Benefit Fund (the "Fund") within
the TDS Plan, under Internal Revenue Code Section 401(h). The Fund was
established to pay for part of the cost of the medical benefits. An amount not
to exceed 25% of the total contribution to the TDS Plan will be contributed to
the Fund annually. An additional contribution equal to a reasonable amortization
of the past service cost may be made without regard to the 25% limitation
described above. The Company will limit overall contributions to the aggregate
accruals recorded by its subsidiaries. The Company established a Voluntary
Employees' Beneficiary Association during 1993 to fund the costs of the life
insurance benefits. The Company's postretirement medical and life insurance
plans are currently underfunded.
The following table sets forth the plans' funded status reconciled with the
amount shown in the Company's consolidated balance sheet at December 31, 1995
(dollars in thousands):
Life Health
Insurance Care
Plan Plan Total
--------------------------------------
(Dollars in thousands)
Accumulated postretirement
benefit obligation:
Retiree's $ 1,066 $ 3,292 $ 4,358
Fully eligible active
plan participants 597 2,562 3,159
Other active plan
participants 1,001 9,950 10,951
--------------------------------------
2,664 15,804 18,468
Plan assets at fair value 940 5,876 6,816
--------------------------------------
Accumulated postretirement
benefit obligation in excess
of plan assets 1,724 9,928 11,652
Unrecognized prior
service cost (42) (357) (399)
Unrecognized net gain from
past experience different
from that assumed and from
changes in assumptions 180 713 893
--------------------------------------
Accrued postretirement
benefit cost
at December 31, 1995 $ 1,862 $10,284 $12,146
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Net postretirement cost for 1995, 1994 and 1993 includes the following
components:
DECEMBER 31,
1995 1994 1993
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(Dollars in thousands)
Service cost $ 588 $ 810 $ 806
Interest cost on accumulated
postretirement benefit
obligation 1,082 1,116 1,378
Actual return on plan assets (656) -- (64)
Net amortization and deferral 204 (224) (49)
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Net postretirement cost $ 1,218 $ 1,702 $ 2,071
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For measurement purposes, a 10.9% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1995; the rate was assumed to
decrease over eight years to 6.1% and to remain at 6.1% thereafter. The assumed
rates of compensation increases and return on plan assets were 5% and 8%,
respectively. The health care cost trend rate assumption has a significant
effect on the amounts reported. Increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995, by $3.5 million and
the aggregate of the service and interest cost components of postretirement
expense for the year then ended by $502,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1994. SFAS No. 112 requires employers to
recognize the obligation to provide benefits to former or inactive employees
after employment but before retirement. The adoption of SFAS No. 112 had no
significant effect on results of operations or financial condition.
NOTE 17
SUBSEQUENT EVENTS
AMERICAN PORTABLE INITIAL PUBLIC OFFERING
American Portable filed a registration statement on February 20, 1996, for an
initial public offering of 11.0 million of its Common Shares and is expected to
grant the underwriters an over-allotment option for up to 1.65 million Common
Shares. If the offering is completed as currently planned, upon completion of
the offering, TDS will own 82.4% to 84.3% of the capital stock of American
Portable. It is estimated that the initial public offering price will be between
$15 and $18 per Common Share.
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
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(Dollars in thousands, except per share amounts)
1995
Operating Revenues $209,975 $ 232,091 $256,508 $255,812
Operating Income 29,156 33,825 40,560 28,457
Net Income 23,193 22,580 42,596 15,609
Net Income Available to Common $ 22,701 $ 22,086 $ 42,338 $ 15,100
Weighted Average Common Shares (000s) 57,292 58,508 59,038 58,741
Earnings per Common Shares: $ .39 $ .38 $ .72 $ .26
1994
Operating Revenues $158,802 $ 173,585 $193,105 $205,318
Operating Income 22,304 29,005 32,303 25,210
Net Income Before Cumulative Effect of
Accounting Changes 10,224 14,320 17,623 18,377
Cumulative Effect of Accounting Changes (723) -- -- --
Net Income 9,501 14,320 17,623 18,377
Net Income Available to Common $ 8,937 $ 13,810 $ 17,166 $ 17,876
Weighted Average Common Shares (000s) 52,555 53,217 54,282 55,612
Earnings per Common Share:
Before Cumulative Effect of
Accounting Changes $ .18 $ .26 $ .31 $ .32
Cumulative Effect of Accounting Changes (.01) -- -- --
Net Income $ .17 $ .26 $ .31 $ .32
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Telephone and Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Telephone and
Data Systems, Inc. (an Iowa corporation) and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, common
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1996
(except with respect to the matter discussed in
Note 17, as to which the date is February 20,1996)
TDS STOCK AND DIVIDEND INFORMATION
TDS's Common Shares are listed on the American Stock Exchange ("AMEX") under
the symbol "TDS" and in the newspapers as "TeleData." As of February 29,
1996, TDS Common Shares were held by 3,921 record owners and the Series A
Common Shares were held by 108 record owners. TDS has paid cash dividends on
Common Shares since 1974, and paid dividends of $.38 and $.36 per Common and
Series A Common Share during 1995 and 1994, respectively.
The Common Shares of United States Cellular Corporation, an 80.8%-owned
subsidiary of TDS, are listed on the AMEX under the symbol "USM" and in the
newspapers as "US Cellu." The Common Shares of American Paging, Inc., an
82.3%-owned subsidiary of TDS, are also listed on the AMEX under the symbol
"APP" and in the newspapers as "AmPaging."
MARKET PRICE PER COMMON SHARE BY QUARTER
TDS's Series A Common Shares and Preferred Shares are not actively traded and
therefore, quotations are not reported for such securities. Dividends on
TDS's Preferred Shares have been paid quarterly since the dates of issue. The
high and low sales prices of the Common Shares on the AMEX as reported by the
Dow Jones News Service are as follows:
1995 1ST 2ND 3RD 4TH
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High $ 46.38 39.38 42.88 43.25
Low $ 36.13 36.00 36.38 35.63
Dividend Paid $ .095 .095 .095 .095
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1994 1ST 2ND 3RD 4TH
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High $ 51.50 42.88 47.63 49.88
Low $ 36.75 36.00 35.50 39.50
Dividend Paid $ .09 .09 .09 .09
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