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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _______________________
Commission File Number 1-8251
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TELEPHONE AND DATA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Iowa 36-2669023
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 North LaSalle Street, Chicago, Illinois 60602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-1900
Not Applicable
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(Former address of principle executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1994
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Common Shares, $1 par value 48,144,865 Shares
Series A Common Shares, $1 par value 6,887,164 Shares
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THIS CONFORMING PAPER FORMAT IS BEING SUBMITTED
PURSUANT TO RULE 901(d) OF REGULATION S-T
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
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3RD QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial
Condition 2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1994 and 1993 20
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1994
and 1993 21
Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993 22-23
Notes to Consolidated Financial Statements 24
Part II. Other Information 26
Signatures 27
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
RESULTS OF OPERATIONS
---------------------
Nine Months Ended 9/30/94 Compared to Nine Months Ended
9/30/93
CONSOLIDATED
Telephone and Data Systems, Inc.'s ("TDS" or the
"Company") consolidated results of operations for the first
nine months of 1994 reflect i) rapid growth in cellular and
paging customer units which resulted in substantial increases
in revenues, ii) steady growth in telephone access lines and
revenues, iii) improvements in cellular economies of scale and
cost-containment measures in all three business units which
resulted in improved cash flow, operating results, and cash
and operating margins, iv) increases in interest and income
tax expense and v) an increase in weighted average shares
outstanding due to the Company's continuing acquisition
program and sales of Common Shares. Operating revenues grew
29.1% to $525.5 million in the first nine months of 1994 over
1993, operating cash flow increased 34.6% to $192.8 million
and operating income rose 46.0% to $83.6 million. Net income
before the cumulative effect of an accounting change rose
52.5% to $42.2 million in the first nine months of 1994 over
1993. Earnings per share before the cumulative effect of an
accounting change grew 33.9% to $.75 in 1994 from $.56 in
1993, reflecting the significantly improved operating results
offset somewhat by a 14.6% increase in weighted average common
shares. Net income and earnings per share in 1994 were
reduced by $723,000 and $.01, respectively, due to TDS's
adoption of a new accounting standard for postemployment
benefits.
TDS Telecommunications Corporation ("TDS Telecom") has
acquired four telephone companies since September 30, 1993.
These acquisitions added 18,600 access lines while internal
growth added 15,800 lines. TDS Telecom provides service to
customers in 29 states. United States Cellular Corporation
(AMEX symbol "USM"), TDS's 81.3%-owned subsidiary, has added
13 markets to consolidated operations since September 30,
1993, through acquisitions and the initiation of cellular
operations. USM currently provides cellular service through
systems serving 124 majority-owned and managed markets.
American Paging, Inc. (AMEX symbol "APP"), TDS's 82.5%-owned
subsidiary, has added approximately 145,500 pagers since
September 30, 1993. APP provides service to its customers
through 38 sales and service operating centers.
Operating revenues grew 29.1% ($118.6 million) in 1994
primarily as a result of the growth in customers served.
Cellular telephone revenues increased as a result of the 61.5%
customer growth in majority-owned markets, which resulted in
increased local retail and access revenue, and increased
roaming revenues, offset somewhat by a 5.2% decline in average
monthly service revenue per unit. Radio paging revenues
increased primarily as a result of the 33.6% growth in the
number of pagers in service offset somewhat by a 12.7% decline
in average monthly service revenue per unit. Telephone
revenues increased primarily due to acquisitions, recovery of
increased costs of providing long-distance services and
internal access line growth.
-2-
<PAGE>
Operating expenses rose 26.4% ($92.3 million) in 1994 as
a result of the continued rapid growth in USM's cellular
telephone operations and the steady growth in TDS Telecom's
and APP's operations. Operating expenses increased at a
slower rate than consolidated revenues due to increasing
economies of scale in the cellular business and cost-
containment measures in all three businesses.
Operating income increased 46.0% to $83.6 million in the
first nine months of 1994 from $57.3 million in 1993. The
increase in operating income reflects improved operating
results in all three business units, as shown in the following
table.
Nine Months Ended September 30,
---------------------------------
1994 1993 Change
(Dollars in thousands) ------- -------- --------
CONSOLIDATED OPERATING INCOME
Telephone Operations $67,513 $61,643 $ 5,870
Cellular Telephone Operations 15,614 (2,592) 18,206
Radio Paging Operations 485 (1,778) 2,263
------- ------- -------
$83,612 $57,273 $26,339
======= ======= =======
Operating Margins:
Telephone 30.5% 30.8%
Cellular Telephone* 6.9% (1.8)%
Radio Paging* .9% (3.8)%
* Computed on Service Revenues
Investment and other income increased 2.0% ($401,000) in
1994. Cellular investment income, net increased $9.1 million
to $19.7 million, reflecting improvement in USM's equity-
method markets managed by others. Minority share of income
increased $6.4 million in the first nine months of 1994 over
1993, as shown in the following table. Gain on sale of
cellular interests in 1993 includes $4.9 million related to
the sale of two cellular minority interests. Other income,
net reflects a $1.0 million pretax charge in 1993 as American
Paging elected to cease national retailer distribution of
pagers through its wholly owned subsidiary, American Paging
Network ("APN").
Minority share of income includes (a) the minority
shareholders' share of USM's net income or loss, (b) the
minority partners' share of income or loss of the cellular
markets majority-owned by USM and (c) the minority
shareholders' share of income of a telephone company majority-
owned by TDS. USM reported net income in 1994 and a net loss
in 1993, resulting in a $5.1 million increase in minority
share of income.
-3-
<PAGE>
MINORITY SHARE OF INCOME
Nine Months Ended September 30,
---------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands)
United States Cellular
Minority Shareholders' Share $(2,743) $ 2,379 $(5,122)
Minority Partners' Share (3,680) (2,744) (936)
------- ------- -------
(6,423) (365) (6,058)
TDS Telecom (1,072) (746) (326)
------- ------- -------
$(7,495) $(1,111) $(6,384)
======= ======= =======
Interest expense increased 3.2% ($879,000) in 1994. The
increase was primarily due to an increase in long-term
interest expense. TDS Telecom's long-term borrowings have
increased $34.3 million since September 30, 1993 (including
$22.7 million from acquired companies.)
Income tax expense increased 52.1% ($11.4 million) in
1994 compared with 1993 as pretax income increased. The
effective income tax rate was 44.0% in the first nine months
of 1994 and 1993. State income taxes increased 39.8% ($1.8
million) in 1994, due primarily to the increase in pretax
income.
Net income before the cumulative effect of a change in
accounting principle improved to $42.2 million in 1994 from
$27.7 million in 1993. Earnings per common share before the
cumulative effect of a change in accounting principle were
$.75 in 1994 and $.56 in 1993. The weighted average number of
common shares outstanding increased 14.6% since September 30,
1993. The increase is primarily due to the issuance of 4.5
million Common Shares in connection with acquisitions and
420,000 Common Shares for cash since September 30, 1993.
Cumulative effect of accounting changes: Effective
January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting
for Postemployment Benefits." SFAS No. 112 requires employers
to recognize the obligation to provide postemployment benefits
to former or inactive employees after employment but before
retirement. The cumulative effect of the new principle on
years prior to 1994 reduced net income and earnings per share
by $723,000 and $.01, respectively.
-4-
<PAGE>
TELEPHONE OPERATIONS
Nine Months Ended September 30,
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Change Change
Due To Excluding
1994 1993 Change Acquisitions Acquisitions
-------------------------------------------------
(Dollars in thousands,
except per access
line amounts)
Operating Revenues
Local Service $ 60,711 $ 53,978 $ 6,733 $ 1,175 $ 5,558
Network Access and
Long-Distance 130,672 119,319 11,353 7,905 3,448
Miscellaneous 29,938 26,546 3,392 1,043 2,349
-------- -------- ------- -------- --------
221,321 199,843 21,478 10,123 11,355
-------- -------- ------- -------- --------
Operating Expenses
Network Operations 35,887 30,613 5,274 3,909 1,365
Customer Operations 31,595 29,113 2,482 1,085 1,397
Corporate and Other 36,397 34,448 1,949 1,768 181
Depreciation 47,141 41,395 5,746 1,297 4,449
Amortization 2,788 2,631 157 231 (74)
-------- -------- ------- -------- --------
153,808 138,200 15,608 8,290 7,318
-------- -------- ------- -------- --------
Operating Income $ 67,513 $ 61,643 $ 5,870 $ 1,833 $ 4,037
======== ======== ======= ======== ========
Telephone Revenues as
a Percent of Total
Revenues 42.1% 49.1%
Additions to Property,
Plant and Equipment* $ 72,463 $ 54,375
Identifiable Assets $938,730 $815,209
Companies 95 92
Access Lines 385,000 350,600
Growth in access lines
in past 12 months:
Acquisitions 18,600 20,000
Internal growth 15,800 13,700
Average monthly revenue
per access line** $ 66 $ 66
* Does not include cash expenditures (in thousands) of $3,430 and
$864, respectively, which relate to additions in prior periods.
** Excludes revenues of long distance carrier in 1994.
Operating revenues from telephone operations increased
10.7% ($21.5 million) in the first nine months of 1994
compared to 1993. The increase in revenues was primarily due
to internal access line growth, recovery of increased costs of
providing long-distance services and the effects of
acquisitions. Acquisitions increased telephone revenues 5.1%
($10.1 million) in 1994. TDS has acquired four telephone
companies serving 18,600 access lines since September 30,
1993. Telephone results of operations include the results of
these acquired companies since the respective dates of
acquisition.
Local service revenues increased 12.5% ($6.7 million) in
1994 with acquisitions increasing such revenues 2.2% ($1.2
million). Internal access line growth and sales of
custom-calling and other features increased revenues 6.7%
($3.6 million). Certain extended community calling ("ECC")
revenues previously reported as network access revenues and
changes in settlement plans increased local service revenues
2.1% ($1.2 million).
-5-
<PAGE>
Network access and long-distance revenues increased 9.5%
($11.4 million) in 1994 with acquisitions increasing such
revenues 6.6% ($7.9 million). An August 1994 acquisition
added a long-distance carrier to TDS Telecom's operations.
Increased usage of the network generated 3.4% ($4.1 million)
of additional network access and long-distance revenue. These
revenues increased 3.6% ($4.3 million) due to recovery of
increased costs of providing access to long-distance carriers.
Out-of-period adjustments to revenues earned based on expense
and investment in the network reduced these revenues .8% ($1.0
million) in 1994. These revenues also decreased 1.8% ($2.1
million) in 1994 due to changes in settlement plans and
because certain ECC revenues are now reported as local service
revenues.
Miscellaneous revenues increased 12.8% ($3.4 million) in
1994 with acquisitions increasing such revenues 3.9% ($1.0
million). Higher sales and leases of customer premise
equipment increased miscellaneous revenues 4.2% ($1.1
million), changes in settlement plans increased these revenues
3.6% ($949,000), and call plan programming services provided
to other carriers increased these revenues 1.4% ($384,000).
Operating expenses increased 11.3% ($15.6 million) in
1994. Acquisitions increased operating expenses 6.0% ($8.3
million).
Network operations expenses increased 17.2% ($5.3
million) with acquisitions increasing these expenses 12.8%
($3.9 million). As discussed above, an August 1994
acquisition added a long-distance carrier to TDS Telecom's
operations. The remainder of the increase was primarily due
to salary and work force changes along with the effects of
general inflation. Depreciation expense increased 13.9% ($5.7
million) with acquisitions increasing such expenses 3.1% ($1.3
million). Additional provisions for depreciation retroactive
to January 1, 1994 increased depreciation expenses 4.3% ($1.8
million). The remaining increase was due primarily to
increases in plant facilities. Customer operations expenses
increased 8.5% ($2.5 million) with acquisitions increasing
such expenses 3.7% ($1.1 million). The remaining increase was
primarily due to increases in salary and workforce changes,
customer billing and programming costs and increased marketing
activities. Corporate and other expenses increased 5.7% ($1.9
million) with acquisitions increasing such expenses 5.1% ($1.8
million).
Operating income from telephone operations increased 9.5%
($5.9 million) in 1994, with acquisitions increasing such
income 3.0% ($1.8 million). The telephone operating margin
was 30.5% in 1994 compared to 30.8% in 1993. The increase in
operating income reflects additional 1994 revenues from
recovery of increased costs of providing long-distance
services and from growth in access lines and minutes of use.
These increases in revenues were offset somewhat by increased
costs for plant operations and customer billing and by
increased depreciation.
-6-
<PAGE>
CELLULAR TELEPHONE OPERATIONS
Nine Months Ended September 30,
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1994 1993 Change
------- -------- --------
(Dollars in thousands, except per
unit amounts)
Operating Revenues
Service* $ 227,101 $ 144,919 $ 82,182
Equipment Sales 9,715 7,051 2,664
---------- ----------- ----------
236,816 151,970 84,846
---------- ----------- ----------
Operating Expenses
System Operations* 33,890 24,941 8,949
Marketing and Selling 46,089 28,249 17,840
Cost of Equipment Sold 25,847 16,633 9,214
General and Administrative 68,258 52,607 15,651
Depreciation 28,192 18,238 9,954
Amortization 18,926 13,894 5,032
---------- ----------- ----------
221,202 154,562 66,640
---------- ----------- ----------
Operating Income (Loss) $ 15,614 $ (2,592) $ 18,206
========== =========== ==========
Cellular Telephone Revenues as a
Percent of Total Revenues 45.1% 37.3%
Additions to Property, Plant
and Equipment** $ 110,644 $ 56,742
Identifiable Assets $1,532,912 $ 1,201,539
Majority-Owned, Managed and
Consolidated Markets:
Population equivalents (000s) 18,793 17,682
Total population (000s) 20,531 18,290
Customers 364,000 225,400
Market penetration 1.77% 1.23%
Markets in operation 124 111
Cell sites in service 686 444
Average monthly service revenue
per unit* $ 81 $ 85
Churn rate per month 2.2% 2.2%
Marketing cost per net customer
addition $ 676 $ 661
* Amounts for 1993 have been reclassified to conform to current year
presentation.
** Does not include cash expenditures (in thousands) of $6,489 and $193,
respectively, which relate to additions in prior periods.
USM owns, operates and invests in cellular markets. USM
owned or had the right to acquire interests, both majority and
minority, in 208 cellular telephone markets at September 30,
1994, representing 24,192,000 population equivalents. USM
expects to divest two of these markets and manage the
operations of six additional markets in the future. In total,
USM expects to manage 146 markets under agreements currently
in place. The remaining interests in 62 markets are managed
by others. USM's consolidated results of operations include
100% of the revenues and expenses of the systems serving its
majority-owned and managed markets. The results of operations
of 124 markets are included in 1994 consolidated results
compared to 111 markets in 1993.
Operating revenues increased 55.8% ($84.8 million) in
1994. The revenue increase is primarily the result of 61.5%
customer growth in the systems serving its majority-owned and
managed markets, growth in roamer revenues and acquisitions.
Acquisitions and start-ups increased revenues 10.4% ($15.8
million). USM changed its financial reporting presentation
for outbound, or pass-through, roamer revenue during the first
quarter of 1994. Pass-through roamer revenue is now treated
as an offset to the expense charged by other cellular carriers
to USM's markets for this roaming service, and the net amount
is included in system operations expense.
-7-
<PAGE>
Service revenues and system operations expense for 1993 have
been reclassified for the effect of this change in
presentation, which allows for more comparability of USM's
revenues and margins to other companies in the cellular
industry. While the number of customers and amount of
revenues earned continued to grow, average revenue per
customer and monthly local minutes of use per customer
declined. Average monthly service revenues per customer
declined to $81 in 1994 from $85 in 1993.
Service revenues from local customers' usage of USM's
systems increased 60.6% ($50.4 million) in 1994. Growth in
the number of customers in USM's consolidated markets was the
primary reason for the increase in local revenue, offset
somewhat by the decrease in average monthly local minutes of
use. The decrease in average minutes of use resulted in a
decrease in average monthly retail revenue per customer, to
$47 in 1994 from $49 in 1993. Monthly local minutes of use
averaged 97 in the first nine months of 1994 compared to 104
in the same period in 1993. The decline in average local
minutes of use follows an industry-wide trend and is believed
to be related to the tendency of the early subscribers in a
market to be the heaviest users. It also reflects USM's and
the cellular industry's continued penetration of the consumer
market, which tends to include more lower-usage customers.
Management anticipates that average local minutes of use and
average monthly revenue per customer will continue to decline
as USM adds more customers. Inbound roamer revenues, earned
when customers of other systems use USM's cellular systems,
increased 48.4% ($24.4 million). The increase is attributable
to an increase in the number of customers from other systems
using USM's systems as well as an increased number of USM-
managed systems and cell sites within those systems. Monthly
roamer revenue per customer averaged $27 in 1994 and $30 in
1993. Long-distance revenues increased 70.1% ($6.8 million)
as the volume of long-distance calls billed by USM increased.
Equipment sales revenue reflects the sale of 98,200 and
52,700 cellular telephone units in 1994 and 1993,
respectively, plus installation and accessories revenue. The
average revenue per telephone unit sold was $99 in 1994
compared to $134 in 1993. The average revenue decline
partially reflects USM's decision to reduce sales prices on
cellular telephones to stimulate customer growth as well as
reduced manufacturers' prices. Also, during the first nine
months of 1994, USM used promotions which were based on
increased equipment discounting. The success of these
promotions led to both an increase in units sold and a
decrease in average equipment sales revenue per unit.
Operating expenses increased 43.1% ($66.6 million) in
1994. The increase in expenses was primarily the result of
increased customer activations, acquisitions and increased
depreciation and amortization expense related to increases in
fixed assets and license costs. Acquisitions and start-ups
increased operating expenses 14.0% ($21.7 million) in 1994.
System operations expenses increased 35.9% ($8.9 million)
in 1994 as a result of increases in customer usage expenses
and other costs associated with operating USM's increased
number of cellular systems and the growing number of cell
sites within those systems. Customer usage expenses represent
charges from other telecommunications service providers for
local interconnection to the landline network, toll charges
and roamer expenses from USM's customers' use of systems other
than their local systems, offset somewhat by increased pass-
through roamer revenue. Customer usage expenses grew 11.6%
($1.5 million) in 1994. Maintenance, utility and cell site
expenses grew 63.6% ($7.4 million) in 1994, reflecting growth
in the number of cells to 686 in 1994 from 444 in 1993 and in
the number of switches in service, and the effects of
acquisitions and start-ups.
-8-
<PAGE>
Marketing and selling expenses increased 63.2% ($17.8
million) in 1994, due primarily to the increased number of
gross customer activations in 1994 and the effects of
acquisitions and start-ups. Marketing and selling expenses
primarily consist of salaries, commissions and expenses of
field sales and retail personnel and offices, agent
commissions, promotional expenses, local advertising and
public relations expenses. Management expects that marketing
and selling costs will continue to increase as additional
customers are added to USM's systems.
Cost of equipment sold reflects the increased unit sales
related to the increase in gross customer activations and the
increase in of 1994 promotional sales activity discussed
above, offset somewhat by declining manufacturers' prices per
unit. The average cost of a telephone unit sold was $263 in
1994 compared to $316 in 1993.
General and administrative expenses increased 29.8%
($15.7 million) in 1994. These expenses include the costs of
operating USM's local business offices and its corporate
expenses. The increase results from the increase in the
number of consolidated markets due to acquisitions as well as
the growth in the customer base in existing systems. USM is
using an ongoing clustering strategy to combine local
operations wherever feasible in order to gain operational
efficiencies and reduce its administrative expenses. Of the
increase in general and administrative expenses in 1994,
approximately $1.5 million was specifically due to legal
expenses incurred to defend the Company against claims
totalling more than $200 million. The Company was successful
at trial, however, the plaintiffs have appealed the decision.
As a result, the Company will likely incur additional legal
expenses in the future related to this case.
Depreciation expense increased 54.6% ($10.0 million) in
1994, reflecting a 56.9% increase in average fixed assets
since September 30, 1993. Amortization expense, primarily
amortization of license costs, increased 36.2% ($5.0 million)
in 1994. This additional amortization reflects the 22.2%
($183 million) increase in license costs for consolidated
operational markets since September 30, 1993.
Operating income was $15.6 million in 1994 compared to an
operating loss of $2.6 million in 1993. Operating margin on
service revenues improved to 6.9% in 1994 from (1.8%) in 1993.
The improvement in operating results was primarily due to
improved results in the more established markets and increased
revenues from growth in the customer base, offset somewhat by
costs associated with the growth of USM's operations and
increased losses on equipment sales. At least 12 markets are
expected to be added to consolidated operations during the
remainder of 1994. The addition of these markets is expected
to increase expenses as USM adds to its technical and
administrative staffs to build and serve the markets.
Additionally, management believes there exists a seasonality
in both service revenues and operating expenses, especially
marketing expenses. As a result, decreased operating income,
or an operating loss, could be generated over the next several
quarters.
Cellular investment income includes USM's and TDS's share
of the net incomes or losses of cellular markets in which they
have a minority interest and for which they follow the equity
method of accounting, net of amortization of license costs
related to those minority interests.
-9-
<PAGE>
CELLULAR INVESTMENT INCOME
Net of License Cost Amortization Nine Months Ended September 30,
---------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands)
Cellular Systems Managed by USM $ 773 $ (171) $ 944
Cellular Systems Managed by Others 18,929 10,766 8,163
------- ------- -------
$19,702 $10,595 $ 9,107
======= ======= =======
Net income from cellular telephone operations was $12.4
million in 1994 compared to a net loss of $11.9 million in
1993. Such net income or loss excludes the USM minority
shareholders' share of such income or loss. Net income or
loss from cellular telephone operations does not include
income taxes from inclusion in the TDS consolidated federal
tax return. Under a tax allocation agreement between TDS and
USM, TDS does not reimburse USM currently for income tax
benefits and credits. Instead, such benefits and credits are
carried forward until they can be used by USM.
TDS owned an aggregate of 63,879,673 shares of common
stock of USM at September 30, 1994, representing over 81% of
the combined total of USM's outstanding Common and Series A
Common Shares and over 96% of their combined voting power.
Assuming USM Common Shares are issued in all instances in
which USM has the choice to issue its Common Shares or other
consideration and assuming all issuances of USM's common stock
to be issued to TDS and third parties for completed and
pending acquisitions and Preferred Stock conversions had been
completed at September 30, 1994, TDS would have owned
approximately 80% of the total outstanding common stock of USM
and controlled over 95% of the combined voting power of both
classes of its common stock. In the event TDS's ownership of
USM falls below 80% of the total value of all of the
outstanding shares of USM's stock, TDS and USM would be
deconsolidated for federal income tax purposes. TDS and USM
have the ability to defer or prevent deconsolidation, if
deferring or preventing deconsolidation would be advantageous,
by delivering TDS Common Shares and/or cash, in lieu of USM's
Common Shares in connection with certain acquisitions.
-10-
<PAGE>
RADIO PAGING OPERATIONS
Nine Months Ended September 30,
---------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands, except per
unit amounts)
Service Operations
Revenues* $ 56,451 $ 46,968 $ 9,483
------- ------- -------
Costs and Expenses
Cost of Services* 13,865 12,112 1,753
Selling and Advertising 9,713 8,307 1,406
General and Administrative* 20,397 18,441 1,956
Depreciation 10,333 8,262 2,071
Amortization* 1,822 1,560 262
------- ------- -------
56,130 48,682 7,448
------- ------- -------
Service Operating Income (Loss) 321 (1,714) 2,035
------- ------- -------
Equipment Sales
Revenue 10,904 8,115 2,789
Cost of Equipment Sold 10,740 8,179 2,561
------- ------- -------
Equipment Sales Income (Loss) 164 (64) 228
------- ------- -------
Operating Income (Loss) $ 485 $ (1,778) $ 2,263
======= ======= =======
Radio Paging Revenues as a
Percent of Total Revenues 12.8% 13.6%
Additions to Property and Equipment** $ 21,095 $ 17,284
Identifiable Assets $ 81,596 $ 67,359
Pagers in Service 578,400 432,900
Average monthly service revenue per unit $ 12.15 $ 13.91
Transmitters in service 888 625
Disconnect rate per month 2.7% 2.9%
Marketing cost per net customer unit
addition $ 84 $ 83
* Amounts for 1993 have been reclassified to conform to year-end 1993
presentation.
** Does not include cash expenditures (in thousands) of $1,227 in 1994 which
relate to additions in 1993.
Includes noncash expenditures (in thousands) of $332 in 1993.
Service revenues increased 20.2% ($9.5 million) in the
first nine months of 1994 from 1993, primarily as a result of
the 33.6% growth in the number of pagers in service. A net
additional 145,500 pagers have been placed in service since
September 30, 1993. However, a continuing decline in average
revenue per pager has slowed service revenue growth. Average
monthly service revenue per pager declined 12.7% to $12.15 in
the first nine months of 1994 from $13.91 in the same period
of 1993. The decline in APP's average service revenue per
pager is consistent with the industry trend. However, APP's
average service revenue per pager remains above the industry
average. Declining average monthly service revenue per pager
is related to competitive factors and a shift toward lower
revenue distribution channels such as resellers and customers
purchasing pagers through retail operations.
Service expenses increased 15.3% ($7.4 million) in 1994
from 1993, primarily as a result of the costs of system
expansion and serving new customers. However, average monthly
operating cost per unit improved 18.5% to $7.38 in 1994 from
$9.05 in 1993 as a result of achieving increasing economies of
scale and operating efficiencies. Cost of services increased
14.5% ($1.8 million) in 1994 reflecting the additional costs
of providing service to the increased customer base, the costs
of upgrading and expanding the systems to improve system
reliability and coverage as well as the activation of regional
systems in Oklahoma, Washington D.C., Minnesota, and central
Florida. APP's transmitters in service increased to 888 at
September 30, 1994 from 625 at September 30, 1993. Selling
and advertising expense increased 16.9% ($1.4
-11-
<PAGE>
million) in 1994 over 1993. The growth in gross sales caused
an increase of approximately $1.2 million that relates to an
increase in the number of sales employees as well as increased
sales commissions paid to both sales employees and retailers.
Selling and advertising expense increased at a slower rate
than the rate of growth in pagers in service due to improved
productivity of sales personnel and increased use of lower-
cost distribution channels such as resellers and retail
outlets. General and administrative expense increased 10.6%
($2.0 million) due primarily to additional bad debt expense
($552,000), additional billing costs due to an enhancement of
APP's customer billing system ($340,000), increases in
employee-related costs ($600,000) and additional costs of
being a public company ($200,000). These increases in service
expenses were offset somewhat by a refund of health and life
insurance premiums totalling $540,000. Depreciation and
amortization charges increased 23.8% ($2.3 million) in 1994,
reflecting increased investment in pagers and related
equipment, additional amortization expense due to a June 1993
acquisition and a write-down of approximately $200,000 of
obsolete pagers in second quarter 1994. Based on a study of
useful lives, APP shortened the estimated useful lives of
pagers and transmitters beginning July 1, 1994. The change in
estimated useful lives increased depreciation expense by
approximately $725,000 for the third quarter of 1994 and is
expected to increase depreciation expense by approximately
$780,000 in the fourth quarter of 1994 and $3.8 million for
1995.
Equipment sales revenue increased 34.4% ($2.8 million)
due to APP's increased emphasis on selling pagers to
customers, particularly through retail stores and resellers.
Cost of equipment sold increased 31.3% ($2.6 million) also due
to the increased focus on pager sales.
Operating income was $485,000 in 1994 compared to
operating loss of $1.8 million in 1993. The improvement in
operating results reflects i) rapid growth in revenues due to
the growth in the customer base, offset somewhat by a
continuing decline in average monthly service revenue per unit
and ii) increased operating expenses due to the growth in
customer units and costs of upgrading the systems to improve
reliability and coverages, tempered by APP's efforts to reduce
costs through process improvements and economies of scale.
Net loss from radio paging operations totalled $351,000
in 1994 compared to a net loss of $3.3 million in 1993.
PARENT AND SERVICE COMPANY OPERATIONS
Other income, net includes the gross income of TDS's
computer, engineering and printing service companies and costs
of corporate operations. Additionally, 1993's amount includes
the $1.0 million charge to cease operations at APN, as
discussed previously.
Nine Months Ended
September 30,
-----------------------
1994 1993
---------- ----------
(Dollars in thousands)
Additions to Property and Equipment* $ 5,716 $ 6,238
Identifiable Assets $ 81,702 $ 83,352
* Does not include cash expenditures (in thousands) of $175 and $566,
respectively, which relate to additions in 1993.
-12-
<PAGE>
Three Months Ended 9/30/94 Compared to Three Months Ended
9/30/93
CONSOLIDATED
Operating revenues grew 29.4% ($43.9 million) in 1994
primarily as a result of the growth in customers served.
Operating expenses rose 25.6% ($32.7 million) in 1994 as a
result of the continued rapid growth in USM's cellular
telephone operations and the steady growth in TDS Telecom's
and APP's operations. Operating income increased 52.9% to
$32.3 million in the third quarter of 1994 from $21.1 million
in 1993. The increase in operating income reflects the strong
gains from cellular telephone operations.
Three Months Ended September 30,
--------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands)
CONSOLIDATED OPERATING INCOME
Telephone Operations $21,941 $20,901 $ 1,040
Cellular Telephone Operations 11,095 228 10,867
Radio Paging Operations (733) (7) (726)
------- ------- -------
$32,303 $21,122 $11,181
======= ======= =======
Operating Margins:
Telephone 27.4% 30.0%
Cellular Telephone* 12.8% .4%
Radio Paging* (3.8)% -
* Computed on Service Revenues
Investment and other income decreased 7.0% ($696,000) in
the third quarter of 1994 over the third quarter of 1993.
Cellular investment income increased 97.6% ($4.4 million),
reflecting improvement in USM's equity-method markets managed
by others. Minority share of income increased $2.8 million as
shown in the following table. Gain on sale of cellular
interests, $4.9 million in 1993, reflects the sale of two
cellular minority interests.
Minority share of income includes (a) the minority
shareholders' share of USM's net income or loss, (b) the
minority partners' share of income or loss of the cellular
markets majority-owned by USM and (c) the minority
shareholders' share of income of a telephone company majority-
owned by TDS.
MINORITY SHARE OF INCOME
Three Months Ended September 30,
---------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands)
United States Cellular
Minority Shareholders' Share $(2,000) $ 142 $(2,142)
Minority Partners' Share (1,366) (757) (609)
------- ------- -------
(3,366) (615) (2,751)
TDS Telecom (244) (218) (26)
------- ------- -------
$(3,610) $ (833) $(2,777)
======= ======= =======
-13-
<PAGE>
Interest expense increased 2.7% ($269,000) in 1994,
primarily due to an increase in short-term notes payable.
Income tax expense increased 47.8% ($4.5 million) in 1994
compared with 1993 as pretax income increased. The effective
income tax rate was 44% in the third quarter of 1994 and 1993.
Net income increased to $17.6 million in the third
quarter of 1994 from $11.9 million in 1993. Earnings per
common share were $.31 in 1994 and $.23 in 1993. The weighted
average number of common shares outstanding increased 12.4% in
1994.
TELEPHONE OPERATIONS
Three Months Ended September 30,
--------------------------------------------------
Change Change
Due To Excluding
1994 1993 Change Acquisitions Acquisitions
--------------------------------------------------
(Dollars in thousands,
except per access
line amounts)
Operating Revenues
Local Service $ 21,213 $ 19,030 $ 2,183 $ 442 $ 1,741
Network Access and
Long-Distance 48,372 41,326 7,046 5,428 1,618
Miscellaneous 10,388 9,281 1,107 452 655
-------- -------- ------- -------- -------
79,973 69,637 10,336 6,322 4,014
Operating Expenses
Network Operations 14,187 11,057 3,130 3,190 (60)
Customer Operations 11,311 10,081 1,230 555 675
Corporate and Other 13,700 11,608 2,092 1,028 1,064
Depreciation 17,845 15,071 2,774 676 2,098
Amortization 989 919 70 72 (2)
-------- -------- ------- -------- -------
58,032 48,736 9,296 5,521 3,775
-------- -------- ------- -------- -------
Operating Income $ 21,941 $ 20,901 $ 1,040 $ 801 $ 239
======== ======== ======= ======== =======
Average monthly revenue
per access line* $ 70 $ 67
* Excludes revenues of long distance carrier in 1994.
Operating revenues from telephone operations increased
14.8% ($10.3 million) in the third quarter of 1994 compared to
1993. The increase in revenues was primarily due to the
effects of acquisitions, internal access line growth, recovery
of increased costs of providing network access and sales of
custom-calling and other features. Local service revenues
increased 11.5% ($2.2 million) in 1994, network access and
long-distance revenues increased 17.1% ($7.0 million), and
miscellaneous revenues increased 11.9% ($1.1 million) for
reasons generally the same as for the first nine months.
Operating expenses increased 19.1% ($9.3 million) in 1994, for
reasons generally the same as for the first nine months.
-14-
<PAGE>
CELLULAR TELEPHONE OPERATIONS
Three Months Ended September 30,
---------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands, except per
unit amounts)
Operating Revenues
Service* $86,675 $57,869 $28,806
Equipment Sales 3,251 2,081 1,170
------- ------- -------
89,926 59,950 29,976
------- ------- -------
Operating Expenses
System Operations* 12,086 9,405 2,681
Marketing and Selling 16,058 10,615 5,443
Cost of Equipment Sold 8,826 8,252 574
General and Administrative 25,052 19,597 5,455
Depreciation 10,050 6,720 3,330
Amortization 6,759 5,133 1,626
------- ------- -------
78,831 59,722 19,109
------- ------- -------
Operating Income $11,095 $ 228 $10,867
======= ======= =======
Average monthly service revenue per unit* $ 83 $ 91
Churn rate per month 2.2% 2.5%
Marketing cost per net customer addition $ 698 $ 626
* Amounts for 1993 have been reclassified to conform to current year
presentation.
Service revenues increased 49.8% ($28.8 million) in the
third quarter of 1994. The revenue increase is primarily the
result of 61.5% customer growth in the systems serving USM's
majority-owned and managed markets, growth in roamer revenues
and the effects of acquisitions and start-ups. Average
monthly service revenue per customer declined to $83 in 1994
from $91 in 1993. Monthly local minutes of use averaged 99 in
the third quarter of 1994 compared to 107 in 1993. Revenues
from local customers' usage of USM's systems increased 55.9%
($17.5 million) in 1994 primarily due to the increased number
of customers served. Inbound roamer revenues increased 40.0%
($8.6 million) in 1994. The increase in inbound roamer
revenues is primarily due to the increased number of other
carriers' customers using USM's systems and the growth in the
number of cell sites within those systems. Long-distance
revenues increased 47.1% ($2.1 million) as the volume of long-
distance calls billed by USM increased.
Equipment sales revenue reflects the sale of 35,100 and
28,300 cellular telephone units in 1994 and 1993,
respectively. The average revenue per telephone unit sold was
$93 in 1994 compared to $73 in 1993.
Operating expenses increased 32.0% ($19.1 million) in the
third quarter of 1994 for reasons generally the same as for
the first nine months.
Operating income was $11.1 million in 1994 compared to
$228,000 in 1993. Operating margin on service revenues
improved to 12.8% in 1994 from .4% in 1993. The improvement
in operating income was primarily due to increased revenues
and cost efficiencies, partially offset by the costs
associated with the growth of USM's operations and the
addition of new markets.
Cellular investment income includes USM's and TDS's share
of the net incomes or losses of cellular markets in which they
have a minority interest and for which they follow the equity
method of accounting, net of amortization of license cost
related to those minority interests.
-15-
<PAGE>
CELLULAR INVESTMENT INCOME
Net of License Cost Amortization Three Months Ended September 30,
-------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands)
Cellular Systems Managed by USM $ 393 $ 122 $ 271
Cellular Systems Managed by Others 8,425 4,341 4,084
------- ------- -------
$ 8,818 $ 4,463 $ 4,355
======= ======= =======
Net income from cellular telephone operations was $8.9
million in 1994 compared to a net loss of $701,000 in 1993.
Such net income or loss excludes the USM minority
shareholders' share of such income or loss. Net income or
loss from cellular telephone operations does not include
income taxes from inclusion in the TDS consolidated federal
tax return. Under a tax allocation agreement between TDS and
USM, TDS does not reimburse USM currently for income tax
benefits and credits. Instead, such benefits and credits are
carried forward until they can be used by USM.
RADIO PAGING OPERATIONS
Three Months Ended September 30,
---------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands, except per
unit amounts)
Service Operations
Revenues* $19,488 $ 16,865 $ 2,623
------- ------- -------
Costs and Expenses
Cost of Services* 5,196 4,382 814
Selling and Advertising 3,615 2,961 654
General and Administrative* 6,913 6,171 742
Depreciation 3,970 2,971 999
Amortization* 619 647 (28)
------- ------- -------
20,313 17,132 3,181
------- ------- -------
Service Operating Loss (825) (267) (558)
------- ------- -------
Equipment Sales
Revenue 3,718 2,739 979
Cost of Equipment Sold 3,626 2,479 1,147
------- ------- -------
Equipment Sales Income 92 260 (168)
------- ------- -------
Operating Loss $ (733) $ (7) $ (726)
======= ======= =======
Average monthly service revenue per unit $ 11.66 $ 13.50
Disconnect rate per month 2.6% 3.0%
Marketing cost per net customer unit
addition $ 86 $ 87
* Amounts for 1993 have been reclassified to conform to year-end 1993
presentation.
Service revenues increased 15.6% ($2.6 million) in the
third quarter of 1994 from 1993, primarily as a result of the
33.6% growth in the number of pagers in service. Service
expenses increased 18.6% ($3.2 million) in 1994 from 1993,
primarily as a result of the costs of system expansion and
serving new customers. Depreciation expense increased
approximately $725,000 due to a change in the estimated useful
lives of pagers and transmitters. Operating loss was $733,000
in 1994 compared to $7,000 in 1993. Net loss from radio
paging operations totalled $573,000 in 1994 compared to a net
loss of $691,000 in 1993.
-16-
<PAGE>
FINANCIAL RESOURCES AND LIQUIDITY
---------------------------------
Cash flows from operating activities totalled $158.3
million in the first nine months of 1994 compared to $113.7
million in 1993. Consolidated operating cash flow totalled
$192.8 million in 1994 compared to $143.3 million in 1993.
The 34.6% increase in operating cash flow reflects improved
operating cash flow in all three of TDS's primary business
units.
Nine Months Ended September 30,
-------------------------------
1994 1993 Change
------- -------- --------
(Dollars in thousands)
OPERATING CASH FLOW
Telephone Operations $ 117,442 $ 105,669 $ 11,773
Cellular Telephone Operations 62,732 29,540 33,192
Radio Paging Operations 12,640 8,044 4,596
------- ------- ------
$ 192,814 $ 143,253 $ 49,561
======= ======= ======
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
$34.5 million in the first nine months of 1994 compared to
$29.5 million in 1993.
Cash flows from financing activities totalled $107.1
million in the first nine months of 1994 compared to $117.8
million in 1993. Sales of common stock by TDS and APP and
long- and short-term borrowings provided most of the Company's
external financing requirements during the first nine months
of 1994. Long-term debt borrowings, primarily under TDS's
Medium-Term Note Program, provided most of the Company's
external financing requirements during the first nine months
of 1993. TDS has used short-term debt to finance its cellular
telephone and radio paging operations, for acquisitions and
for general corporate purposes. Proceeds from the sale of
long-term debt and equity securities from time to time have
retired such short-term debt.
Cash flows from investing activities required cash of
$260.3 million in the first nine months of 1994 compared to
$211.8 million in 1993. Such cash flows primarily consist of
additions to property, plant and equipment requiring the use
of cash, and cash flows for acquisitions and investments in
cellular telephone partnerships. Cash expenditures for
property, plant and equipment totalled $221.2 million in the
first nine months of 1994 compared to $135.9 million in 1993.
Cash used for acquisitions totalled $25.3 million and $47.9
million in the first nine months of 1994 and 1993,
respectively.
Additions to telephone plant and equipment totalled $72.5
million for the first nine months of 1994. Management expects
that plant and equipment additions will total about $107
million in 1994, exclusive of acquisitions. This construction
budget includes $34 million for digital switches, $58 million
for outside plant upgrades such as the installation of fiber
optic cables and $15 million for other construction. The
Company plans to finance its telephone construction programs
primarily using internally generated funds supplemented by
long-term financing obtained under federal government
programs.
Additions to cellular telephone plant and equipment
totalled $110.6 million for the first nine months of 1994.
Management expects such cellular telephone expenditures during
1994 to total about $147 million for enhancements of existing
majority-owned systems and for the construction of switching
offices and cell sites. These additions will be financed by a
combination of the Company's short-term bank financing, vendor
financing and sales of USM equity and/or debt securities.
*
-17-
<PAGE>
Additions to radio paging property and equipment totalled
$21.1 million for the first nine months of 1994. Management
expects that such property and equipment additions will total
about $27 million in 1994, primarily for the purchase of
pagers. The Company's short-term bank financing along with
radio paging operations' internally generated cash will
finance these property additions.
Other fixed asset additions totalled $5.7 million for the
first nine months of 1994. Management expects that these
additions will total about $10 million in 1994 and will be
financed primarily using short-term bank notes along with
internally generated cash.
Cash flows used for acquisitions, net of cash acquired,
totalled $25.3 million in the first nine months of 1994
compared to $47.9 million in 1993. During the first nine
months of 1994, TDS purchased controlling interests in nine
cellular markets and several minority cellular interests
representing a total of 1.2 million population equivalents and
two telephone companies. Some of the entities acquired during
1994 were subject to acquisition agreements prior to 1993.
The aggregate consideration for the acquisitions completed in
1994 was $189.1 million, consisting of $30.1 million in cash,
3.4 million TDS Common Shares ($154.3 million), 49,000 USM
Common Shares ($1.3 million), cancellation of a note
receivable ($1.4 million) and the obligation to deliver 42,000
TDS Common Shares ($2.0 million) in the future.
TDS's active acquisition program may require substantial
external financing during the remainder of 1994. TDS and its
subsidiaries had entered into agreements at September 30,
1994, to acquire controlling interests in five cellular
markets and one minority interest representing approximately
878,000 population equivalents, four telephone companies and
one paging company for an aggregate consideration of
approximately $131.4 million. If all of these pending
acquisitions are completed as planned, TDS will issue
approximately 2.5 million Common Shares ($108.1 million),
125,000 Preferred Shares ($12.5 million) and will pay
approximately $10.8 million in cash. Any cellular interests
acquired by TDS are expected to be assigned to USM, and at the
time this occurs USM will reimburse TDS for TDS's
consideration delivered and costs incurred in such
acquisitions in the form of USM Common Shares, notes payable
and cash. Additionally, USM has commitments to issue 812,000
of its Common Shares in 1994 through 1996 in connection with
acquisitions closed in 1993 and prior years.
TDS and USM plan to continue to acquire additional
cellular interests in markets that strengthen USM's position,
and are currently negotiating agreements for the acquisition
of additional cellular interests. TDS and APP are also
currently negotiating agreements for the acquisition of
additional telephone and paging companies, respectively.
On November 8, 1994, APP acquired five regional
narrowband Personal Communications Services ("PCS") licenses
at auction by the Federal Communications Commission ("FCC").
Each of these five licenses consists of a 50 kHz channel
paired with a 12.5 kHz return channel. The licenses, when
granted, will authorize APP to introduce two-way wireless
messaging services including acknowledgement paging, data and
telemetry services, and digitized voice messaging throughout
the United States. APP intends to begin deploying services in
early 1996 in some of its existing markets. APP's bid for the
licenses aggregated $53.6 million. According to FCC auction
procedures, APP will make a 20% down payment on the licenses
by November 15, 1994, and pay the remaining 80% five days
after the FCC has granted the licenses. See "Liquidity" for a
discussion of the Company's financial resources.
-18-
<PAGE>
TDS is a party to a legal proceeding before the Federal
Communications Commission ("FCC") involving a cellular license
in a Wisconsin Rural Service Area. Pending the resolution of
the issues in the Wisconsin proceeding, further FCC grants to
TDS and its subsidiaries will be conditioned on the outcome of
that proceeding. TDS's and USM's ability to sell or exchange
properties with third parties while such proceeding is pending
may be affected. See Note 14 of Notes to Consolidated
Financial Statements, Legal Proceedings (La Star Application),
in the Company's 1993 Annual Report to Shareholders for a
discussion of the proceeding involving the Wisconsin Rural
Service Area and the La Star proceeding. As disclosed in the
Company's Current Report on Form 8-K dated March 30, 1994, the
FCC's decision in the La Star proceeding was vacated and
remanded to the FCC for further proceedings by a federal court
of appeals. The Company will evaluate what impact the
proceedings in the La Star matter may have on the Wisconsin
proceeding.
Liquidity. Management believes that TDS has adequate
internal and external resources to finance its business
development, construction and acquisition programs. TDS and
its subsidiaries had cash and temporary investments totalling
$81.0 million and longer-term investments totalling $71.1
million at September 30, 1994. 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 had $113.1 million of bank lines
of credit for general corporate purposes at September 30,
1994, all of which were committed. Unused amounts of such
lines totalled $33.2 million, all of which were committed.
These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.
TDS and USM also have access to debt and equity capital
markets, including shelf registration statements covering
issuance of common stock for acquisitions, and in the case of
TDS, covering the issuance of Common Shares for cash. TDS's
shelf registration statement for Common Shares for
acquisitions had 4.3 million unissued shares at September 30,
1994, including 2.5 million shares reserved under definitive
agreements. 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. At September 30, 1994, $277.6
million remained unused on the universal shelf. Of this
unused amount, up to $150 million has been allocated to TDS's
Series C Medium-Term Note Program. The remaining $127.6
million may be used for either debt or equity security
issuances. In February 1994, APP issued 3.5 million Common
Shares in an initial public offering at a price of $14.00 per
share. The $45.6 million proceeds (after underwriting
discount) were used to reduce TDS's short-term debt and for
general corporate purposes.
Management believes that TDS's internal cash flow and
funds available from cash and cash investments provide
substantial financial flexibility. TDS also has substantial
lines of credit and longer-term financing commitments to meet
its short- and longer-term financing needs. Moreover, TDS,
USM and APP 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.
-19-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Unaudited
---------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1994 1993 1994 1993
--------- -------- -------- --------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Telephone $ 79,973 $ 69,637 $221,321 $ 199,843
Cellular telephone 89,926 59,950 236,816 151,970
Radio paging 23,206 19,604 67,355 55,083
--------- --------- --------- ---------
193,105 149,191 525,492 406,896
--------- --------- --------- ---------
OPERATING EXPENSES
Telephone 58,032 48,736 153,808 138,200
Cellular telephone 78,831 59,722 221,202 154,562
Radio paging 23,939 19,611 66,870 56,861
--------- --------- --------- ---------
160,802 128,069 441,880 349,623
--------- --------- --------- ---------
OPERATING INCOME 32,303 21,122 83,612 57,273
--------- --------- --------- ---------
INVESTMENT AND OTHER INCOME
Interest and dividend income 3,148 2,117 7,652 5,663
Minority share of income (3,610) (833) (7,495) (1,111)
Cellular investment income, net
oflicense cost amortization 8,818 4,463 19,702 10,595
Gain on sale of cellular
interests - 4,851 - 4,970
Other income (expense), net 879 (667) 588 (71)
--------- --------- --------- ---------
9,235 9,931 20,447 20,046
--------- --------- --------- ---------
INCOME BEFORE INTEREST
AND INCOME TAXES 41,538 31,053 104,059 77,319
Interest expense 10,067 9,798 28,760 27,881
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 31,471 21,255 75,299 49,438
Income tax expense 13,848 9,368 33,132 21,781
--------- --------- --------- ---------
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES 17,623 11,887 42,167 27,657
Cumulative effect of accounting
changes - - (723) -
--------- --------- --------- ---------
NET INCOME 17,623 11,887 41,444 27,657
Preferred Dividend Requirement (457) (594) (1,733) (1,789)
--------- --------- --------- ---------
NET INCOME AVAILABLE TO
COMMON $ 17,166 $ 11,293 $ 39,711 $ 25,868
========= ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES (000s) 54,282 48,302 53,121 46,339
EARNINGS PER COMMON SHARE:
Before cumulative effect of
accounting changes $ .31 $ .23 $ .75 $ .56
Cumulative effect of accounting
changes - - (.01) -
--------- --------- --------- ---------
Net Income $ .31 $ .23 $ .74 $ .56
========= ========= ========= =========
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .09 $ .085 $ .27 $ .255
========= ========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
- 20 -
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Nine Months Ended
Septmber 30,
--------------------
1994 1993
-------- --------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 41,444 $ 27,657
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Cumulative effect of accounting changes 723 -
Depreciation and amortization 117,061 93,437
Deferred taxes 14,155 9,171
Investment income (22,549) (14,405)
Minority share of income 7,495 1,111
Gain on sale of cellular interests - (4,970)
Other noncash expense 4,220 6,264
Change in accounts receivable (20,968) (13,587)
Change in accounts payable 7,341 5,505
Change in accrued taxes 4,808 1,633
Change in other assets and liabilities 4,577 1,912
-------- --------
158,307 113,728
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 8,994 119,900
Repayments of long-term debt (22,837) (29,386)
Change in notes payable 73,600 (9,726)
Common stock issued 8,366 50,689
Minority partner capital
contributions (distributions) 9,458 (605)
Redemption of preferred stock (268) (104)
Dividends paid (15,483) (13,165)
Sale of stock by a subsidiary 45,253 241
-------- --------
107,083 117,844
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (221,239) (135,930)
Investments in and advances to cellular
minority partnerships (17,274) (14,478)
Distributions from partnerships 12,647 8,157
Proceeds from investment sales - 6,750
Other investments (8,355) (28,327)
Acquisitions, excluding cash acquired (25,252) (47,940)
Change in temporary investments (844) 8
-------- --------
(260,317) (211,760)
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 5,073 19,812
CASH AND CASH EQUIVALENTS -
Beginning of period 55,666 40,810
-------- --------
End of period $ 60,739 $ 60,622
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
- 21 -
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
September 30, 1994 December 31, 1993
------------------ -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 60,739 $ 55,666
Temporary investments 20,217 17,719
Accounts receivable from
customers and others 106,853 80,796
Materials and supplies, at average cost,
and other current assets 30,521 25,375
----------- ------------
218,330 179,556
----------- ------------
INVESTMENTS
Cellular limited partnership interests 115,430 101,210
Cellular license acquisition costs, net 115,961 92,277
Marketable equity securities 22,760 19,368
Other 130,347 115,532
----------- ------------
384,498 328,387
----------- ------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant and franchise costs, net 715,030 638,848
Cellular telephone plant and
license costs, net 1,209,209 1,014,103
Radio paging, net 60,864 52,945
Other, net 35,267 32,402
----------- ------------
2,020,370 1,738,298
----------- ------------
OTHER ASSETS AND DEFERRED CHARGES 11,742 12,941
----------- ------------
$2,634,940 $ 2,259,182
=========== ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
- 22 -
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
September 30, 1994 December 31, 1993
------------------ -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt
and preferred stock $ 36,565 $ 24,859
Notes payable 79,909 6,309
Accounts payable 86,746 82,878
Advance billings and customer deposits 19,582 17,273
Accrued interest 3,852 8,968
Accrued taxes 13,024 7,995
Other current liabilities 23,798 15,249
----------- ------------
263,476 163,531
----------- ------------
DEFERRED LIABILITIES AND CREDITS 103,746 90,979
----------- ------------
LONG-TERM DEBT, excluding current portion 521,046 514,442
----------- ------------
REDEEMABLE PREFERRED STOCK, excluding
current portion 15,401 25,632
----------- ------------
MINORITY INTEREST in subsidiaries 266,129 223,480
----------- ------------
NONREDEEMABLE PREFERRED STOCK 16,421 16,833
----------- ------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share 47,392 43,504
Series A Common Shares, par value
$1 per share 6,887 6,881
Common Shares issuable (41,908 and 304,328
shares, respectively) 1,995 15,189
Capital in excess of par value 1,277,427 1,069,022
Retained earnings 115,020 89,689
----------- ------------
1,448,721 1,224,285
----------- ------------
$2,634,940 $ 2,259,182
=========== ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The September 30, 1994 consolidated financial statements
included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with
generally accepted accounting principles have been
condensed or omitted pursuant to such rules and
regulations, although the Company believes that the
disclosures are adequate to make the information
presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes
thereto included in the Company's latest annual report on
Form 10-K as amended with respect to Note 7 of the
Combined Financial Statements of the Los Angeles SMSA
Limited Partnership, Nashville/Clarksville MSA Limited
Partnership and Baton Rouge MSA Limited Partnership, with
respect to certain investments in debt and equity
securities, Note 2 of Notes to Consolidated Financial
Statements included in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994, and with
respect to certain commitments and contingencies, Note 5
of the Notes to Consolidated Financial Statements
included in the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
The accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only
normal recurring items) necessary to present fairly the
financial position as of September 30, 1994, and the
results of operations and cash flows for the nine months
ended September 30, 1994 and 1993. The results of
operations for the nine months ended September 30, 1994
and 1993, are not necessarily indicative of the results
to be expected for the full year. Certain 1993 cellular
and paging operating revenues and expenses have been
reclassified to conform to current year presentation.
2. Earnings per Common Share were computed by dividing Net
Income Available to Common, less an amount due to a
subsidiaries issuable securities, by the weighted average
number of common and common equivalent shares outstanding
during the period. Dilutive common stock equivalents at
September 30, 1994, consist of dilutive Common Share
options.
3. Assuming that acquisitions accounted for as purchases
during the period January 1, 1993, to September 30, 1994,
had taken place on January 1, 1993, pro forma results of
operations from continuing operations would have been,
for the nine months ended September 30, 1994: operating
revenues $548.1 million, net income before cumulative
effect of accounting changes $42.2 million and primary
earnings per common share before cumulative effect of
accounting changes $.74; and would have been, for the
nine months ended September 30, 1993: operating revenues
$452.2 million, net income before cumulative effect of
accounting changes $18.4 million and primary earnings per
common share before cumulative effect of accounting
changes $.32.
- 24 -
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Supplemental Cash Flow Information
Cash and cash equivalents includes cash and those short-
term, highly liquid investments with original maturities
of three months or less. Those investments with original
maturities of three months to twelve months are
classified as temporary investments.
TDS acquired certain cellular licenses and operating
companies in 1994 and 1993. TDS also acquired one
telephone company during the first nine months of 1994
and two telephone companies and one paging company during
the first nine months of 1993. In conjunction with these
acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred
Shares issued.
Nine Months Ended
September 30,
--------------------------------
1994 1993
------------- ------------
(Dollars in thousands)
Property, plant and equipment $ 68,021 $ 65,586
Cellular licenses 142,341 272,097
Increase (decrease) in equity method
investment in cellular interests (6,207) (4,670)
Long-term debt (21,931) (22,934)
Deferred credits (5,478) (3,907)
Other assets and liabilities,
excluding cash and cash equivalents 5,447 2,267
Minority interest 621 (11,471)
Common Shares issued and issuable (156,283) (235,466)
Preferred Shares issued - (3,000)
USM Stock issued and issuable (1,279) (7,653)
Subsidiary preferred stock issued - (2,909)
--------- ---------
Decrease in cash due to acquisitions $ 25,252 $ 47,940
========= =========
The following table summarizes interest and income taxes paid, and other
non-cash transactions.
Nine Months Ended
September 30,
--------------------------------
1994 1993
------------- ------------
(Dollars in thousands)
Interest paid $ 33,748 $ 28,942
Income taxes paid 13,288 13,129
Common Shares issued by TDS for
conversion of TDS and Subsidiary
Preferred Stock $ 411 $ 1,949
- 25 -
<PAGE>
PART II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
--------------------------
Townes Telecommunications, Inc., et. al. v. TDS, et. al.
-------------------------------------------------------
Plaintiffs Townes Telecommunications, Inc. ("Townes"),
Tatum Telephone Company ("Tatum Telephone") and Tatum Cellular
Telephone Company ("Tatum Cellular") filed a suit in the
District Court of Rusk County, Texas, against both TDS and USM
as defendants. Plaintiff Townes alleged that it entered into
an oral agreement with defendants which established a joint
venture to develop cellular business in certain markets.
Townes alleged that defendants usurped a joint venture
opportunity and breached fiduciary duties to Townes by
purchasing interests in nonwireline markets in Texas RSA #11
and the Tyler (Texas) MSA on their own behalf rather than on
behalf of the alleged joint venture. In its Fifth Amendment
Original Petition Townes sought unspecified damages not to
exceed $33 million for usurpation, breach of fiduciary duty,
civil conspiracy, breach of contract and tortious
interference. Townes also sought imposition of a constructive
trust on defendants' profits from Texas RSA #11 and the Tyler
(Texas) MSA and transfer of those interests to the alleged
joint venture. In addition, Townes sought reasonable
attorneys' fees equal to one-third of the judgement, along
with prejudgement interest. Plaintiffs Tatum Telephone and
Tatum Cellular sought a declaration that transfers by
defendants of a 49% interest in Tatum Cellular violated a
five-year restriction on alienation of Tatum Cellular shares
contained in a written shareholders' agreement. Tatum
Telephone and Tatum Cellular sought to void the transfers.
All plaintiffs together sought as much as $200 million in
punitive damages.
The case went to trial on April 25, 1994. On May 5, 1994
the jury returned a verdict in favor of TDS and USM on all
issues. Plaintiffs thereafter made a motion for a mistrial
which the Court denied on June 17, 1994. On June 17, the
Court also entered judgement on the jury's verdict in favor of
TDS and USM. On July 15, 1994 Plaintiffs filed a motion for a
new trial. That motion was denied on August 11, 1994. The
Plaintiffs filed an appeal of the case on September 12, 1994.
Defendants intend to vigorously contest any issues raised on
appeal.
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
(a) Exhibit 11 - Computation of earnings per common
share.
(b) Exhibit 12 - Statement regarding computation of
ratios.
(c) Exhibit 27 - Financial Data Schedule
(d) Exhibit 99.1 - Unaudited Consolidated Statements of
Income for the Twelve Months Ended
September 30, 1994 and 1993.
Exhibit 99.2 - Pro Forma Financial Information.
(e) Reports on Form 8-K filed during the quarter ended
September 30, 1994:
No reports on Form 8-K were filed during the quarter
ended September 30, 1994.
- 26 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TELEPHONE AND DATA SYSTEMS, INC.
----------------------------------
(Registrant)
Date November 10, 1994 MURRAY L. SWANSON
----------------- ----------------------------------
Murray L. Swanson
Executive Vice President-Finance
Date November 10, 1994 GREGORY J. WILKINSON
----------------- ----------------------------------
Gregory J. Wilkinson
Vice President and Controller
(Principal Accounting Officer)
- 27 -
<PAGE>
Exhibit 11
Telephone and Data Systems, Inc.
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Three Months Ended September 30, 1994 1993
---------------------------------------------------------------------------
Primary Earnings
Net Income $17,623 $11,887
Dividends on Preferred Shares (457) (594)
------- -------
Net Income Available to Common $17,166 $11,293
======= =======
Minority Income Adjustment (1) $ (103) $ -
======= =======
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 53,601 48,018
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 170 270
Convertible Preferred Shares 469 -
Common Shares Issuable 42 -
------- -------
Primary Shares 54,282 48,288
======= =======
Primary Earnings per Common Share $ .31 $ .23
======= =======
Fully Diluted Earnings*
Net Income $17,623 $11,887
Dividends on Preferred Shares (394) (594)
------- -------
Net Income Available to Common $17,229 $11,293
======= =======
Minority Income Adjustment (1) $ (104) $ -
======= =======
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 53,601 48,018
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 182 274
Convertible Preferred Shares 739 -
Common Shares Issuable 42 -
------- -------
Fully Diluted Shares 54,564 48,292
======= =======
Fully Diluted Earnings per Common Share $ .31 $ .23
======= =======
* This calculation is submitted in accordance with Securities Act of
1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of
less than 3%.
(1) The minority income adjustment, which is deducted from net income
before cumulative effect of accounting changes applicable to Common,
reflects the additional minority share of the subsidiary's income
computed as if all of the subsidiary's issuable securities were
outstanding.
<PAGE>
Exhibit 11
Telephone and Data Systems, Inc.
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Nine Months Ended September 30, 1994 1993
---------------------------------------------------------------------------
Primary Earnings
Net Income before cumulative effect
of accounting changes $42,167 $27,657
Dividends on Preferred Shares (1,733) (1,789)
------- -------
Net income before cumulative effect
of accounting changes applicable
to Common 40,434 25,868
Cumulative effect of accounting changes (723) -
------- -------
Net Income Available to Common $39,711 $25,868
======= =======
Minority Income Adjustment (1) $ (229) $ -
======= =======
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 52,860 46,064
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 183 275
Convertible Preferred Shares 38 -
Common Shares Issuable 40 -
------- -------
Primary Shares 53,121 46,339
======= =======
Primary Earnings per Common Share
Net Income before cumulative effect
of accounting changes $ .75 $ .56
Cumulative effect of accounting changes (.01) -
------- -------
Net Income $ .74 $ .56
======= =======
(1) The minority income adjustment, which is deducted from net income
before cumulative effect of accounting changes applicable to Common,
reflects the additional minority share of the subsidiary's income
computed as if all of the subsidiary's issuable securities were
outstanding.
<PAGE>
Telephone and Data Systems, Inc.
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Nine Months Ended September 30, 1994 1993
---------------------------------------------------------------------------
Fully Diluted Earnings*
Net Income before cumulative effect
of accounting changes $42,167 $27,657
Dividends on Preferred Shares (1,541) (1,789)
------- -------
Net income before cumulative effect
of accounting changes applicable
to Common 40,626 25,868
Cumulative effect of accounting changes (723) -
------- -------
Net Income Available to Common $39,903 $25,868
======= =======
Minority Income Adjustment (1) $ (230) $ -
======= =======
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 52,860 46,064
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 193 308
Convertible Preferred Shares 309 -
Common Shares Issuable 40 -
------- -------
Fully Diluted Shares 53,402 46,372
======= =======
Fully Diluted Earnings per Common Share
Net Income before cumulative effect
of accounting changes $ .75 $ .56
Cumulative effect of accounting changes (.01) -
------- -------
Net Income $ .74 $ .56
======= =======
* This calculation is submitted in accordance with Securities Act of
1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of
less than 3%.
(1) The minority income adjustment, which is deducted from net income
before cumulative effect of accounting changes applicable to Common,
reflects the additional minority share of the subsidiary's income
computed as if all of the subsidiary's issuable securities were
outstanding.
<PAGE>
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
For the Nine Months Ended September 30, 1994
(Dollars In Thousands)
EARNINGS:
Income from Continuing Operations before
income taxes $ 75,299
Add (Deduct):
Minority Share of Cellular Losses (97)
Earnings on Equity Method (22,548)
Distributions from Minority Subsidiaries 11,739
Amortization of Non-Telephone Capitalized
Interest 19
Minority interest in majority-owned subsidiaries
that have fixed charges 4,114
---------
68,526
Add fixed charges:
Consolidated interest expense 28,644
Interest Portion (1/3) of Consolidated
Rent Expense 3,685
Amortization of debt expense and discount
on indebtedness 117
---------
$ 100,972
=========
FIXED CHARGES:
Consolidated interest expense $ 28,644
Interest Portion (1/3) of Consolidated
Rent Expense 3,685
Amortization of debt expense and discount
on indebtedness 117
---------
$ 32,446
=========
RATIO OF EARNINGS TO FIXED CHARGES 3.11
=========
Tax-Effected Redeemable Preferred Dividends $ 1,733
Fixed Charges 32,446
---------
Fixed Charges and Redeemable Preferred Dividends $ 34,179
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 2.95
=========
Tax-Effected Preferred Dividends $ 3,107
Fixed Charges 32,446
---------
Fixed Charges and Preferred Dividends $ 35,553
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 2.84
=========
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Telephone and Data Systems, Inc. as of
September 30, 1994, and for the nine months then ended, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 60,739
<SECURITIES> 22,760
<RECEIVABLES> 72,650
<ALLOWANCES> 0
<INVENTORY> 16,205
<CURRENT-ASSETS> 218,330
<PP&E> 2,619,913
<DEPRECIATION> 599,543
<TOTAL-ASSETS> 2,634,940
<CURRENT-LIABILITIES> 263,476
<BONDS> 521,046
<COMMON> 54,279
15,401
16,421
<OTHER-SE> 1,394,442
<TOTAL-LIABILITY-AND-EQUITY> 2,634,940
<SALES> 0
<TOTAL-REVENUES> 525,492
<CGS> 0
<TOTAL-COSTS> 441,880
<OTHER-EXPENSES> (20,447)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,760
<INCOME-PRETAX> 75,299
<INCOME-TAX> 33,132
<INCOME-CONTINUING> 42,167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (723)
<NET-INCOME> 41,444
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
</TABLE>
Exhibit 99.1
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
---------
Twelve Months Ended
September 30,
----------------------
1994 1993
---------- ---------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Telephone $ 289,600 $ 262,508
Cellular telephone 299,156 193,107
Radio paging 87,635 70,704
--------- ---------
Total operating revenues 676,391 526,319
--------- ---------
OPERATING EXPENSES
Telephone 204,620 182,524
Cellular telephone 289,606 202,306
Radio paging 86,093 73,533
--------- ---------
Total operating expenses 580,319 458,363
--------- ---------
OPERATING INCOME 96,072 67,956
--------- ---------
INVESTMENT AND OTHER INCOME
Interest and dividend income 10,071 7,734
Minority share of income (6,859) (2,809)
Cellular investment income, net of
license cost amortization 24,811 13,037
Gain on sale of cellular properties
and investments - 22,035
Other income, net 504 (841)
--------- ---------
28,527 39,156
--------- ---------
INCOME BEFORE INTEREST AND INCOME TAXES 124,599 107,112
Interest expense 38,345 36,363
--------- ---------
INCOME BEFORE INCOME TAXES 86,254 70,749
Income tax expense 37,848 31,349
--------- ---------
NET INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 48,406 39,400
Extraordinary item - (769)
Cumulative effect of accounting changes (723) -
--------- ---------
NET INCOME 47,683 38,631
Preferred Dividend Requirement (2,318) (2,351)
--------- ---------
NET INCOME AVAILABLE TO COMMON $ 45,365 $ 36,280
========= =========
WEIGHTED AVERAGE COMMON SHARES (000s) 52,365 44,910
EARNINGS PER COMMON SHARE:
Before extraordinary item
and cumulative effect of accounting changes $ .88 $ .82
Extraordinary item - (.01)
Cumulative effect of accounting changes (.01) -
---------- ---------
Net Income $ .87 $ .81
========== =========
DIVIDENDS PER COMMON AND SERIES A
COMMON SHARE $ .355 $ .335
========== =========
<PAGE>
Exhibit 99.2
TELEPHONE AND DATA SYSTEMS INC.
-------------------------------
PRO FORMA FINANCIAL INFORMATION
-------------------------------
Telephone and Data Systems, Inc. ("TDS"), together with
its majority-owned subsidiaries, TDS Telecommunications
Corporation, United States Cellular Corporation (AMEX symbol
"USM") and American Paging, Inc. (AMEX symbol "APP"), are
referred to in this report as the "Company."
From January 1 through September 30, 1994, the Company
acquired two telephone companies and controlling interests in
nine cellular markets and several minority cellular interests
representing a total of approximately 1.2 million population
equivalents. The total consideration paid for these
acquisitions was approximately $189.1 million, consisting of
$30.1 million in cash, 3.4 million TDS Common Shares, 49,000
USM Common Shares, the obligation to deliver 42,000 TDS Common
Shares in the future and the cancellation of a note receivable
of $1.4 million.
As of September 30, 1994, the Company had pending
agreements to acquire four telephone companies, one paging
company and controlling interests in five cellular markets and
one minority interest representing a total of approximately
878,000 population equivalents. The total consideration to be
paid for the acquisitions described in this paragraph, valued
at the time such agreements were entered into, is
approximately $131.4 million. If these acquisitions are
completed as planned, the Company will issue approximately 2.5
million TDS Common Shares, 125,000 TDS Preferred Shares and
will pay approximately $10.8 million in cash.
Pursuant to Rule 3-05 and Rule 11-01 of Regulation S-X, the
completed and pending acquisitions of businesses described in
the foregoing paragraphs are not individually significant.
The following pro forma financial information is included
pursuant to Article 11 of Regulation S-X:
Telephone and Data Systems, Inc. Unaudited Condensed Pro Forma
Consolidated Financial Statements:
Unaudited Condensed Pro Forma Consolidated Balance Sheet
as of September 30, 1994
Unaudited Condensed Pro Forma Consolidated Statement of
Income for the Nine Months Ended September 30, 1994
Unaudited Condensed Pro Forma Consolidated Statement of
Income for the Year Ended December 31, 1993
Notes to Unaudited Condensed Pro Forma Consolidated
Financial Statements
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
Condensed Pro Forma Consolidated Balance Sheet
September 30, 1994
Unaudited
---------
(In Thousands)
ASSETS
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
TDS and Pending Increase TDS
Consolidated(a) Acquisitions (Decrease) Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS $ 218,330 $ 8,622 $ - $ 226,952
---------- -------- -------- ----------
INVESTMENTS
Cellular limited
partnership interests 115,430 566 - 115,996
Cellular license
acquisition costs, net 115,961 3,487 - 119,448
Marketable equity
securities 22,760 - - 22,760
Other 130,347 756 - 131,103
---------- -------- -------- ----------
384,498 4,809 - 389,307
---------- -------- -------- ----------
PROPERTY, PLANT AND
EQUIPMENT
Telephone plant and
franchise costs, net 715,030 23,535 36,395 (1) 774,960
Cellular telephone
plant and license
costs, net 1,209,209 8,231 76,445 (1) 1,293,885
Radio paging, net 60,864 543 11,119 (1) 72,526
Other, net 35,267 - - 35,267
---------- -------- -------- ----------
2,020,370 32,309 123,959 2,176,638
---------- -------- -------- ----------
OTHER ASSETS AND
DEFERRED CHARGES 11,742 2,057 - 13,799
---------- -------- -------- ----------
$2,634,940 $ 47,797 $123,959 $2,806,696
========== ======== ======== ==========
The accompanying notes to condensed pro forma consolidated financial
statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
Condensed Pro Forma Consolidated Balance Sheet
September 30, 1994
Unaudited
---------
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
TDS and Pending Increase TDS
Consolidated(a) Acquisitions (Decrease) Consolidated
-----------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES $ 263,476 $ 11,828 $ 10,855 (1) $ 286,159
---------- -------- -------- ----------
DEFERRED LIABILITIES AND
CREDITS 103,746 2,350 - 106,096
---------- -------- -------- ----------
LONG-TERM DEBT, excluding
current portion 521,046 26,098 - 547,144
---------- -------- -------- ----------
REDEEMABLE PREFERRED STOCK,
excluding current
portion 15,401 - 12,508 (1) 27,909
---------- -------- -------- ----------
MINORITY INTEREST in
subsidiaries 266,129 56 - 266,185
---------- -------- -------- ----------
NONREDEEMABLE PREFERRED
STOCK 16,421 - - 16,421
---------- -------- -------- ----------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value
$1 per share 47,392 105 2,380 (1) 49,877
Series A Common Shares,
par value $1 per share 6,887 - - 6,887
Common Shares Issuable 1,995 - - 1,995
Capital in excess of
par value 1,277,427 4,595 100,981 (1) 1,383,003
Retained earnings 115,020 2,765 (2,765)(1) 115,020
---------- -------- -------- ----------
1,448,721 7,465 100,596 1,556,782
---------- -------- -------- ----------
$2,634,940 $ 47,797 $123,959 $2,806,696
========== ======== ======== ==========
The accompanying notes to condensed pro forma consolidated financial
statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
Condensed Pro Forma Consolidated Statement of Income
For the Nine Months Ended September 30, 1994
Unaudited
---------
(In Thousands, except per share amounts)
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
TDS and Pending Increase TDS
Consolidated Acquisitions(b) (Decrease) Consolidated
-------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $ 221,321 $ 28,431 $ - $ 249,752
Cellular telephone 236,816 9,861 - 246,677
Radio paging 67,355 3,464 - 70,819
---------- -------- -------- ----------
Total operating revenues 525,492 41,756 - 567,248
---------- -------- -------- ----------
OPERATING EXPENSES
Telephone 153,808 23,546 1,102 (3) 178,456
Cellular telephone 221,202 11,288 2,054 (3) 234,544
Radio paging 66,870 3,090 778 (3) 70,738
---------- -------- -------- ----------
Total operating expenses 441,880 37,924 3,934 483,738
---------- -------- -------- ----------
OPERATING INCOME 83,612 3,832 (3,934) 83,510
---------- -------- -------- ----------
INVESTMENT AND OTHER
INCOME (EXPENSE)
Interest and dividend
income 7,652 5 (120)(5) 7,537
Minority share of income (7,495) - 132 (2) (6,488)
875 (6)
Cellular investment
income, net of license
cost amortization 19,702 - (102)(4) 19,600
Other, net 588 479 - 1,067
---------- -------- -------- ----------
20,447 484 785 21,716
---------- -------- -------- ----------
INCOME BEFORE INTEREST
AND INCOME TAXES 104,059 4,316 (3,149) 105,226
Interest expense 28,760 2,553 (120)(5) 32,154
961 (7)
---------- -------- -------- ----------
INCOME BEFORE INCOME TAXES 75,299 1,763 (3,990) 73,072
Income tax expense 33,132 1,440 (2,275)(8) 32,297
---------- -------- -------- ----------
NET INCOME(c) 42,167 323 (1,715) 40,775
Preferred Dividend
Requirement (1,733) - (516)(9) (2,249)
---------- -------- -------- ----------
NET INCOME AVAILABLE
TO COMMON(c) $ 40,434 $ 323 $ (2,231) $ 38,526
========== ======== ======== ==========
WEIGHTED AVERAGE
COMMON SHARES (000s) 53,121 3,829 56,950
========== ======== ==========
EARNINGS PER COMMON
SHARE(c) $ .75 .67
========== ==========
The accompanying notes to condensed pro forma consolidated financial
statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
Condensed Pro Forma Consolidated Statement of Income
For the Year Ended December 31, 1993
Unaudited
---------
(In Thousands, except per share amounts)
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
TDS and Pending Increase TDS
Consolidated Acquisitions(b) (Decrease) Consolidated
-------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $ 268,122 $ 45,291 $ - $ 313,413
Cellular telephone 214,310 18,639 - 232,949
Radio paging 75,363 4,618 - 79,981
---------- -------- -------- ----------
Total operating revenues 557,795 68,548 - 626,343
---------- -------- -------- ----------
OPERATING EXPENSES
Telephone 189,012 38,239 1,633 (3) 228,884
Cellular telephone 222,966 21,436 3,704 (3) 248,106
Radio paging 76,084 4,120 1,037 (3) 81,241
---------- -------- -------- ----------
Total operating expenses 488,062 63,795 6,374 558,231
---------- -------- -------- ----------
OPERATING INCOME 69,733 4,753 (6,374) 68,112
---------- -------- -------- ----------
INVESTMENT AND OTHER
INCOME (EXPENSE)
Interest and dividend
income 8,082 265 (188)(5) 8,159
Minority share of income (475) - 45 (2) (1,701)
(1,271)(6)
Cellular investment
income, net of license
cost amortization 15,704 - (124)(4) 15,580
Gain on sale of cellular
interests 4,970 - - 4,970
Other, net (155) 4,890 - 4,735
---------- -------- -------- ----------
28,126 5,155 (1,538) 31,743
---------- -------- -------- ----------
INCOME BEFORE INTEREST
AND INCOME TAXES 97,859 9,908 (7,912) 99,855
Interest expense 37,466 4,114 (188)(5) 43,511
2,119 (7)
---------- -------- -------- ----------
INCOME BEFORE INCOME TAXES 60,393 5,794 (9,843) 56,344
Income tax expense 26,497 2,403 (5,115)(8) 23,785
---------- -------- -------- ----------
NET INCOME (c) 33,896 3,391 (4,728) 32,559
Preferred Dividend
Requirement (2,386) - (688)(9) (3,074)
---------- -------- -------- ----------
NET INCOME AVAILABLE
TO COMMON (c) $ 31,510 $ 3,391 $ (5,416) $ 29,485
========== ======== ======== ==========
WEIGHTED AVERAGE COMMON
SHARES (000s) 47,266 5,890 53,156
========== ======== ==========
EARNINGS PER COMMON
SHARE (c) $ .67 $ .55
========== ==========
The accompanying notes to condensed pro forma consolidated financial
statements are an integral part of this statement.
</TABLE>
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a) Includes the balance sheets of the entities
discussed in the second paragraph of this exhibit.
(b) Includes the income statements of the entities
discussed in the second paragraph of this exhibit prior to the
date of acquisition by the Company, as well as each of the
income statements of the entities for which acquisition by the
Company is pending as of the date of this Form 10-Q.
(c) Net income, net income available to common and
earnings per share are presented prior to extraordinary items
and the cumulative effect of accounting changes.
(d) Cellular operating revenues and expenses for 1993
have been reclassified to conform to 1994 presentation.
(e) The pro forma adjustments are described in the
following paragraphs:
1) Reflects TDS's acquisition of the telephone,
cellular telephone, and radio paging interests described in
the third paragraph of this exhibit. Also reflects the
elimination of the equity of these interests in purchase
transactions and the allocation of the purchase price in
excess of book value (in thousands).
Purchase price (aggregate) $ 131,424
Less: TDS's proportionate share of acquired
companies' equity at
September 30, 1994 7,465
---------
Purchase price to be allocated $ 123,959
=========
Purchase price in excess of book value--
Cellular operations $ 76,445
Telephone operations 36,395
Paging operations 11,119
---------
$ 123,959
=========
The pro forma allocations of the purchase prices to the
acquired entities' assets as set forth above are based upon
preliminary estimates of the values of those assets.
2) Reflects the minority shareholders' portion of
acquired companies' net loss.
3) Reflects the amortization of assumed costs in excess
of book value. Excess cost amounts are primarily assumed to
be amortized over 5 to 40 years.
4) Reflects the elimination of the equity-method losses
of acquired entities which are consolidated in the Pro Forma
Consolidated Statements of Income.
5) Reflects the elimination of intercompany interest
income and interest expense between the Company and acquired
entities. The acquired entities were previously accounted for
by the equity method of accounting (see Note 4).
6) Reflects the minority shareholders' portion of USM's
net loss due to the addition of the cellular entities and the
related pro forma adjustments in (2)-(4) above.
7) Reflects the estimated interest expense incurred as
a result of increases in Notes Payable in connection with the
acquisitions included in the Condensed Pro Forma Consolidated
Statements of Income.
<PAGE>
8) Reflects the estimated income tax effects of the pro
forma adjustments in (2)-(4) and (7) above.
9) Reflects the preferred dividend requirement on the
TDS Preferred Shares to be issued.
<PAGE>
