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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 March 31, 1995
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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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 principal 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
----- -----
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 April 28, 1995
- ------------------------------ -----------------------------
Common Shares, $1 par value 50,879,852 Shares
Series A Common Shares, $1 par value 5,879,661 Shares
- --------------------------------------------------------------------
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------
1ST QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
--------
Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-16
Consolidated Statements of Income -
Three Months Ended March 31, 1995 and 1994 17
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994 18
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 19-20
Notes to Consolidated Financial Statements 21-23
Part II. Other Information 24
Signatures 25
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended 3/31/95 Compared to Three Months Ended 3/31/94
- -----------------------------------------------------------------
CONSOLIDATED
Telephone and Data Systems, Inc.'s ("TDS" or the
"Company") consolidated results of operations for the first
quarter of 1995 reflect i) rapid growth in cellular customer
units which resulted in a substantial increase in revenues, ii)
steady growth in telephone access lines and revenues, iii)
improvements in economies of scale and cost-containment measures
in the cellular business unit which resulted in improved cash
flow and operating results, 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.
Operating revenues grew 32% to $210.0 million in the first
quarter of 1995 over 1994, operating cash flow increased 31% to
$73.4 million and operating income rose 31% to $29.2 million.
Gains on sales of cellular interests of $8.8 million (after
income taxes and USM's minority share) were recognized in 1995.
Net income before the cumulative effect of an accounting change
rose 127% to $23.2 million in the first quarter of 1995 over
1994. Earnings per share before the cumulative effect of an
accounting change grew 117% to $.39 in 1995 from $.18 in 1994,
reflecting the significantly improved operating results and the
gains on sales of cellular interests, offset somewhat by a 9%
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. On a comparable basis, excluding
nonrecurring and unusual items, net income available to common
increased 44% to $13.9 million and earnings per share rose 33% to
$.24.
United States Cellular Corporation (AMEX symbol
"USM"), TDS's 81.1%-owned subsidiary, has added a net 15 markets
to consolidated operations since March 31, 1994, through
acquisitions and the initiation of cellular operations. USM
currently provides cellular service through systems serving 135
majority-owned and managed markets. TDS Telecommunications
Corporation ("TDS Telecom"), TDS's wholly owned subsidiary, has
acquired seven telephone companies and one long-distance company
since March 31, 1994. These acquisitions added 32,600 access
lines while internal growth added 17,300 lines. American Paging,
Inc. (AMEX symbol "APP"), TDS's 82.5%-owned subsidiary, has
acquired one paging system since March 31, 1994, which added
approximately 35,000 pagers. APP provides service to its
customers through 36 sales and service operating centers.
In March 1995, American Portable
Telecommunications, Inc. ("APT"), TDS's wholly owned subsidiary,
was the successful bidder for eight broadband Personal
Communications Services ("PCS") licenses. The eight 30 megahertz
PCS licenses cover the Major Trading Areas of Minneapolis-St.
Paul, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas
City, Columbus, Alaska and Guam-N. Mariana Islands, and account
for 27.9 million population equivalents.
-2-
<PAGE>
Operating revenues grew 32% ($51.2 million) in 1995
primarily as a result of the growth in customers served.
Cellular telephone revenues increased as a result of the 63%
customer growth in majority-owned and managed markets. This
customer growth resulted in increased local retail and access
revenue, and increased roaming revenue, offset somewhat by a 6%
decline in average monthly service revenue per unit. Telephone
revenues increased primarily due to acquisitions, internal
access line growth and a 6% increase in average monthly revenue
per access line. Radio paging revenues increased primarily as a
result of the 43% growth in the number of pagers in service,
offset somewhat by a 14% decline in average monthly service
revenue per unit
Operating expenses rose 32% ($44.3 million) in 1995
as a result of the continued rapid growth in USM's operations and
the steady growth in TDS Telecom's and APP's operations.
Telephone operating expenses increased due to the effects of
acquisitions and growth in internal operations. APP expenses
increased due to signficantly higher selling and advertising
expenses in an attempt to stimulate customer growth through its
direct and reseller distribution channels, increased provisions
for bad debts, depreciation and franchise taxes and additional
costs to serve the increased customer base.
Operating income increased 31% to $29.2 million in
the first quarter of 1995 from $22.3 million in 1994. The
increase in operating income reflects primarily improved
operating results in the cellular telephone business unit, as
shown in the following table.
Three Months Ended March 31,
---------------------------------------
1995 1994 Change
----------- ---------- ----------
(Dollars in thousands)
CONSOLIDATED OPERATING INCOME
Cellular Telephone Operations $ 8,064 $ (1,004) $ 9,068
Telephone Operations 23,121 22,738 383
Radio Paging Operations (2,029) 570 (2,599)
--------- -------- ---------
$ 29,156 $ 22,304 $ 6,852
========= ======== ========
Operating Margins:
Cellular Telephone* 8% (2%)
Telephone 27% 32%
Radio Paging* (9%) 3%
* Computed on Service Revenues
Management anticipates increasing rating growth in
cellular and paging units in service and revenues as USM and APP
continue their expansion and development programs. Marketing and
system operations expenses associated with this rapid expansion
will most likely reduce the rate of growth in operating cash flow
and operating income over the next several quarters.
Investment and other income increased to $25.4
million in 1995 from $5.2 million in 1994. Cellular investment
income, net increased $6.1 million to $9.7 million, reflecting
improvement in USM's equity method markets. Gain on sale of
cellular interests was $19.5 million in the first quarter of
1995. USM recognized $18.5 million in gains on the sales of a
100%-owned market and two minority interests. TDS recognized a
gain of $1.0 million as a result of the sale of a minority
cellular interest held by one of its telephone subsidiaries.
Minority share of income increased $5.0 million in the first
quarter of 1995 over 1994, as shown in the following table.
-3-
<PAGE>
Minority share of (income) loss 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, (c) the minority shareholders'
share of income of a telephone company majority-owned by TDS, and
(d) the minority shareholders' share of APP's loss. The minority
shareholders' share of USM's net income increased $4.8 million in
the first quarter of 1995 over 1994 due to the improvement in
USM's operating results.
MINORITY SHARE OF (INCOME) LOSS
Three Months Ended March 31,
---------------------------------------
1995 1994 Change
----------- ---------- ----------
(Dollars in thousands)
United States Cellular
Minority Shareholders' Share $ (4,472) $ 342 $(4,814)
Minority Partners' Share (1,888) (1,118) (770)
--------- --------- --------
(6,360) (776) (5,584)
TDS Telecom (283) (421) 138
American Paging 481 --- 481
--------- --------- --------
$ (6,162) $ (1,197) $(4,965)
========= ========= ========
Interest expense increased 34% ($3.2 million) in
1995. Interest on long-term debt increased 20% ($1.8 million) in
1995 compared to 1994. Long-term debt outstanding has increased
to $670.3 million as of March 31, 1995 from $534.0 million as of
March 31, 1994. The Company's balance of short-term notes
payable increased to $95.1 million in 1995 from $22.4 million in
1994, resulting in an increase in short-term interest expense of
$1.4 million in the first quarter of 1995 compared with the first
quarter of 1994.
Income tax expense increased 136% ($10.9 million)
in 1995 compared with 1994 as pretax income increased. The
effective income tax rate was 45% in the first quarter of 1995
and 44% in 1994. State income taxes increased 132% ($2.5
million) in 1995, due primarily to the increase in pretax income.
Net income before the cumulative effect of a change
in accounting principle improved to $23.2 million in 1995 from
$10.2 million in 1994. Earnings per common share before the
cumulative effect of a change in accounting principle were $.39
in 1995 and $.18 in 1994. The weighted average number of common
shares outstanding increased 9% in 1995. The increase is
primarily due to the issuance of 4.2 million Common Shares since
March 31, 1994 in connection with acquisitions.
Cumulative effect of accounting change: Effective
January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits." 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>
CELLULAR TELEPHONE OPERATIONS
Three Months Ended March 31,
---------------------------------------
1995 1994 Change
----------- ---------- ----------
(Dollars in thousands, except per unit amounts)
Operating Revenues
Service $ 96,400 $ 63,361 $ 33,039
Equipment Sales 3,348 2,872 476
--------- --------- --------
99,748 66,233 33,515
--------- --------- --------
Operating Expenses
System Operations 13,202 9,730 3,472
Marketing and Selling 19,922 14,054 5,868
Cost of Equipment Sold 11,199 8,009 3,190
General and Administrative 27,667 20,726 6,941
Depreciation 12,264 8,622 3,642
Amortization 7,430 6,096 1,334
--------- --------- --------
91,684 67,237 24,447
--------- --------- --------
Operating Income (Loss) $ 8,064 $ (1,004) $ 9,068
========= ========= ========
Cellular Telephone Revenues as
a Percent of Total Revenues 48% 42%
Additions to Property, Plant
and Equipment* $ 39,406 $ 19,398
Identifiable Assets $1,708,648 $1,385,742
Majority-Owned, Managed and
Consolidated Markets:
Population equivalents (000s) 18,266 18,775
Total population (000s) 22,061 19,927
Customers 478,000 294,000
Market penetration 2.17% 1.48%
Markets in operation 135 120
Cell sites in service 841 566
Average monthly service
revenue per customer $ 71 $ 76
Churn rate per month 2.1% 2.3%
Marketing cost per net
customer addition $ 646 $ 711
* Includes noncash amounts (in thousands) of $874 in 1995. Does not
include cash expenditures (in thousands) of $12,710 in 1994, which
relate to additions in 1993.
USM owns, operates and invests in cellular
telephone systems. USM owns or has the right to acquire
interests, both majority and minority, in 210 cellular telephone
markets at March 31, 1995, representing 25.2 million population
equivalents. USM manages the operations in 147 markets at March
31, 1995. USM has agreed to divest its controlling interests in
12 of these markets and its noncontrolling interest in one other
market and manage the operations of 15 additional markets.
In total, USM expects to manage 149 markets under agreements in
place as of March 31, 1995. The remaining interests in 61 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 135 markets are included in 1995 consolidated results compared
to 120 markets in 1994.
Operating revenues increased 51% ($33.5 million) in
1995. The revenue increase is primarily the result of 63%
customer growth in the systems serving its majority-owned and
managed markets, growth in roaming revenues and acquisitions.
Acquisitions and start-ups increased revenues 9% ($5.8 million).
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
revenue per customer declined to $71 in 1995 from
-5-
<PAGE>
$76 in 1994. Monthly local minutes of use averaged 86 in the
first three months of 1995 compared to 89 in the same period in
1994. 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
monthly service revenue per customer will continue to decline as
USM's distribution channels provide additional customers who
generate fewer local minutes of use and as roaming revenues grow
more slowly.
Service revenues from local retail customers' usage
of USM's systems increased 52% ($20.0 million) in 1995. Growth
in the number of customers in USM's consolidated markets was the
primary reason for the increase in local retail 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 local retail revenue per customer, to $43 in
1995 from $46 in 1994. Inbound roaming revenues, earned when
customers of other systems use USM's cellular systems when
roaming, increased 50% ($9.8 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 offset
somewhat by a reduction in monthly inbound roaming revenue per
customer. Monthly inbound roaming revenue per customer averaged
$22 in 1995 and $24 in 1994. Long-distance revenues increased
49% ($2.2 million) as the volume of long-distance calls billed by
USM increased.
Equipment sales revenue reflects the sale of 54,400
and 28,700 cellular telephone units in 1995 and 1994,
respectively, plus installation and accessories revenue. The
average revenue per telephone unit sold was $62 in 1995 compared
to $100 in 1994. The average revenue decline partially reflects
USM's decision to reduce sales prices on cellular telephones to
stimulate customer growth, to maintain its market position and to
meet competitive prices as well as reduced manufacturers' prices.
Operating expenses increased 36% ($24.4 million) in
1995. 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 7% ($4.6 million) in 1995.
System operations expenses increased 36% ($3.5
million) in 1995 as a result of increases in customer usage
expenses and costs associated with operating USM's cellular
systems. Customer usage expenses represent charges from other
telecommunications service providers for local interconnection to
the landline network, toll charges and roaming expenses from
USM's customers' use of systems other than their local systems,
offset somewhat by increased pass-through roaming revenue.
Customer usage expenses increased 32% ($1.3 million) in 1995.
Maintenance, utility and cell site expenses grew 39% ($2.2
million) in 1995, reflecting growth in the number of cells to 841
in 1995 from 566 in 1994 and the effects of acquisitions and
start-ups.
Marketing and selling expenses increased 42% ($5.9
million) in 1995, due primarily to the increased number of gross
customer activations in 1995 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.
-6-
<PAGE>
Cost of equipment sold reflects the increased unit
sales related to the increase in gross customer activations
offset somewhat by falling manufacturers' prices. The average
cost of a telephone unit sold was $206 in 1995 compared to $279
in 1994.
General and administrative expenses increased 33%
($6.9 million) in 1995. These expenses include the costs of
operating USM's local business offices and its corporate
expenses. The increase results from the growth in the number of
consolidated markets, the growth in the customer base in existing
markets and an expansion of both local administrative office and
corporate staff, necessitated by growth in USM's business and the
acquisition of and start-up of additional operations. USM is
using an ongoing clustering strategy to combine local operations
wherever feasible in order to gain operational efficiencies and
reduce its administrative expenses.
Depreciation expense increased 42% ($3.6 million)
in 1995, reflecting a 54% increase in average fixed assets since
March 31, 1994. Amortization expense, primarily amortization of
license costs, increased 22% ($1.3 million) in 1995. This
additional amortization reflects a 14% ($123.9 million) increase
in license costs for consolidated operational markets since March
31, 1994.
Operating income was $8.1 million in 1995 compared
to a loss of $1.0 million in 1994. Operating margin on service
revenues improved to 8% in 1995 from (2%) in 1994. The increase
in operating income 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. USM expects to add a net of five markets to consolidated
operations by the end of 1995, through the acquisition of
majority interests in 17 operational markets and the divestiture
of 12 markets currently majority-owned and managed by USM. The
Company anticipates increasing growth in cellular units in
service and revenues as it continues its expansion and
development programs. Marketing and system operations expenses
associated with this expansion will most likely reduce the rate
of growth in operating cash flow and operating income over the
next several quarters.
Cellular investment income includes USM's and TDS's
share of the net income or loss 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 these minority interests.
CELLULAR INVESTMENT INCOME (LOSS)
Three Months Ended March 31,
---------------------------------------
1995 1994 Change
----------- ---------- ----------
(Dollars in thousands)
Cellular Markets
Managed by USM $ (117) $ (158) $ 41
Managed by Others 9,789 3,741 6,048
--------- --------- --------
$ 9,672 $ 3,583 $ 6,089
========= ========= ========
Net income (loss) from cellular telephone
operations was $19.1 million in 1995 compared to ($1.5) million
in 1994. The 1995 improvement resulted from the gains on sales
of cellular interests, improved operating results and increased
investment income. Such net income (loss) excludes the USM
minority shareholders' share of such income (loss). Net income
(loss) from cellular telephone operations does not include income
taxes from the inclusion of USM 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.
-7-
<PAGE>
TDS owned an aggregate of 66,284,155 shares of
common stock of USM at March 31, 1995, representing 81.1% of the
combined total of USM's outstanding Common and Series A
Common Shares and 95.9% of their combined voting power. Assuming
USM's Common Shares are issued in all instances in which USM has
the choice to issue its Common Shares or other consideration and
assuming all issuances of USM's common stock to TDS and third
parties for completed and pending acquisitions and redemptions of
USM Preferred Stock and TDS Preferred Shares had been completed
at March 31, 1995, TDS would have owned 79.9% of the total
outstanding common stock of USM and controlled over 95.6% of the
combined voting power of both classes of its common stock.
In addition, as discussed below under "Financial
Resources and Liquidity," USM intends to issue debt which may be
converted into USM Common Shares. The conversion of such debt
would also reduce TDS's equity ownership and voting control of
USM. 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 tax purposes. If this
occurs, TDS would lose the ability to offset any tax losses
against the taxable income of USM and its subsidiaries, and
certain other benefits which the tax consolidation of TDS and USM
permits.
As discussed, above, TDS and USM have structured
certain acquisition transactions involving the issuance of USM
Common Shares to permit delivery of TDS Common Shares and/or cash
in lieu of USM Common Shares. In addition, at the election of
USM, any conversion of the convertible debt issued by USM may be
satisfied by the payment of cash equal to the value of the USM
Common Shares issuable at the time of conversion. These and
other arrangements are designed to permit TDS and USM to defer a
tax deconsolidation. Nevertheless, the continued issuance of USM
Common Shares to parties other than TDS (e.g., under employee
benefit plans) may eventually result in the tax deconsolidation
of TDS and USM unless other actions are taken to defer or prevent
such a deconsolidation.
-8-
<PAGE>
TELEPHONE OPERATIONS
Three Months Ended March 31,
-----------------------------------------------------
Change Change
Due To Excluding
1995 1994 Change Acquisitions Acquisitions
-------- -------- ------ ------------ ------------
(Dollars in thousands, except per access line amounts)
Operating Revenues
Local Service $ 22,638 $ 19,395 $ 3,243 $ 1,181 $ 2,062
Network Access and
Long-Distance 51,166 41,803 9,363 8,907 456
Miscellaneous 10,505 9,862 643 393 250
------- ------- ------- ------ --------
84,309 71,060 13,249 10,481 2,768
------- ------- ------- ------ --------
Operating Expenses
Network Operations 16,288 11,069 5,219 4,598 621
Customer Operations 11,798 10,319 1,479 794 685
Corporate and Other 14,127 11,491 2,636 1,654 982
Depreciation 17,722 14,553 3,169 1,297 1,872
Amortization 1,253 890 363 479 (116)
------- ------- ------- ------ --------
61,188 48,322 12,866 8,822 4,044
------- ------- ------- ------ --------
Operating Income $23,121 $ 22,738 $ 383 $ 1,659 $ (1,276)
======= ======= ======= ====== ========
Telephone Revenues as a
Percent of Total
Revenues 40% 45%
Additions to Property,
Plant and
Equipment* $ 14,745 $ 13,585
Identifiable Assets $1,036,467 $ 825,239
Companies 100 93
Access Lines 410,000 360,100
Growth in access
lines from prior
quarter-end:
Acquisitions 12,900 ---
Internal growth 4,600 3,900
Average monthly
revenue per access
line $ 70 $ 66
* Does not include cash expenditures (in thousands) of $9,359 and
$7,143, respectively, which relate to additions in prior periods.
Operating revenues from telephone operations
increased 19% ($13.2 million) in the first quarter of 1995
compared to 1994. The increase in revenues was primarily due to
the effects of aquisitions, internal access line growth and
recovery of increased costs of providing network access to long-
distance providers. Acquisitions increased telephone revenues
15% ($10.5 million) in 1995. TDS has acquired seven telephone
companies serving 32,600 access lines and a long-distance company
serving approximately 30,000 customers since March 31, 1994.
Telephone results of operations include the results of these
acquired companies since the respective dates of acquisition.
Local service revenues increased 17% ($3.2 million)
in 1995 with acquisitions increasing such revenues 6% ($1.2
million). Internal access line growth and sales of
custom-calling and other features increased revenues 7% ($1.4
million). Certain extended community calling ("ECC") revenues
previously reported as network access revenues increased local
service revenues 2% ($348,000). Permanent rate increases added
1% ($272,000) to local service revenue in 1995.
-9-
<PAGE>
Network access and long-distance revenues increased
22% ($9.4 million) in 1995 with acquisitions increasing such
revenues 21% ($8.9 million). These revenues increased 2%
($769,000) due to recovery of increased costs of providing access
to long-distance carriers. Increased usage of the network
generated 2% ($688,000) of additional network access and long-
distance revenue. These revenues decreased 1% ($537,000) in 1995
as certain ECC revenues are now reported as local service
revenues. Also, network access revenues in 1994 include an
additional $415,000 in settlements relating to prior periods due
primarily from retroactively billed access services.
Miscellaneous revenues increased 7% ($643,000) in
1995, with acquisitions increasing such revenues 4% ($394,000).
Higher sales and leases of customer premise equipment increased
these miscellaneous revenues 4% ($367,000).
Operating expenses increased 27% ($12.9 million) in
1995. The effects of acquisitions increased expenses 18% ($8.8
million).
Network operations expenses increased 47% ($5.2
million) with acquisitions increasing these expenses 42% ($4.6
million). The remainder of the increase was primarily due to
salary and work force changes along with the effects of general
inflation. Depreciation expense increased 22% ($3.2 million)
with acquisitions increasing such expenses 9% ($1.3 million).
The remaining increase was due primarily to increases in plant
facilities. Customer operations expenses increased 14% ($1.5
million) with acquisitions increasing such expenses 8%
($794,000). The remaining increase was primarily due to
increases in wages, staffing levels and general inflation.
Corporate and other expenses increased 23% ($2.6 million) with
acquisitions increasing such expenses 14% ($1.7 million). The
remaining increase was due primarily to increases in wages,
staffing levels and general inflation.
Operating income from telephone operations
increased 2% ($383,000) in 1995, with acquisitions increasing
such income 7% ($1.7 million). The telephone operating margin
was 27.4% in 1995 compared to 32.0% in 1994. The 1995 operating
margin was reduced to 27.4% by the acquisition of a long-distance
company which produces lower margins than the local telephone
operations and retroactive reductions in access revenues. The
1994 operating margin of 32.0% was unusually high due to the
recognition of access revenues for services provided in the
previous year. The operating margin in 1995 is anticipated to be
lower than in 1994 due to the long-distance company acquired in
1994 mentioned above, continued regulatory pressure on revenues
and pressure from long-distance providers to reduce network
access rates.
-10-
<PAGE>
RADIO PAGING OPERATIONS
Three Months Ended March 31,
---------------------------------------
1995 1994 Change
----------- ---------- ----------
(Dollars in thousands, except per unit amounts)
Service Operations
Revenue $ 22,237 $ 18,139 $ 4,098
------- ------- -------
Costs and Expenses
Cost of Services 5,452 4,207 1,245
Selling and Advertising 4,142 3,020 1,122
General and Administrative 9,064 6,776 2,288
Depreciation 4,587 3,107 1,480
Amortization 973 602 371
------- ------- -------
24,218 17,712 6,506
------- ------- -------
Service Operating
(Loss) Income (1,981) 427 (2,408)
------- ------- -------
Equipment Sales
Revenue 3,681 3,370 311
Cost of Equipment Sold 3,729 3,227 502
------- ------- -------
Equipment Sales
(Loss) Income (48) 143 (191)
------- ------- -------
Operating (Loss) Income $ (2,029) $ 570 $ (2,599)
======= ======= =======
Radio Paging Revenues as a
Percent of Total Revenues 12% 13%
Additions to Property
and Equipment* $ 8,085 $ 7,004
Identifiable Assets $ 147,676 $ 74,907
Pagers in service 705,100 492,300
Average monthly service
revenue per unit $ 11 $ 13
Transmitters in service 969 758
Disconnect rate per month 2.3% 2.8%
Marketing cost per net
customer unit addition $ 79 $ 99
* Does not include cash expenditures (in thousands) of $1,016 and
$1,474 in 1995 and 1994, respectively, which relate to additions in
prior periods.
Service revenues increased 23% ($4.1 million) in
the first quarter of 1995 from 1994, primarily as a result of the
43% growth in the number of pagers in service. A net additional
212,800 pagers have been placed in service since March 31, 1994.
However, a continuing decline in average revenue per pager has
slowed service revenue growth. Average monthly service revenue
per pager declined 14% to $11 in the first three months of 1995
from $13 in the same period of 1994. Of the decline, 9% was due
to a change in distribution channel mix and 5% was due to pricing
declines within the distribution channels. The decline in APP's
average service revenue per pager is consistent with the industry
trend. Declining average monthly service revenue per pager is
related to a shift toward lower distribution channels such as
resellers and retail stores as well as competitive factors.
Service expenses increased 37% ($6.5 million) in
1995 from 1994, primarily due to additional costs of serving new
customers and system expansion as well as significantly higher
selling and advertising expenses, increased provisions for bad
debts and payroll and franchise taxes and additional
depreciation. Cost of services increased 30% ($1.2 million) in
1995 reflecting the additional costs of providing service to the
increased customer base and the costs of upgrading and expanding
the systems to improve system reliability and coverage. APP's
transmitters in service increased to 969 at March 31, 1995 from
758 at March 31, 1994. Selling and advertising expense increased
37% ($1.1 million) in 1995 over 1994 primarily to stimulate
growth in the direct and reseller distribution channels. While a
198% increase in reseller net unit sales was achieved, an
increase of only 10% was achieved in direct gross unit sales.
General
-11-
<PAGE>
and administrative expense increased 34% ($2.3 million) due
primarily to increases in bad debt expense ($400,000), payroll
taxes ($300,000) and franchise taxes ($150,000). Depreciation
charges increased 48% ($1.5 million) in 1995 reflecting an
increase of approximately $900,000 in depreciation expense due to
the change in depreciable lives of pagers and transmitters that
occurred July 1, 1994, as well as an increase due to the
increased investment in pagers and related equipment.
Equipment sales revenue increased 9% ($311,000) due
to APP's increased emphasis on selling pagers to customers,
particularly through retail stores and resellers. Cost of
equipment sold increased 16% ($502,000) also due to the increased
focus on pager sales and to replace pagers related to a system
upgrade in the Florida market.
Operating loss was $2.0 million in 1995 compared to
operating income of $570,000 in 1994. The decrease in operating
results reflects i) a continuing decline in average monthly
service revenue per unit and ii) increased operating expenses due
to the growth in customers, efforts to expand the customer base,
increased bad debts from the consumer market and increased
depreciation charges.
Net loss from radio paging operations totalled $2.3
million in 1995 compared with net income of $12,000 in 1994.
-12-
<PAGE>
PARENT AND SERVICE COMPANY OPERATIONS
Other income, net includes the gross income of
TDS's computer, printing and other service companies and costs of
corporate operations.
Three Months Ended
March 31,
-----------------------
1995 1994
--------- ---------
(Dollars in thousands)
Additions to Property and Equipment* $ 5,282 $ 1,729
Identifiable Assets $ 357,887 $113,586
* Includes noncash amounts (in thousands) of $80 in 1995. Does not
include cash expenditures (in thousands) of $74 in 1994, which relate
to additions in 1993.
FINANCIAL RESOURCES AND LIQUIDITY
- ---------------------------------
Cash flows from operating activities totalled $48.2
million in the first quarter of 1995 compared to $41.0 million in
1994. Consolidated operating cash flow (operating income plus
depreciation and amortization) totalled $73.4 million in 1995
compared to $56.2 million in 1994. The 31% increase in operating
cash flow reflects primarily improved operating cash flow in
cellular telephone operations.
Three Months Ended March 31,
---------------------------------------
1995 1994 Change
----------- ---------- ----------
(Dollars in thousands)
OPERATING CASH FLOW
Cellular Telephone Operations $ 27,758 $ 13,714 $14,044
Telephone Operations 42,096 38,181 3,915
Radio Paging Operations 3,531 4,279 (748)
--------- --------- --------
$ 73,385 $ 56,174 $17,211
========= ========= ========
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 $25.2 million in the first quarter of 1995 compared to
$15.2 million in the first quarter of 1994.
Cash flows from financing activities totalled $76.6
million in the first quarter of 1995 compared to $56.9 million in
1994. Long-term borrowings provided most of the Company's
external financial requirements during the first quarter of 1995.
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 quarter of 1994. 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 $93.6 million in the first quarter of 1995 compared to $62.7
million in 1994. Such cash flows primarily consist of additions
to property, plant and equipment requiring the use of cash, and
cash flows for acquisitions, PCS licenses and for investments in
cellular telephone partnerships.
-13-
<PAGE>
Additions to cellular telephone plant and equipment
totalled $39.4 million for the first quarter of 1995. Management
expects such cellular telephone expenditures during 1995 to total
about $180 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.
Additions to telephone plant and equipment totalled
$14.7 million for the first quarter of 1995. Management expects
that plant and equipment additions will total about $110 million
in 1995, exclusive of acquisitions. This construction budget
includes $37 million for new digital switches and $54 million for
outside plant upgrades such as the installation of fiber optic
cables. 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 radio paging property and equipment
totalled $8.1 million for the first quarter of 1995. Management
expects that such property and equipment additions will total
about $35 million in 1995, 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 $5.3 million
for the first quarter of 1995. Management expects that these
additions will total about $25 million in 1995 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 $13.9 million in the first quarter of 1995
compared to $4.3 million in 1994. During the first quarter of
1995, TDS purchased controlling interests in six cellular markets
and several minority cellular interests representing a total of
1.0 million population equivalents and four telephone companies.
Some of the entities acquired during 1995 were subject to
acquisition agreements prior to 1995. The aggregate
consideration for the acquisitions completed in 1995 was $119.9
million, consisting of 2.2 million TDS Common Shares ($99.7
million), $16.5 million in cash and 112,000 USM Common Shares
($3.7 million).
TDS's acquisition program may require external
financing during the remainder of 1995. TDS and its subsidiaries
had agreements pending at March 31, 1995, to acquire controlling
interests in four cellular markets and a minority interest in one
market representing approximately 403,000 population equivalents,
one telephone company and one paging company for an aggregate
consideration of approximately $80.1 million. If all of these
pending acquisitions are completed as planned, TDS and/or USM
will issue approximately 1.2 million TDS Common Shares ($53.3
million) and 297,000 USM Common Shares ($8.7 million) and will
pay approximately $18.1 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.
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.
-14-
<PAGE>
APP was the successful bidder in 1994 for five
regional PCS licenses, providing equivalent coverage to that of a
nationwide license, at auction by the FCC. APP's bids for the
licenses aggregated $53.6 million. Pursuant to the FCC auction
procedures, APP made a 20% down payment of $10.7 million in 1994
and will pay the remaining 80% or $42.9 million within five
business days after the FCC grants the licenses (expected to be
mid-1995). APP is currently evaluating several uses for the
licenses. APP does not intend to begin deploying PCS services
until 1996 and does not believe that it will incur significant
additional capital spending in 1995 related to these licenses.
However, APP estimates it will require $50 million beginning in
1996 when APP begins expanding its infastructure to accommodate
the services that these licenses will allow.
APT's successful bid commitment totalled $289.2
million for the eight broadband PCS licenses, or $10.35 per
population equivalent. The Company has made a 20% down payment
(less its initial $20.4 million deposit) on the licenses.
Management anticipates that initial construction will begin in
late 1995 or early 1996 following detailed engineering and site
procurement. Marketing and selling activities along with
commercial operations are anticipated to commence in late 1996 or
early 1997.
APT anticipates that construction, development and
introduction of PCS networks and services will require
substantial capital and operating expenditures over the next
several years. While construction (including microwave
relocation), start-up and market development activities may be
impacted by many factors, APT's PCS license costs, capital
expenditures and working capital needs are estimated to total
approximately $300 million in 1995, $215 million in 1996, and
$350 million for 1997-1999. TDS anticipates that start-up and
development of high-quality networks and the marketing of systems
in APT's major markets may reduce TDS's operating and net income
somewhat during 1995 and future years.
TDS plans to finance APT's 1995 and 1996 capital
and operating expenditures primarily by selling non-strategic
cellular and other assets and by issuing debt and equity
securities. TDS has arranged asset sales involving estimated
total proceeds of more than $150 million. In addition, TDS is
finalizing a $300 million short-term credit facility to provide
the interim funding needed until the long-term funding activities
mentioned above are completed.
USM filed a registration statement with the
Securities and Exchange Commission ("SEC") on April 28, 1995
covering the sale of approximately $200 million net proceeds of
zero coupon convertible debt. This convertible debt will be
issued in the form of Liquid Yield Option Notes ("LYONS" ) (
trademark of Merrill Lynch & Co., Inc.), which LYONs will be
20-year fixed-rate securities and will be subordinated to all
senior indebtedness of USM's. Each LYON will be convertible at
the option of the holder at any time on or prior to maturity at a
to-be-determined conversion rate. Upon conversion, USM may elect
to deliver its Common Shares or cash equal to the market value of
the Common Shares into which the LYONs are convertible.
Beginning five years after the date of issue, the LYONs may be
redeemed at any time for cash at the option of USM at redemption
prices equal to the issue price plus accrued original issue
discount through the date of redemption. On the fifth
anniversary of the issue date, USM will purchase LYONs at the
option of the holder at the issue price plus accrued original
issue discount through that date. USM will have the option of
purchasing such LYONs with cash, USM Common Shares or TDS common
equity securities, or any combination thereof. TDS anticipates
using the net proceeds from this offering for general corporate
purposes.
-15-
<PAGE>
TDS is party to a legal proceeding before the FCC
involving a cellular license in a Wisconsin Rural Service Area
("RSA"). In March 1995, a preliminary settlement was reached
with a group of Wisconsin telephone companies (the "Settlement
Group") involved in that proceeding, and a definitive agreement
was executed with another party to the same proceeding. The
proposed settlements, which follow extensive discovery by the FCC
and other parties, contemplate a summary decision finding that
TDS and its affiliates are fully qualified to be FCC licensees.
The final settlements will be subject to the negotiation of a
definitive agreement with the Settlement Group and the action of
the judge presiding in the FCC proceeding. See Note 12 of Notes
to Consolidated Financial Statements, Legal Proceedings (La Star
and Wisconsin RSA 8 Applications), in the Company's 1994 Annual
Report on Form 10-K for further discussion of the proceeding
involving the Wisconsin RSA.
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 unrestricted cash and temporary investments
totalling $54.6 million and longer-term investments totalling
$67.7 million at March 31, 1995. These investments are primarily
the result of telephone operations' internally generated cash.
While certain regulated telephone subsidiaries debt agreements
place limits on intercompany dividend payments, these
restrictions are not expected to affect the Company's ability to
meet its cash obligations.
TDS and its subsidiaries had $168.1 million of bank
lines of credit for general corporate purposes at March 31, 1995,
$143.1 million of which were committed. Unused amounts of such
lines totalled $77.7 million, $52.7 million of which were
committed. These line of credit agreements provide for
borrowings at negotiated rates up to the prime rate.
TDS and USM also have access to debt and equity
capital markets, including shelf registration statements to issue
common stock and preferred stock for acquisitions. TDS's shelf
registration statement for Common Shares for acquisitions had 1.6
million unissued shares at March 31, 1995, including 631,000
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 March
31, 1995, $238.4 million remained unused on the universal shelf.
The unused amount may be used for debt or equity security
issuances including the sale of debt under TDS's $150 million
Series C Medium-Term Note Program, of which $110.8 million is
unused.
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 for use in
connection with 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.
-16-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------
Unaudited
---------
Three Months Ended
March 31,
-------------------------------------
1995 1994
--------------- ---------------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Cellular telephone $ 99,748 $ 66,233
Telephone 84,309 71,060
Radio paging 25,918 21,509
--------------- ---------------
209,975 158,802
--------------- ---------------
OPERATING EXPENSES
Cellular telephone 91,684 67,237
Telephone 61,188 48,322
Radio paging 27,947 20,939
--------------- ---------------
180,819 136,498
--------------- ---------------
OPERATING INCOME 29,156 22,304
--------------- ---------------
INVESTMENT AND OTHER INCOME
Interest and dividend income 3,095 2,048
Minority share of income (6,162) (1,197)
Cellular investment income, net of
license cost amortization 9,672 3,583
Gain on sale of cellular interests 19,488 ---
Other income, net (666) 769
--------------- ---------------
25,427 5,203
--------------- ---------------
INCOME BEFORE INTEREST AND INCOME TAXES 54,583 27,507
Interest expense 12,414 9,249
--------------- ---------------
INCOME BEFORE INCOME TAXES 42,169 18,258
Income tax expense 18,976 8,034
--------------- ---------------
NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 23,193 10,224
Cumulative effect of accounting
change --- (723)
--------------- ---------------
NET INCOME 23,193 9,501
Preferred Dividend Requirement (492) (564)
--------------- ---------------
NET INCOME AVAILABLE TO COMMON $ 22,701 $ 8,937
=============== ===============
WEIGHTED AVERAGE COMMON SHARES (000s) 57,292 52,555
EARNINGS PER COMMON SHARE:
Before cumulative effect of
accounting change $ .39 $ .18
Cumulative effect of accounting
change -- (.01)
--------------- ---------------
Net Income $ .39 $ .17
=============== ===============
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .095 $ .09
=============== ===============
The accompanying notes to financial statements are an integral part of
these statements.
-17-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
-------------------------------------
1995 1994
--------------- ---------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,193 $ 9,501
Add (Deduct) adjustments to reconcile
net income to net cash provided by
operating activities
Cumulative effect of accounting change --- 723
Depreciation and amortization 47,139 36,606
Deferred taxes 6,018 10,218
Investment income (11,240) (5,021)
Minority share of income 6,162 1,197
Gain on sale of cellular interests (19,488) ---
Other noncash expense 1,643 1,106
Change in accounts receivable 4,073 (5,265)
Change in accounts payable (14,007) (774)
Change in accrued taxes 11,313 (4,775)
Change in other assets and liabilities (6,592) (2,539)
--------------- ---------------
48,214 40,977
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 96,317 6,397
Repayments of long-term debt (8,534) (10,274)
Change in notes payable (6,691) 16,041
Common stock issued 2,489 5,532
Minority partner capital distributions (657) (658)
Redemption of preferred stock (534) (268)
Dividends paid (5,933) (5,095)
Sale of stock by a subsidiary 158 45,241
--------------- ---------------
76,615 56,916
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and
equipment (76,939) (63,117)
Investments in and advances to cellular
minority partnerships (3,578) (3,979)
Distributions from partnerships 1,792 5,098
Investments in PCS licenses (37,885) ---
Proceeds from investment sales 32,220 ---
Other investments 5,280 2,043
Acquisitions, excluding cash acquired (13,928) (4,280)
Change in temporary investments (517) 1,523
--------------- ---------------
(93,555) (62,712)
--------------- ---------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 31,274 35,181
CASH AND CASH EQUIVALENTS -
Beginning of period 24,733 55,666
--------------- ---------------
End of period $ 56,007 $ 90,847
=============== ===============
The accompanying notes to financial statements are an integral part of
these statements.
-18-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
March 31, 1995 December 31, 1994
--------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 34,007 $ 24,733
Cash and cash equivalents -
restricted (Note 5) 22,000 ---
Temporary investments 20,639 19,833
Accounts receivable from customers
and others 109,343 110,266
Materials and supplies, at average cost,
and other current assets 33,437 31,086
--------------- ----------------
219,426 185,918
--------------- ----------------
INVESTMENTS
Cellular limited partnership interests 118,296 111,733
Cellular license acquisition costs, net 121,884 94,470
Marketable equity securities 24,553 25,604
Marketable non-equity securities 67,711 71,314
Other 61,881 60,806
--------------- ----------------
394,325 363,927
--------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Cellular telephone plant and
license costs, net 1,372,517 1,289,837
Telephone plant and franchise costs, net 798,736 760,221
Radio paging, net 71,858 70,817
Other, net 35,267 32,700
--------------- ----------------
2,278,378 2,153,575
--------------- ----------------
OTHER ASSETS AND DEFERRED CHARGES
PCS licenses and deposits 343,484 74,501
Other 15,065 12,206
--------------- ----------------
358,549 86,707
--------------- ----------------
$ 3,250,678 $ 2,790,127
=============== ================
The accompanying notes to financial statements
are an integral part of these statements.
-19-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
March 31, 1995 December 31, 1994
--------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt
and preferred shares $ 37,914 $ 37,447
Notes payable 95,082 98,608
Accounts payable 92,333 112,967
Due to FCC-PCS licenses 273,995 42,897
Advance billings and customer deposits 22,201 20,898
Accrued interest 5,967 10,054
Accrued taxes 16,409 3,894
Other current liabilities 18,456 19,419
--------------- ----------------
562,357 346,184
--------------- ----------------
DEFERRED LIABILITIES AND CREDITS 125,968 119,076
--------------- ----------------
LONG-TERM DEBT, excluding current portion 646,389 536,509
--------------- ----------------
REDEEMABLE PREFERRED SHARES, excluding
current portion 1,666 13,209
--------------- ----------------
MINORITY INTEREST in subsidiaries 295,616 272,292
--------------- ----------------
NONREDEEMABLE PREFERRED SHARES 29,557 29,819
--------------- ----------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share 50,253 47,938
Series A Common Shares, par value $1
per share 6,876 6,887
Common Shares issuable (31,431 and
41,908 shares, respectively) 1,496 1,995
Capital in excess of par value 1,385,599 1,288,453
Retained earnings 144,901 127,765
--------------- ----------------
1,589,125 1,473,038
--------------- ----------------
$ 3,250,678 $ 2,790,127
=============== ================
The accompanying notes to financial statements
are an integral part of these statements.
-20-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The 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.
The accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only
normal recurring items) necessary to present fairly the
financial position as of March 31, 1995 and December 31,
1994, and the results of operations and cash flows for the
three months ended March 31, 1995 and 1994. The results
of operations for the three months ended March 31, 1995
and 1994, are not necessarily indicative of the results to
be expected for the full year.
2. Earnings per Common Share were computed by dividing Net
Income Available to Common by the weighted average number
of common and common equivalent shares outstanding during
the period. Dilutive common stock equivalents at March
31, 1995, consist of dilutive Common Share options.
3. Assuming that acquisitions accounted for as purchases
during the period January 1, 1994, to March 31, 1995, had
taken place on January 1, 1994, unaudited pro forma
results of operations from continuing operations would
have been as follows:
Three Months Ended
March 31,
--------------------------------------
1995 1994
--------------- ---------------
(Dollars in thousands,
except per share amounts)
Operating revenues $ 212,627 $ 173,907
Net income before
cumulative effect of
accounting change 22,566 9,124
Earnings per share before
cumulative effect of
accounting change $ .38 $ .15
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 greater than three months to twelve months
are classified as temporary investments.
-21-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TDS acquired certain cellular licenses and operating
companies in 1995 and 1994. TDS also acquired four
telephone companies during the first quarter of 1995. In
conjunction with these acquisitions, the following assets
were acquired and liabilities assumed, and Common Shares
and Preferred Shares issued.
Three Months Ended
March 31,
-------------------------------------
1995 1994
--------------- ---------------
(Dollars in thousands,
except per share amounts)
Property, plant and equipment $ 55,272 $ 3,782
Cellular licenses 87,953 98,061
Increase (decrease) in equity method
investment in cellular interests (1,943) (4,154)
Long-term debt (19,511)
Deferred credits (769) (18)
Other assets and liabilities,
excluding cash and cash equivalents (2,548) (1,337)
Minority interest (1,151) 711
Common Shares issued and issuable (99,692) (92,765)
USM Stock issued and issuable (3,683)
--------------- ---------------
Decrease in cash due to acquisitions $ 13,928 $ 4,280
=============== ===============
The following table summarizes interest and income taxes paid, and
other noncash transactions.
Three Months Ended
March 31,
-------------------------------------
1995 1994
--------------- ---------------
(Dollars in thousands,
except per share amounts)
Interest paid $ 16,367 $ 13,874
Income taxes paid 1,819 4,144
Common Shares issued by TDS for
conversion of TDS and Subsidiary
Preferred Stock $ 263 $ 181
-22-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Restricted Cash
A subsidiary of the Company has entered into an Exchange
Agreement ("Agreement") in connection with the sale of a
cellular market in order to qualify for like-kind exchange
treatment in accordance with Internal Revenue Service
regulations. Pursuant to the Agreement, $22,000,000
received from the sale of the cellular market was
transferred into an escrow account and will be used to
purchase qualified replacement property as defined by
Section 1031 of the Internal Revenue Code. The qualified
replacement property was identified within 45 days of the
sale of the cellular market which occurred on March 24,
1995. The purchase of the replacement property must occur
within 180 days after March 24, 1995.
6. Contingencies
The Company's material contingencies as of March 31, 1995,
include the collectibility of a $5.4 million note
receivable under a long-term financing agreement with
cellular company and a $9.9 million standby letter of
credit in support of a bank loan to an entity minority-
owned by the Company. For further discussion of these
contingencies, see Note 14 of Notes to Consolidated
Financial Statements included in the Company's 1994 Report
on Form 10-K for the year ended December 31, 1994.
-23-
<PAGE>
PART II. OTHER INFORMATION
----------------------------
Item 5. Other Information
- --------------------------
USM announced on April 28, 1995, that it filed a registration
statement with the Securities and Exchange Commission covering
the proposed sale of approximately $200 million net proceeds of
zero coupon convertible debt. The net proceeds of the 20-year
fixed rate securities will be used to repay variable-rate
borrowings from TDS. See the news release attached as Exhibit
99.2 for further information regarding the debt offering.
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 March 31, 1995
and 1994.
(e) Exhibit 99.2 - News release regarding the proposed sale of
approximately $200 million net proceeds of
zero coupon convertible debt.
(f) Reports on Form 8-K filed during the quarter ended March
31, 1995:
TDS filed a Current Report on Form 8-K dated March 15,
1995, which included a press release that announced a
preliminary settlement has been reached with a group of
Wisconsin telephone companies (the "Settlement Group")
involved in a proceeding initiated by the Federal
Communications Commission ("FCC") and that a definitive
settlement agreement has been reached with BellSouth
Mobility Inc with respect to the same proceeding (and
certain other litigation between the parties). Pending
the negotiation of a definitive agreement with the
Settlement Group, the judge postponed the scheduled
start of the hearing. The hearing was to determine
whether United States Cellular Corporation
misrepresented facts to, lacked candor in its dealings
with, or attempted to mislead the FCC in the La Star
matter previously reported and to determine if TDS
possessed the requisite character qualifications to
retain its cellular license for Wisconsin Rural Service
Area 8.
In the same Form 8-K dated March 15, 1995, the Company
also filed a press release to announce that on March 13,
1995, its wholly owned subsidiary, American Portable
Telecommunications, Inc., was the successful bidder for
eight broadband Personal Communications Services ("PCS")
licenses at auction conducted by the FCC. The licenses
cover the Major Trading Areas ("MTAs") of Minneapolis-
St. Paul, Tampa-St. Petersburg-Orlando, Houston,
Pittsburgh, Kansas City, Columbus, Alaska and Guam-N.
Mariana Islands, and account for 27.9 million 1994
population equivalents.
No other reports on Form 8-K were filed during the
quarter ended March 31, 1995.
-24-
<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 May 12, 1995 MURRAY L. SWANSON
------------ ---------------------------------
Murray L. Swanson
Executive Vice President-Finance
Date May 12, 1995 GREGORY J. WILKINSON
------------ ----------------------------------
Gregory J. Wilkinson
Vice President and Controller
(Principal Accounting Officer)
-25-
<PAGE>
Exhibit 11
Telephone and Data Systems, Inc.
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Three Months Ended March 31, 1995 1994
--------------------------------------------------------------------------
Primary Earnings
Net Income before cumulative effect
of accounting change $ 23,193 $ 10,224
Dividends on Preferred Shares (492) (564)
Minority income adjustment assuming issuance
of a subsidiary's issuable securities (95) ---
--------- ---------
Net income before cumulative effect
of accounting change applicable
to Common 22,606 9,660
Cumulative effect of accounting change --- (723)
--------- ---------
Net Income Available to Common $ 22,606 $ 8,937
========= =========
Primary Shares
Weighted average number of Common and
Series A Common Shares Outstanding 56,349 52,290
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 170 202
Convertible Preferred Shares 734 28
Common Shares Issuable 39 35
--------- ---------
Primary Shares 57,292 52,555
========= =========
Primary Earnings per Common Share
Net Income before cumulative effect
of accounting change $ .39 $ .18
Cumulative effect of accounting change -- (.01)
--------- ---------
Net Income $ .39 $ .17
========= =========
Fully Diluted Earnings*
Net Income before cumulative effect
of accounting change $ 23,193 $ 10,224
Dividends on Preferred Shares (343) (564)
Minority income adjustment assuming issuance
of a subsidiary's issuable securities (95) ---
--------- ---------
Net income before cumulative effect
of accounting change applicable
to Common 22,755 9,660
Cumulative effect of accounting change --- (723)
--------- ---------
Net Income Available to Common $ 22,755 $ 8,937
========= =========
Fully Diluted Shares
Weighted average number of Common and
Series A Common Shares Outstanding 56,349 52,290
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 171 206
Convertible Preferred Shares 1,231 28
Common Shares Issuable 39 35
--------- ---------
Fully Diluted Shares 57,790 52,559
========= =========
Fully Diluted Earnings per Common Share
Net Income before cumulative effect
of accounting change $ .39 $ .18
Cumulative effect of accounting change -- (.01)
--------- ---------
Net Income $ .39 $ .17
========= =========
* 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%.
<PAGE>
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
For the Three Months March 31, 1995
(Dollars In Thousands)
EARNINGS:
Income from Continuing Operations before
income taxes $ 42,169
Add (Deduct):
Minority Share of Losses (558)
Earnings on Equity Method (11,240)
Distributions from Minority Subsidiaries 1,792
Amortization of Non-Telephone Capitalized
Interest 7
Minority interest in majority-owned subsidiaries
that have fixed charges 4,798
--------
36,968
Add fixed charges:
Consolidated interest expense 12,369
Interest Portion (1/3) of Consolidated Rent Expense 1,276
Amortization of debt expense and discount on
indebtedness 45
--------
$ 50,658
========
FIXED CHARGES:
Consolidated interest expense $ 12,369
Interest Portion (1/3) of Consolidated Rent Expense 1,276
Amortization of debt expense and discount on indebtedness 45
--------
$ 13,690
========
RATIO OF EARNINGS TO FIXED CHARGES 3.70
========
Tax-Effected Redeemable Preferred Dividends $ 500
Fixed Charges 13,690
--------
Fixed Charges and Redeemable Preferred Dividends $ 14,190
========
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 3.57
========
Tax-Effected Preferred Dividends $ 1,156
Fixed Charges 13,690
--------
Fixed Charges and Preferred Dividends $ 14,846
========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 3.41
========
<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
March 31, 1995, and for the three months then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 56,007
<SECURITIES> 24,553
<RECEIVABLES> 82,798
<ALLOWANCES> 2,990
<INVENTORY> 18,642
<CURRENT-ASSETS> 219,426
<PP&E> 2,949,749
<DEPRECIATION> 671,371
<TOTAL-ASSETS> 3,250,678
<CURRENT-LIABILITIES> 562,357
<BONDS> 646,389
<COMMON> 57,129
1,666
29,557
<OTHER-SE> 1,531,996
<TOTAL-LIABILITY-AND-EQUITY> 3,250,678
<SALES> 0
<TOTAL-REVENUES> 209,975
<CGS> 0
<TOTAL-COSTS> 180,819
<OTHER-EXPENSES> (25,427)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,414
<INCOME-PRETAX> 42,169
<INCOME-TAX> 18,976
<INCOME-CONTINUING> 23,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,193
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
Exhibit 99.1
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Unaudited
Twelve Months Ended
March 31,
------------------------
1995 1994
----------- -----------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Cellular telephone $ 365,919 $ 239,075
Telephone 319,590 277,225
Radio paging 96,474 79,897
----------- -----------
781,983 596,197
----------- -----------
OPERATING EXPENSES
Cellular telephone 339,466 245,355
Telephone 227,601 194,879
Radio paging 99,242 79,302
----------- -----------
666,309 519,536
----------- -----------
OPERATING INCOME 115,674 76,661
----------- -----------
INVESTMENT AND OTHER INCOME
Interest and dividend income 11,659 8,352
Minority share of income (14,044) (2,427)
Cellular investment income, net of license cost
amortization 32,107 16,835
Gain on sale of cellular and telephone interests 26,945 4,970
Other income, net (2,757) 430
----------- -----------
53,910 28,160
----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 169,584 104,821
Interest expense 44,416 38,329
----------- -----------
INCOME BEFORE INCOME TAXES 125,168 66,492
Income tax expense 51,655 29,175
----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 73,513 37,317
Cumulative effect of accounting change (723)
----------- -----------
NET INCOME 73,513 36,594
Preferred Dividend Requirement (1,745) (2,353)
----------- -----------
NET INCOME AVAILABLE TO COMMON $ 71,768 $ 34,241
=========== ===========
WEIGHTED AVERAGE COMMON SHARES (000s) 55,346 49,332
EARNINGS PER COMMON SHARE:
Before cumulative effect of accounting change $ 1.29 $.71
Cumulative effect of accounting change (.02)
----------- -----------
Net Income $ 1.29 $.69
=========== ===========
DIVIDENDS PER COMMON AND SERIES A
COMMON SHARE $ .365 $ .345
=========== ===========
<PAGE>
Exhibit 99.2
UNITED STATES CELLULAR REGISTERS
$200 MILLION OF CONVERTIBLE DEBT
April 28, 1995, Chicago, Illinois - United States
Cellular Corporation (AMEX symbol "USM") announced today that
it has filed a registration statement with the Securities and
Exchange Commission ("SEC") covering the sale of approximately
$200 million net proceeds of zero coupon convertible debt
(excluding the Underwriter's over-allotment option). The net
proceeds of the 20-year fixed-rate securities will be used to
repay variable-rate borrowings from USM's parent company,
Telephone and Data Systems, Inc. ("TDS"). Any additional net
proceeds will be used for general corporate purposes.
The convertible debt will be issued in the form of Liquid
Yield Option{TM} Notes ("LYONs"{TM}) underwritten by Merrill Lynch
& Co., Inc.
Each LYON will be convertible at the option of the Holder
at any time on or prior to maturity at a conversion rate to be
determined at pricing. Upon conversion, USM may elect to
deliver its Common Shares or cash equal to the market value of
the Common Shares into which the LYONs are convertible.
Beginning five years after the date of issue, the LYONs
may be redeemed at any time for cash at the option of USM at
redemption prices equal to the issue price plus accrued
Original Issue Discount through the date of redemption.
On the fifth anniversary of the issue date, USM will
purchase LYONs at the option of the Holder at the issue price
plus accrued Original Issue Discount through that date. USM
will have the option of purchasing such LYONs with cash, USM
Common Shares or TDS common equity securities, or any
combination thereof.
The registration statement relating to these securities
has been filed with the SEC but has not yet become effective.
These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes
effective. This shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
Headquartered in Chicago, USM manages and invests in
cellular systems throughout the United States. As of March
31, 1995, USM owned or had rights to acquire interests
representing 25.2 million population equivalents in 210
markets. At that date, USM managed operational systems
serving 147 markets.
For additional information, please contact Kenneth R.
Meyers, Vice President - Finance and Chief Financial Officer,
at (312) 399-8900. Out-of-town media, please call collect.
TM - Trademark of Merrill Lynch & Co., Inc.
<PAGE>
