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, 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
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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 Identification No.)
incorporation or organization)
30 North LaSalle Street, Chicago, Illinois 60602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-1900
Not Applicable
(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 October 31, 1995
Common Shares, $1 par value 51,091,104 Shares
Series A Common Shares, $1 par value 6,888,480 Shares
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<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
3RD QUARTER REPORT ON FORM 10-Q
INDEX
Page No.
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Part I Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-21
Consolidated Statements of Income -
Three Months and Nine Months Ended
September 30, 1995 and 1994 22
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 23
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 24-25
Notes to Consolidated Financial Statements 26-28
Part II Other Information 29
Signatures 30
<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
Nine Months Ended 9/30/95 Compared to Nine Months Ended 9/30/94
CONSOLIDATED
Telephone and Data Systems, Inc.'s ("TDS" or the "Company") consolidated
results of operations for the first nine months of 1995 reflect:
o rapid growth in cellular customer units which resulted in a
substantial increase in revenues, improved cash flow and operating
results,
o steady growth in telephone access lines and revenues,
o slower growth in pagers served and significantly higher operating
costs in the paging business unit,
o significant gains and cash proceeds from sales and trades of
non-strategic cellular assets and marketable securities,
o increases in interest and income tax expense and
o an increase in weighted average shares outstanding due to the
Company's continuing acquisition program.
Operating revenues grew 33% to $698.6 million in the first nine months
of 1995 over 1994, operating cash flow increased 26% to $243.3 million and
operating income rose 24% to $103.5 million. Gains on sales of cellular
interests and other investments of $79.7 million ($39.8 million after income
taxes and USM's minority share) were recognized in 1995. Net income available to
common rose 119% to 86.9 million in the first nine months of 1995 over 1994.
Earnings per share grew 101% to $1.49 in 1995 over 1994, reflecting the
significantly improved operating results and the gains on sales of cellular
interests, offset somewhat by a 10% increase in weighted average common shares.
On a comparable basis, excluding the gains on sales in 1995 and a $1.5 million
insurance refund (net of income taxes and USM's minority share) in 1994, net
income available to common increased 21% to $47.1 million and earnings per share
rose 9% to $.81.
United States Cellular Corporation (AMEX symbol "USM"), TDS's
80.8%-owned subsidiary, has added a net of 14 markets to consolidated operations
since September 30, 1994, through acquisitions, divestitures and the initiation
of cellular operations. USM currently provides cellular service to 618,000
customers in 138 majority-owned and managed markets. TDS Telecommunications
Corporation ("TDS Telecom"), TDS's wholly owned subsidiary, has acquired five
telephone companies since September 30, 1994. These acquisitions added 16,100
access lines while internal growth added 20,900 lines. TDS Telecom currently
operates 100 telephone companies serving 422,000 access lines. American Paging,
Inc. (AMEX symbol "APP"), TDS's 82.4%-owned subsidiary, has acquired two paging
companies since September 30, 1994, which added approximately 54,200 pagers. APP
provides service to 776,900 customers through 37 sales and service operating
centers.
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<PAGE>
In March 1995, American Portable Telecom, 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.
APT is in the process of building its management and operating team to develop
and construct APT's PCS systems in its major markets. Recently, APT announced
the selection of GSM "PCS-1900" as its choice of technology for its PCS network.
Operating revenues grew 33% ($173.1 million) in 1995 primarily as a
result of the growth in customers served. Cellular telephone revenues increased
as a result of the 70% customer growth in majority-owned and managed markets as
well as the increased use of USM's systems by customers of other systems while
roaming. This customer growth resulted in increased local retail and access
revenue, offset somewhat by an 8% decline in average monthly service revenue per
customer. Telephone revenues increased primarily due to acquisitions and
internal access line growth. Radio paging revenues increased primarily as a
result of the 34% growth in the number of pagers in service, offset somewhat by
changes in distribution channel mix and pricing declines within the distribution
channels which resulted in a 12% decline in average monthly service revenue per
unit.
Operating expenses rose 35% ($153.2 million) in 1995 as a result of the
continued rapid growth in USM's operations and the steady growth in TDS
Telecom's operations and significantly higher operating costs in APP's
operations. USM's operating expense increase reflects the additional marketing
and selling expenses incurred to add new customers as well as the costs of
providing services to the increased customer base. Telephone operating expenses
increased due to the effects of acquisitions and growth in internal operations.
APP expenses increased due to additional costs to serve current customers and to
add new customers as well as costs associated with the planned restructuring of
its operations.
Operating income increased 24% to $103.5 million in the first nine
months of 1995 from $83.6 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.
Nine Months Ended September 30,
-------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands)
CONSOLIDATED OPERATING INCOME
Cellular Telephone Operations $ 36,883 $ 15,614 $ 21,269
Telephone Operations 73,036 67,513 5,523
Radio Paging Operations (6,378) 485 (6,863)
--------- --------- ---------
$ 103,541 $ 83,612 $ 19,929
Operating Margins: ========= ========= =========
Cellular Telephone* 11% 7%
Telephone 28% 31%
Radio Paging* (9%) 1%
* Computed on Service Revenues
Management anticipates increasing 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 may reduce the rate of growth in operating cash flow and operating
income over the next several quarters.
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<PAGE>
Additionally, management believes there exists a seasonality at USM in both
service revenues, which tend to increase more slowly in the first and fourth
quarters, and operating expenses, which tend to be higher in the fourth quarter
due to increased marketing activities and customer growth. This seasonality may
cause operating income to vary from quarter to quarter.
Investment and other income increased to $93.5 million in 1995 from
$20.4 million in 1994. Cellular investment income, net increased $9.4 million to
$29.1 million, reflecting improvement in USM's equity method markets. Gain on
sale of cellular interests and other investments was $79.7 million in the first
nine months of 1995. USM recognized $77.7 million in gains on the sale of five
majority-owned markets, four minority interests and various marketable equity
securities. TDS Telecom recognized gains of $2.1 million as a result of the sale
of two minority cellular interests held by one of its telephone subsidiaries
and the sale of marketable equity securities. Minority share of income
increased $12.9 million in the first nine months of 1995 over 1994, as shown in
the table below.
Minority share of (income) loss includes (a) the minority shareholders'
share of USM's net income, (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 $12.5 million in the first nine months of 1995 over 1994 due to
the improvement in USM's operating results and gains on the sale of cellular
interests and other investments.
MINORITY SHARE OF (INCOME) LOSS
Nine Months Ended September 30,
-------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands)
United States Cellular
Minority Shareholders' Share $(15,251) $ (2,743) $(12,508)
Minority Partners' Share (5,713) (3,680) (2,033)
-------- -------- --------
(20,964) (6,423) (14,541)
TDS Telecom (1,506) (1,072) (434)
American Paging 2,050 -- 2,050
-------- -------- --------
$(20,420) $ (7,495) $(12,925)
======== ======== ========
Interest expense increased 36% ($10.4 million) in 1995. Interest on
long-term debt increased 33% ($9.0 million) in 1995 compared to 1994. Long-term
debt outstanding increased to $895.1 million as of September 30, 1995 from
$545.9 million as of September 30, 1994 due in part to the completion of
convertible debt financing at USM. The Company's balance of short-term notes
payable increased to $147.3 million in 1995 from $79.9 million in 1994,
resulting in an increase in short-term interest expense of $1.5 million in the
first nine months of 1995 compared with the first nine months of 1994. Interest
expense would have been greater but, the Company capitalized interest on the
debt incurred to finance the broadband PCS licenses of APT. As of September 30,
1995, TDS has capitalized a total of $6.5 million of interest charges on debt
with an average interest rate of approximately 7.4%.
Income tax expense increased 110% ($36.3 million) in 1995 compared with
1994 as pretax income increased. The effective income tax rate was 44% in the
first nine months of 1995 and 1994.
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<PAGE>
Net income before the cumulative effect of a change in accounting
principle improved to $88.4 million in 1995 from $42.2 million in 1994. Earnings
per common share before the cumulative effect of a change in accounting
principle were $1.49 in 1995 and $.75 in 1994. The weighted average number of
common shares outstanding increased 10% in 1995. The increase is primarily due
to the issuance of 3.2 million Common Shares since September 30, 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 1994 net income and earnings
per share by $723,000 and $.01, respectively.
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<PAGE>
CELLULAR TELEPHONE OPERATIONS
Nine Months Ended September 30,
-----------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands, except per unit amounts)
Operating Revenues
Service $ 344,454 $ 227,101 $ 117,353
Equipment Sales 10,985 9,715 1,270
-------- -------- --------
355,439 236,816 118,623
-------- -------- --------
Operating Expenses
System Operations 52,413 33,890 18,523
Marketing and Selling 69,204 46,089 23,115
Cost of Equipment Sold 38,393 25,847 12,546
General and Administrative 94,271 68,258 26,013
Depreciation 40,595 28,192 12,403
Amortization 23,680 18,926 4,754
-------- --------- ----------
318,556 221,202 97,354
-------- --------- ----------
Operating Income $ 36,883 $ 15,614 $ 21,269
======== ========= ==========
Cellular Telephone Revenues as a
Percent of Total Revenues 51% 45%
Additions to Property, Plant
and Equipment* $ 162,142 $ 110,644
Identifiable Assets $1,833,984 $1,532,912
Majority-Owned, Managed and Consolidated
Markets:
Population equivalents (000s) 19,911 19,048
Total population (000s) 22,210 20,531
Customers 618,000 364,000
Market penetration 2.78% 1.77%
Markets in operation 138 124
Cell sites 1n service 1,041 686
Average monthly service revenue per
customer $ 75 $ 81
Churn rate per month 2.0% 2.2%
Marketing cost per net customer addition $ 586 $ 676
* Includes (in thousands) $(1,278) and $(6,489), respectively, of unpaid amounts
for current year additions less cash amounts paid in the current year for prior
year additions.
USM owns, operates and invests in cellular markets. USM owns or has the
right to acquire interests, both majority and minority, in 203 cellular
telephone markets at September 30, 1995, representing 24.6 million population
equivalents. USM manages the operations in 149 markets at September 30, 1995.
USM expects to divest its controlling interests in seven of these markets and
manage the operations of one additional market in the future. In total, USM
expects to manage 143 markets under agreements in place as of September 30,
1995. The remaining interests in 60 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 138 markets are included in 1995 consolidated results compared to
124 markets in 1994.
Operating revenues increased 50% ($118.6 million) in 1995. The revenue
increase is primarily the result of 70% customer growth in the systems serving
its majority-owned and managed markets, growth in roaming revenues and
acquisitions. Acquisitions increased
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<PAGE>
revenues 13% ($30.3 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 $75 in 1995 from $81 in 1994. The 8% decrease in average
monthly service revenue per customer in 1995 was primarily a result of the
decline in average local minutes of use per customer and a decrease in per
customer inbound roaming revenue. Monthly local minutes of use averaged 93 in
the first nine months of 1995 compared to 97 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 customers 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 service revenue per customer will continue to decline as USM adds more
customers.
Service revenues from local customers' usage of USM's systems increased
55% ($74.0 million) in 1995. 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 $45 in 1995 from $48 in 1994. Inbound roaming
revenues, earned when customers of other systems use USM's cellular systems when
roaming, increased 45% ($34.0 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 inbound roaming revenue per customer averaged $24 in 1995 and
$27 in 1994. Long-distance revenues increased 51% ($8.4 million) as the volume
of long-distance calls billed by USM increased.
Equipment sales revenue reflects the sale of 191,900 and 98,200 cellular
telephone units in 1995 and 1994, respectively, plus installation and
accessories revenue. The average revenue per telephone unit sold was $57 in 1995
compared to $99 in 1994. The average revenue decline reflects USM's decision to
reduce sales prices on cellular telephones to increase the number of customers,
to maintain its market position and to meet competitive prices as well as
reduced manufacturers' prices.
Operating expenses increased 44% ($97.4 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 increased operating
expenses 11% ($23.9 million) in 1995.
System operations expenses increased 55% ($18.5 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 72% ($10.7
million) in 1995 reflecting higher utilization of services. Maintenance, utility
and cell site expenses grew 41% ($7.8 million) in 1995, reflecting growth in the
number of cells to 1,041 in 1995 from 686 in 1994 and the effects of
acquisitions.
Marketing and selling expenses increased 50% ($23.1 million) in 1995,
due primarily to the increased number of gross customer activations in 1995 and
the effects of acquisitions.
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<PAGE>
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 offset somewhat by falling manufacturers'
prices. The average cost of a telephone unit sold was $200 in 1995 compared to
$263 in 1994.
General and administrative expenses increased 38% ($26.0 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 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 44% ($12.4 million) in 1995, reflecting a
52% increase in average fixed assets since September 30, 1994. Amortization
expense, primarily amortization of license costs, increased 25% ($4.8 million)
in 1995. This additional amortization reflects a 2% ($22.7 million) increase in
license costs for operational consolidated markets since September 30, 1994.
Operating income was $36.9 million in 1995 compared to $15.6 million in
1994. Operating margin on service revenues improved to 11% in 1995 from 7% in
1994. The increase in operating income reflects 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 divest a net of five markets
from consolidated operations by mid-1996, through the acquisition of majority
interests in two operational markets and the divestiture of seven markets
currently majority-owned and managed by USM.
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
increased 48% ($9.4 million) in 1995, due to improved results in markets managed
by others.
Net income from cellular telephone operations was $64.7 million in 1995
compared to $12.4 million in 1994. The 1995 improvement resulted from the gains
on sales of cellular interests, improved operating results and increased
investment income. Net income from cellular telephone operations excludes the
USM minority shareholders' share of such income. USM is included in a
consolidated federal income tax return with other members of the TDS
consolidated group. 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 67,052,931 shares of common stock of USM at
September 30, 1995, representing 80.8% of the combined total of USM's
outstanding Common and Series
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<PAGE>
A Common Shares and 95.8% 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 September 30, 1995, TDS would have owned 80.1% of the total outstanding
common stock of USM and controlled 95.6% of the combined voting power of both
classes of its common stock.
In addition, USM has issued 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.
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 may eventually result in the tax
deconsolidation of TDS and USM unless other actions are taken to defer or
prevent such a deconsolidation.
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<PAGE>
TELEPHONE OPERATIONS
Nine Months Ended September 30,
--------------------------------
Change Change
Due To Excluding
Acquis- Acquis-
1995 1994 Change itions itions
---- ---- ------ --------- ---------
(Dollars in thousands, except per access line amounts)
Operating Revenues
Local Service $ 70,461 $ 60,711 $ 9,750 $ 3,836 $ 5,914
Network Access and
Long-Distance 160,816 130,672 30,144 22,393 7,751
Miscellaneous 31,532 29,938 1,594 955 639
--------- -------- -------- -------- --------
262,809 221,321 41,488 27,184 14,304
--------- -------- -------- -------- --------
Operating Expenses
Network Operations 50,669 35,887 14,782 11,245 3,537
Customer Operations 35,948 31,595 4,353 2,666 1,687
Corporate and Other 45,567 36,397 9,170 5,010 4,160
Depreciation 53,558 47,141 6,417 3,702 2,715
Amortization 4,031 2,788 1,243 282 961
--------- -------- -------- -------- --------
189,773 153,808 35,965 22,905 13,060
--------- -------- -------- -------- --------
Operating Income $ 73,036 $ 67,513 $ 5,523 $ 4,279 $ 1,244
========= ======== ======== ======== ========
Telephone Revenues as
a Percent of Total
Revenues 38% 42%
Additions to Property,
Plant and Equipment* $ 65,839 $ 72,463
Identifiable Assets $1,022,439 $938,730
Companies 100 95
Access Lines 422,000 385,000
Growth in access lines
for nine months:
Acquisitions 12,900 16,500
Internal growth 16,600 12,300
Average monthly revenue
per acccss line $ 72 $ 68
* Includes (in thousands) $(8,907) and $(3,430), respectively, of unpaid amounts
for current year additions less cash amounts paid in the current year for prior
year additions.
Operating revenues from telephone operations increased 19% ($41.5
million) in the first nine months of 1995 compared to 1994. The increase in
revenues was primarily due to the effects of acquisitions, internal access line
growth and recovery of increased costs of providing network access to
long-distance providers. Acquisitions increased telephone revenues 12% ($27.2
million) in 1995. TDS has acquired five telephone companies serving 16,100
access lines since September 30, 1994. Telephone results of operations include
the results of those companies acquired since their respective dates of
acquisition.
Local service revenues increased 16% ($9.8 million) in 1995 with
acquisitions increasing such revenues 6% ($3.8 million). Internal access line
growth and sales of custom-calling and other features increased revenues 7%
($4.1 million). Certain extended community calling
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<PAGE>
("ECC") revenues and extended area service revenues previously reported as
network access revenues increased local service revenues 3% ($1.7 million).
Network access and long-distance revenues increased 23% ($30.1 million)
in 1995 with acquisitions increasing such revenues 17% ($22.4 million). These
revenues increased 3% ($4.2 million) due to recovery of increased costs of
providing access to long-distance carriers. Increased usage of the network
generated 3% ($3.5 million) of additional network access and long-distance
revenue. Settlements received from toll pools relating to prior years' activity
increased these revenues 1% ($1.1 million). These revenues decreased 1% ($1.6
million) in 1995 as certain ECC revenues are now reported as local service
revenues.
Miscellaneous revenues increased 5% ($1.6 million) in 1995, with
acquisitions increasing such revenues 3% ($1.0 million). Higher sales and leases
of customer premise equipment increased these miscellaneous revenues 2%
($540,000).
Operating expenses increased 23% ($36.0 million) in 1995. The effects of
acquisitions increased expenses 15% ($22.9 million).
Network operations expenses increased 41% ($14.8 million) with
acquisitions increasing these expenses 31% ($11.2 million). Customer operations
expenses increased 14% ($4.4 million) with acquisitions increasing such expenses
8% ($2.7 million). Corporate and other expenses increased 25% ($9.2 million)
with acquisitions increasing such expenses 14% ($5.0 million). The remainder of
the increases were due primarily to increases in wages, staffing levels and
general inflation. Depreciation expense increased 14% ($6.4 million) with
acquisitions increasing such expenses 8% ($3.7 million). The remaining increase
was due primarily to increases in plant facilities.
Operating income from telephone operations increased 8% ($5.5 million)
in 1995, with acquisitions increasing such income 6% ($4.3 million). The
telephone operating margin was 28% in 1995 compared to 31% in 1994. The 1995
operating margin was reduced to 28% by both the acquisition of a long-distance
company in August of 1994 which produces lower margins than the local telephone
operations and earnings pressures from regulatory agencies and long-distance
providers. The operating margin in the remainder of 1995 is anticipated to
continue to be lower than in 1994 for the same reasons.
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RADIO PAGING OPERATIONS
Nine Months Ended September 30,
-------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands, except per unit amounts)
Service Operations
Revenue $ 69,212 $ 56,451 $ 12,761
-------- --------- ---------
Costs and Expenses
Cost of Services 17,477 13,865 3,612
Selling and Advertising 11,923 9,713 2,210
General and Administrative 28,254 20,397 7,857
Depreciation 14,996 10,333 4,663
Amortization 2,917 1,822 1,095
-------- --------- ---------
75,567 56,130 19,437
-------- --------- ---------
Service Operating (Loss) Income (6,355) 321 (6,676)
-------- --------- ---------
Equipment Sales
Revenue 11,114 10,904 210
Cost of Equipment Sold 11,137 10,740 397
-------- --------- ---------
Equipment Sales (Loss) Income (23) 164 (187)
-------- --------- ---------
Operating (Loss) Income $ (6,378) $ 485 $ (6,863)
======== ========= =========
Radio Paging Revenues as a
Percent of Total Revenues 11% 13%
Additions to Property and Equipment* $ 19,703 $ 21,095
Identifiable Assets $152,841 $ 81,596
Pagers in service 776,900 578,400
Average monthly service revenue per unit $ 11 $ 12
Transmitters in service 1,012 888
Disconnect rate per month 2.5% 2.7%
Marketing cost per net customer
unit addition $ 113 $ 84
* Includes (in thousands) $(528) and $(1,227), respectively, of unpaid amounts
for current year additions less cash amounts paid in the current year for prior
year additions.
Service revenues increased 23% ($12.8 million) in the first nine months
of 1995 from 1994, primarily as a result of the 34% growth in the number of
pagers in service. A net additional 198,500 pagers have been placed in service
since September 30, 1994. However, a continuing shift toward lower revenue
producing distribution channels such as resellers and retail stores as well as
competitive factors has slowed service revenue growth. Average monthly service
revenue per pager declined 12% to $11 in the first nine months of 1995 from $12
in the same period of 1994. Of the decline, 8% was due to a change in
distribution channel mix and 4% was due to pricing declines within the
distribution channels.
Service operating expenses increased 35% ($19.4 million) in 1995 from
1994, primarily to serve the expanded customer base as well as to increase
system capacity and geographic coverage. APP also recorded $2.2 million in
restructure charges related to the planned consolidation of the administrative
functions of its 17 operating centers into one location which is expected to
continue into 1996. The expense includes charges related to the subleasing
excess office space it will be vacating, employee severance and related costs
and accelerated depreciation charges. Cost of services increased 26% ($3.6
million) in 1995 reflecting the additional costs of providing service to the
increased customer base as well as the costs of upgrading and expanding the
systems to improve system reliability and coverage ($3.0 million). APP's
transmitters in service increased to 1,012 at September 30, 1995 from 888 at
September 30, 1994. Selling and advertising expense increased 23% ($2.2 million)
in 1995 over 1994 primarily to support reseller and direct marketing programs
which failed to produce planned
-12-
<PAGE>
customer growth. General and administrative expense increased 39% ($7.9 million)
due primarily to increases in general office expenses and employee-related
expenses to support the increased customer base ($3.5 million), bad debt
expenses ($1.5 million) and a portion of the restructure charges ($1.8 million).
Depreciation charges increased 45% ($4.7 million) in 1995 reflecting increase
due to the increased investment in pagers and related equipment, an increase of
approximately $1.7 million in depreciation expense due to the change in
depreciable lives of pagers and transmitters that occurred July 1, 1994, and
$450,000 of accelerated depreciation on certain assets to be removed from
service as a result of the restructuring.
Operating loss was $6.4 million in 1995 compared to operating income of
$485,000 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,
the restructuring charges, increased bad debts from the consumer market and
increased depreciation charges. Management expects slower unit and revenue
growth through the initial stages of the restructuring period as a result of
refocusing the sales force on direct sales and the retraining of customer
service representatives.
Net loss from radio paging operations totalled $9.6 million in 1995
compared with $351,000 in 1994. The 1995 increase relates to the increase in
operating loss and the increase in APP's interest expense of $3.9 million, the
majority of which is related to borrowings for the purchase of five narrowband
PCS licenses.
-13-
<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 including APT.
Nine Months Ended
September 30,
------------------
1995 1994
---- ----
(Dollars in thousands)
Additions to Property and Equipment* $ 9,489 $ 5,716
Identifiable Assets** $391,362 $81,702
* Includes (in thousands) $239 and $(175), respectively, of unpaid amounts for
current year additions less cash amounts paid in the current year for prior year
additions.
** Includes PCS license cost of $295.7 million in 1995.
Three Months Ended 9/30/95 Compared to Three Months Ended 9/30/94
CONSOLIDATED
Operating revenues grew 33% ($63.4 million) in the third quarter of 1995
primarily as a result of the growth in customers served. Operating expenses rose
34% ($55.1 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.
Operating income increased 26% to $40.6 million in the third quarter of 1995
from $32.3 million in 1994. The increase in operating income principally
reflects improved operating results in the cellular telephone business unit.
Three Months Ended September 30,
--------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands)
CONSOLIDATED OPERATING INCOME
Cellular Telephone Operations $ 17,967 $ 11,095 $ 6,872
Telephone Operations 24,932 21,941 2,991
Radio Paging Operations (2,339) (733) (1,606)
-------- -------- --------
$ 40,560 $ 32,303 $ 8,257
======== ======== ========
Operating Margins:
Cellular Telephone* 13% 13%
Telephone 28% 27%
Radio Paging* (10%) (4)%
* Computed on Service Revenues
Investment and other income increased $38.4 million in the third quarter
of 1995 over 1994. Cellular investment income increased 26% ($2.3 million),
reflecting improvement in USM's equity-method markets managed by others. Gain on
sale of cellular interests and other investments was $43.4 million in the third
quarter of 1995. Minority share of income increased $4.4 million as shown in the
table below.
Minority share of income includes (a) the minority shareholders' share
of USM's net income (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.
-14-
<PAGE>
MINORITY SHARE OF (INCOME) LOSS
Three Months Ended September 30,
--------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands)
United States Cellular
Minority Shareholders' Share $(6,185) $(2,000) $(4,185)
Minority Partners' Share (1,950) (1,366) (584)
------- ------- -------
(8,135) (3,366) (4,769)
TDS Telecom (695) (244) (451)
American Paging 865 -- 865
------- ------- -------
$(7,965) $(3,610) $(4,355)
======= ======= =======
Interest expense increased 20% ($2.1 million) in 1995, primarily
reflecting increases in long-term and short-term debt. Interest expense would
have been greater but, the Company capitalized interest on the debt incurred to
finance the broadband PCS licenses of APT. As of September 30, 1995, TDS has
capitalized a total of $6.5 million of interest charges on debt with an average
interest rate of approximately 7.4%. Income tax expense increased 142% ($19.6
million) in 1995 compared with 1994 as pretax income increased. The effective
income tax rate was 44% in the third quarter of 1995 and 1994.
Net income increased to $42.6 million in the third quarter of 1995 from
$17.6 million in 1994. Earnings per common share were $.72 in 1995 and $.31 in
1994. The weighted average number of common shares outstanding increased 9% in
1995. On a comparable basis, excluding nonrecurring and unusual items, net
income available to common increased 25% to $21.3 million and earnings per share
rose 16% to $.36.
CELLULAR TELEPHONE OPERATIONS
Three Months Ended September 30,
--------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands)
Operating Revenues
Service $134,554 $86,675 $47,879
Equipment Sales 4,013 3,251 762
-------- ------- -------
138,567 89,926 48,641
-------- ------- -------
Operating Expenses
System Operations 21,972 12,086 9,886
Marketing and Selling 25,571 16,058 9,513
Cost of Equipment Sold 14,356 8,826 5,530
General and Administrative 35,131 25,052 10,079
Depreciation 15,143 10,050 5,093
Amortization 8,427 6,759 1,668
-------- ------- -------
120,600 78,831 41,769
-------- ------- -------
Operating Income $ 17,967 $11,095 $ 6,872
======== ======= =======
Operating revenues increased 54% ($48.6 million) in the third quarter of
1995. The revenue increase is primarily the result of 70% customer growth in the
systems serving USM's majority-owned and managed markets, growth in roamer
revenues and the effects of acquisitions. Average monthly service revenue per
customer declined to $77 in 1995 from $83
-15-
<PAGE>
in 1994. Monthly local minutes of use averaged 97 in the third quarter of 1995
compared to 99 in 1994. Revenues from local customers' usage of USM's systems
increased 63% ($30.8 million) in 1995 primarily due to the increased number of
customers served. Inbound roaming revenues increased 47% ($14.1 million) in
1995. The increase in inbound roaming 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 54%
($3.6 million) as the volume of long-distance calls billed by USM increased.
Equipment sales revenue reflects the sale of 72,500 and 35,100 cellular
telephone units in 1995 and 1994, respectively. The average revenue per
telephone unit sold was $55 in 1995 compared to $93 in 1994.
Operating expenses increased 53% ($41.8 million) in the third quarter of
1995 for reasons generally the same as for the first nine months.
Operating income was $18.0 million in 1995 compared to $11.1 million in
1994. Operating margin on service revenues remained relatively stable at 13%.
The improvement in operating income was primarily due to increased revenues from
growth in the number of customers served, partially offset by the costs
associated with the growth of USM's operations and the addition of new markets.
Cellular investment income increased 26% ($2.3 million) in the third
quarter of 1995, due to improved results in markets managed by others.
Net income from cellular telephone operations was $26.1 million in 1995
compared to $8.9 million in 1994. Net income from cellular telephone operations
excludes the USM minority shareholders' share of such income. USM is included in
a consolidated federal income tax return with other members of the TDS
consolidated group. 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.
-16-
<PAGE>
TELEPHONE OPERATIONS
Three Months Ended September 30,
--------------------------------
Change Change
Due To Excluding
1995 1994 Change Acquisitions Acquisitions
---- ---- ------ ------------ ------------
(Dollars in thousands)
Operating Revenues
Local Service $ 24,070 $21,213 $ 2,857 $ 1,100 $ 1,757
Network Access and
Long-Distance 55,515 48,372 7,143 4,345 2,798
Miscellaneous 10,813 10,388 425 348 77
------ ------ ------- ------- -------
90,398 79,973 10,425 5,793 4,632
Operating Expenses ------ ------- ------- ------- -------
Network Operations 17,831 14,187 3,644 2,025 1,619
Customer Operations 11,927 11,311 616 678 (62)
Corporate and Other 16,214 13,700 2,514 1,271 1,243
Depreciation 18,098 17,845 253 857 (604)
Amortization 1,396 989 407 44 363
------- ------- ------- ------- -------
65,466 58,032 7,434 4,875 2,559
------- ------- ------- ------- -------
Operating Income $24,932 $21,941 $ 2,991 $ 918 $ 2,073
======= ======= ======= ======= =======
Operating revenues from telephone operations increased 13% ($10.4
million) in the third quarter of 1995 compared to 1994. 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 13% ($2.9
million) in 1995, network access and long-distance revenues increased 15% ($7.1
million), and miscellaneous revenues increased 4% ($425,000) for reasons
generally the same as for the first nine months. Operating expenses increased
13% ($7.4 million) in 1995, for reasons generally the same as for the first nine
months.
RADIO PAGING OPERATIONS
Three Months Ended September 30,
--------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands)
Service Operations
Revenues $ 24,109 $ 19,488 $ 4,621
--------- -------- --------
Costs and Expenses
Cost of Services 6,052 5,196 856
Selling and Advertising 3,472 3,615 (143)
General and Administrative 10,171 6,913 3,258
Depreciation 5,608 3,971 1,637
Amortization 1,021 618 403
--------- -------- --------
26,324 20,313 6,011
--------- -------- ---------
Service Operating Loss (2,215) (825) (1,390)
--------- -------- --------
Equipment Sales
Revenue 3,434 3,718 (284)
Cost of Equipment Sold 3,558 3,626 (68)
-------- -------- --------
Equipment Sales (Loss) Income (124) 92 (216)
-------- -------- --------
Operating $ (2,339) $ (733) $ (1,606)
======== ======== ========
-17-
<PAGE>
Service revenues increased 24% ($4.6 million) in the third quarter of
1995 from 1994, primarily as a result of the 34% growth in the number of pagers
in service. Service operating expenses increased 30% ($6.0 million) in 1995 from
1994, $2.2 million of which was due to the restructuring charges recorded in the
third quarter. The remaining increase is primarily due to the same reasons as
the first nine months. Operating loss was $2.3 million in 1995 compared to
$733,000 in 1994. Net loss from radio paging operations totalled $4.0 million in
1995 compared to $573,000 in 1994.
FINANCIAL RESOURCES AND LIQUIDITY
Cash flows from operating activities totalled $159.1 million in the
first nine months of 1995 compared to $158.3 million in 1994. Consolidated
operating cash flow (operating income plus depreciation and amortization)
totalled $243.3 million in 1995 compared to $192.8 million in 1994. The 26%
increase in operating cash flow reflects primarily improved operating cash flow
in cellular telephone operations.
Nine Months Ended September 30,
-------------------------------
1995 1994 Change
---- ---- ------
(Dollars in thousands)
OPERATING CASH FLOW
Cellular Telephone Operations $101,158 $ 62,732 $ 38,426
Telephone Operations 130,625 117,442 13,183
Radio Paging Operations 11,535 12,640 (1,105)
-------- -------- --------
$243,318 $192,814 $ 50,504
======== ======== ========
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 $84.2 million in the first nine months of 1995
compared to $34.5 million in the first nine months of 1994.
Cash flows from financing activities totalled $342.7 million in the
first nine months of 1995 compared to $107.1 million in 1994. Long-term
borrowings, primarily the convertible debt financing completed at USM and USM's
vendor financing arrangements used to construct cell sites, provided most of the
Company's external financial requirements during the first nine months of 1995.
Sales of common stock by TDS and APP and short-term borrowings provided most of
the Company's external financing requirements during the first nine months 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 $476.4 million in
the first nine months of 1995 compared to $260.3 million in 1994. In the first
nine months of 1995, $319.0 million was paid for the acquisition and development
of broadband and narrowband PCS licenses. The remaining cash requirements
primarily consisted of additions to property, plant and equipment and
acquisitions offset somewhat by the proceeds on the sale of non-strategic
cellular assets.
PCS Development
APT's successful bid commitment totalled $289.2 million for the eight
broadband PCS licenses, or $10.35 per population equivalent. Management
anticipates that initial construction
-18-
<PAGE>
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 estimates that between now and the year 2000, it
will need approximately $500-550 million for capital expenditures and $180-200
million for working capital, start-up costs and market development activities.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in APT's major markets may reduce the rate of growth in
TDS's operating and net income from levels which would otherwise be achieved
during 1995 and future years.
TDS plans to finance APT's 1995 and 1996 capital and operating
expenditures using a variety of resources, including, but not limited to,
internally generated cash, vendor financing and equity investors in APT. USM
recently received approximately $221 million in net proceeds from the sale of
convertible debt securities, of which $208.4 million was used to repay its
borrowings from TDS. TDS and USM have also arranged sales of non-strategic
cellular and other assets involving estimated total proceeds of more than $175
million, of which approximately $145 million have been completed. In addition,
TDS has a $300 million short-term credit facility to provide the interim funding
needed until the long-term funding activities mentioned above are completed.
APP was the successful bidder in 1994 for five regional narrowband PCS
licenses, providing equivalent coverage to that of a nationwide license, at
auction by the Federal Communications Commission ("FCC"). APP's bids for the
licenses, aggregating $53.6 million, have been paid. 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,
significant funds will be required when APP begins expanding its infrastructure
to accommodate the services that these licenses will allow.
Property, Plant and Equipment
Additions to cellular telephone plant and equipment totalled $162.1
million for the first nine months 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 internally
generated cash flow, the Company's short-term bank financing and vendor
financing.
Additions to telephone plant and equipment totalled $65.8 million for
the first nine months 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.
-19-
<PAGE>
Additions to radio paging property and equipment totalled $19.7 million
for the first nine months of 1995. Management expects that such property and
equipment additions will total about $30 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 $9.5 million for the first nine
months 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.
Acquisitions and Divestitures
Cash flows used for acquisitions, net of cash acquired, totalled $48.9
million in the first nine months of 1995 compared to $25.3 million in 1994.
During the first nine months of 1995, TDS purchased controlling interests in ten
cellular markets and several minority cellular interests representing a total of
1.4 million population equivalents and four telephone companies. The aggregate
consideration for the acquisitions completed in 1995 was $179.1 million,
consisting of 2.8 million TDS Common Shares ($121.9 million), $44.6 million in
cash and 417,000 USM Common Shares ($12.6 million).
TDS's acquisition program may require external financing during the
remainder of 1995. TDS and APP had agreements pending at September 30, 1995, to
acquire controlling interests in two telephone companies and one paging company,
respectively. At September 30, 1995, USM had agreements pending to acquire a
controlling interest in one market and to exchange a controlling interest in one
market for a controlling interest in another market. 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.
USM sold its majority interests in five markets, its minority interests
in four markets and various marketable securities while TDS Telecom sold two
minority interests held by one of its telephone subsidiaries and various
marketable securities for aggregate cash proceeds of $147.6 million.
At September 30, 1995, USM had agreements pending to divest
controlling interests in six other markets and to settle litigation related to
an investment interest which was divested earlier in 1995. Pursuant to the
divestiture agreements, USM will divest 612,000 population equivalents and
receive $104.7 million in cash. Management believes the acquisitions and
exchanges currently pending will enhance USM's clustering strategy by divesting
markets which are less strategic for cash or markets which add to its current
clusters. All of the pending exchange, acquisition, divestiture and litigation
settlement agreements discussed above are expected to be completed by mid-1996.
Certain of the divestitures and the litigation settlement will generate
substantial gains for book and tax purposes.
TDS and USM continue to assess the makeup of its cellular holdings in
order to maximize the benefits derived from clustering its markets. As the
number of opportunities for outright acquisitions has decreased and as USM's
clusters have grown to realize greater economies of scale, USM's focus has
shifted toward exchanges and divestitures of managed and investment interests.
TDS and APP are also currently negotiating agreements for the acquisition of
additional telephone and paging companies, respectively.
-20-
<PAGE>
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 $74.5 million and longer-term investments
totalling $61.3 million at September 30, 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 $468.0 million of bank lines of credit for
general corporate purposes at September 30, 1995, $443.0 million of which were
committed. Unused amounts of such lines totalled $323.4 million, $298.4 million
of which were committed. Such bank lines of credit include a one-year $300
million revolving credit agreement dated May 19, 1995. The outstanding balance
on this agreement bears interest at the Eurodollar Rate plus .32%. As of
September 30, 1995, $177 million was unused and available under this agreement.
The remaining 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 approximately 1.1 million unissued shares at September 30,
1995. TDS increases this shelf registration from time to time as needs warrant.
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,
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 was unused at September 30, 1995.
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.
-21-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1995 1994 1995 1994
---------------------------------------------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Cellular telephone $ 138,567 $ 89,926 $ 355,439 $ 236,816
Telephone 90,398 79,973 262,809 221,321
Radio paging 27,543 23,206 80,326 67,355
--------- --------- --------- ---------
256,508 193,105 698,574 525,492
--------- --------- --------- ---------
OPERATING EXPENSES
Cellular telephone 120,600 78,831 318,556 221,202
Telephone 65,466 58,032 189,773 153,808
Radio paging 29,882 23,939 86,704 66,870
--------- --------- --------- ---------
215,948 160,802 595,033 441,880
--------- --------- --------- ---------
OPERATING INCOME 40,560 32,303 103,541 83,612
-------- --------- --------- ---------
INVESTMENT AND OTHER INCOME
Interest and dividend
income 3,998 3,148 9,803 7,652
Minority share of income (7,965) (3,610) (20,420) (7,495)
Cellular investment income,
net of license cost
amortization 11,117 8,818 29,083 19,702
Gain on sale of cellular
interests and other
investments 43,375 -- 79,749 --
Other income (expense), net (2,900) 879 (4,763) 588
------- -------- -------- ---------
47,625 9,235 93,452 20,447
------- -------- -------- ---------
INCOME BEFORE INTEREST
AND INCOME TAXES 88,185 41,538 196,993 104,059
Interest expense 12,121 10,067 39,191 28,760
------- -------- -------- ---------
INCOME BEFORE INCOME TAXES 76,064 31,471 157,802 75,299
Income tax expense 33,468 13,848 69,433 33,132
------- -------- -------- ---------
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE 42,596 17,623 88,369 42,167
Cumulative effect of accounting
change -- -- -- (723)
------ -------- -------- ---------
NET INCOME 42,596 17,623 88,369 41,444
Preferred Dividend Requirement (258) (457) (1,453) (1,733)
------- -------- -------- ---------
NET INCOME AVAILABLE TO
COMMON $42,338 $ 17,166 $ 86,916 $ 39,711
======= ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES (000s) 59,038 54,282 58,191 53,121
EARNINGS PER COMMON SHARE:
Before cumulative effect
of accounting change $ .72 $ .31 $ 1.49 $ .75
Cumulative effect of
accounting change -- -- -- (.01)
--------- --------- --------- ---------
Net Income $ .72 $ .31 $ 1.49 $ .74
========= ========= ========= =========
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .095 $ .09 $ .285 $ .27
========= ========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-22-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended
September 30,
------------------
1995 1994
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 88,369 $ 41,444
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Cumulative effect of accounting changes -- 723
Depreciation and amortization 148,441 117,061
Deferred taxes 15,930 14,155
Investment income (30,937) (22,549)
Minority share of income 20,420 7,495
Gain on sale of cellular interests and
other investments (79,749) --
Other noncash expense 14,188 4,220
Change in accounts receivable (32,439) (20,968)
Change in accounts payable (7,990) 7,341
Change in accrued taxes 24,516 4,808
Change in other assets and liabilities (1,686) 4,577
---------- ---------
159,063 158,307
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 333,174 8,994
Repayments of long-term debt (24,246) (22,837)
Change in notes payable 44,629 73,600
Common stock issued 6,346 8,366
Minority partner capital contributions
(distributions) 373 9,458
Redemption of preferred stock (534) (268)
Dividends paid (17,942) (15,483)
Sale of stock by a subsidiary 915 45,253
---------- ---------
342,715 107,083
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (267,647) (221,239)
Investments in and advances to cellular
minority partnerships (8,726) (17,274)
Distributions from partnerships 7,616 12,647
Investments in PCS licenses (318,963) --
Proceeds from investment sales 152,387 --
Other investments 12,187 (8,355)
Acquisitions, excluding cash acquired (48,859) (25,252)
Change in temporary investments (4,414) (844)
---------- ---------
(476,419) (260,317)
---------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 25,359 5,073
CASH AND CASH EQUIVALENTS -
Beginning of period 24,733 55,666
---------- ---------
End of period $ 50,092 $ 60,739
========== =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-23-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, 1995 December 31, 1994
-------------------------------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 50,092 $ 24,733
Temporary investments 24,395 19,833
Accounts receivable from customers
and others 145,776 110,266
Materials and supplies, at average cost,
and other current assets 34,691 31,086
---------- ----------
254,954 185,918
---------- ----------
INVESTMENTS
Cellular limited partnership interests 143,237 111,733
Cellular license acquisition costs, net 108,352 94,470
PCS license acquisition costs 350,567 74,501
Marketable equity securities 735 25,604
Marketable non-equity securities 60,531 71,314
Other 62,398 60,806
--------- ----------
725,820 438,428
--------- ----------
PROPERTY, PLANT AND EQUIPMENT
Cellular telephone plant and
license costs, net 1,476,050 1,289,837
Telephone plant and franchise costs, net 807,024 760,221
Radio paging, net 74,063 70,817
Other, net 35,067 32,700
--------- ----------
2,392,204 2,153,575
--------- ----------
OTHER ASSETS AND DEFERRED CHARGES 27,648 12,206
--------- ----------
$3,400,626 $2,790,127
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-24-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
September 30, 1995 December 31, 1994
------------------ -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt
and preferred shares $ 34,477 $ 37,447
Notes payable 147,264 98,608
Accounts payable 97,418 112,967
Due to FCC-PCS licenses -- 42,897
Advance billings and customer deposits 24,421 20,898
Accrued interest 6,719 10,054
Accrued taxes 31,611 3,894
Other current liabilities 31,056 19,419
---------- ----------
372,966 346,184
---------- ----------
DEFERRED LIABILITIES AND CREDITS 134,390 119,076
---------- ----------
LONG-TERM DEBT, excluding current portion 874,086 536,509
---------- ----------
REDEEMABLE PREFERRED SHARES,
excluding current portion 1,664 13,209
---------- ----------
MINORITY INTEREST in subsidiaries 320,985 272,292
---------- ----------
NONREDEEMABLE PREFERRED SHARES 30,010 29,819
---------- ----------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share 50,948 47,938
Series A Common Shares, par value
$1 per share 6,888 6,887
Common Shares issuable (31,431 and
41,908 shares, respectively) 1,496 1,995
Capital in excess of par value 1,409,345 1,288,453
Retained earnings 197,848 127,765
---------- ----------
1,666,525 1,473,038
---------- ----------
$3,400,626 $2,790,127
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-25-
<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 September 30, 1995 and
December 31, 1994, and the results of operations and cash flows for the
nine months ended September 30, 1995 and 1994. The results of operations
for the nine months ended September 30, 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
September 30, 1995, consist of dilutive Common Share options.
3. Assuming that acquisitions accounted for as purchases during the period
January 1, 1994, to September 30, 1995, had taken place on January 1,
1994, unaudited pro forma results of operations from continuing operations
would have been as follows:
Nine Months Ended
September 30,
------------------
1995 1994
---- ----
(Dollars in thousands,except
per share amounts)
Operating revenues $ 721,943 $ 602,763
Net income before
cumulative effect of
accounting change 75,287 25,792
Earnings per share before
cumulative effect of
accounting change $ 1.26 $ .41
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.
-26-
<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 nine
months of 1995. 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,
--------------------
1995 1994
---- ----
(Dollars in thousands)
Property, plant and equipment $ 77,696 $ 68,021
Cellular licenses 119,364 142,341
Decrease in equity method
investment in cellular interests (19) (6,207)
Long-term debt (8,933) (21,931)
Deferred credits (214) (5,478)
Other assets and liabilities,
excluding cash and cash equivalents (2,618) 5,447
Minority interest (1,912) 621
Common Shares issued and issuable (121,864) (156,283)
USM Stock issued and issuable (12,641) (1,279)
--------- ---------
Decrease in cash due to acquisitions $ 48,859 $ 25,252
========= =========
The following table summarizes interest and income taxes paid, and other
noncash transactions.
Nine Months Ended
September 30,
-----------------
1995 1994
---- ----
(Dollars in thousands)
Interest paid $ 42,351 $ 33,748
Income taxes paid 27,629 13,288
Common Shares issued by TDS and Subsidiary
for conversion of TDS Preferred Stock $ 13,653 $ 411
-27-
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Gain on Sale of Cellular Interests and Other Investments
The gains in 1995 reflect the sales of minority- and majority-owned
cellular interests and other investments as follows: (a) USM recognized
$77.7 million on the sales of non- strategic cellular interests. USM sold
its majority interests in five markets, its minority interests in four
markets and an equity investment during the first nine months of 1995. (b)
TDS Telecom recognized $2.1 million on the sales of marketable equity
securities and two minority cellular interests held by one of its
telephone subsidiaries.
6. Capitalized Interest
During the third quarter, the Company began capitalizing interest as a
component of the cost of readying its broadband PCS licenses for use.
Total interest capitalized during the period was $6.5 million.
7. Contingencies
The Company's material contingencies as of September 30, 1995, include the
collectibility of a $5.5 million note receivable under a long-term
financing agreement with a 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.
-28-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
La Star and Wisconsin RSA 8 Applications. On September 28, 1995, TDS and
USM announced that on September 27, 1995, a FCC administrative law judge found
both companies fully qualified to be FCC licensees. The decision favorably
resolves candor issues raised in the La Star and Wisconsin RSA 8 matters. A copy
of the news release was filed under cover of Form 8-K on October 3, 1995.
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, 1995 and 1994.
(e) Reports on Form 8-K filed during the quarter ended September 30, 1995:
No reports on Form 8-K were filed during the quarter ended September
30, 1995.
-29-
<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, 1995 /s/ MURRAY L. SWANSON
--------------------- -----------------------------------
Murray L. Swanson,
Executive Vice President-Finance
Date November 10, 1995 /s/ GREGORY J. WILKINSON
-------------------- ----------------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
-30-
<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, 1995 1994
- --------------------------------------------------------------------------------
Primary Earnings
Net Income before cumulative effect
of accounting change $ 42,596 $ 17,623
Dividends on Preferred Shares (258) (457)
Minority income adjustment assuming issuance
of a subsidiaries issuable securities` -- (103)
-------- --------
Net Income Available to Common $ 42,338 $ 17,063
======== ========
Primary Shares
Weighted average number of Common and
Series A Common Shares Outstanding 57,805 53,601
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 154 170
Convertible Preferred Shares 1,048 469
Common Shares Issuable 31 42
-------- --------
Primary Shares 59,038 54,282
-------- --------
Primary Earnings per Common Share $ .72 $ .31
======== ========
Fully Diluted Earnings*
Net Income before cumulative effect
of accounting change $ 42,596 $ 17,623
Dividends on Preferred Shares (110) (394)
Minority income adjustment assuming issuance
of a subsidiaries issuable securities -- (104)
-------- --------
Net Income Available to Common $ 42,486 $ 17,125
======== ========
Fully Diluted Shares
Weighted average number of Common and
Series A Common Shares Outstanding 57,805 53,601
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 160 182
Convertible Preferred Shares 1,542 739
Common Shares Issuable 31 42
------ ------
Fully Diluted Shares 59,538 54,564
======= ========
Fully Diluted Earnings per Common Share $ .71 $ .31
======== ========
* 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 11
Telephone and Data Systems, Inc.
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Nine Months Ended September 30, 1995 1994
- --------------------------------------------------------------------------------
Primary Earnings
Net Income before cumulative effect
of accounting change $ 88,369 $ 42,167
Dividends on Preferred Shares (1,453) (1,733)
-------- --------
Net income before cumulative effect
of accounting change applicable
to Common 86,916 40,434
Cumulative effect of accounting change -- (723)
Minority income adjustment assuming issuance
of a subsidiaries issuable securities -- (229)
--------- --------
Net Income Available to Common $ 86,916 $ 39,482
========= ========
Primary Shares
Weighted average number of Common and
Series A Common Shares Outstanding 57,289 52,860
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 160 183
Convertible Preferred Shares 708 38
Common Shares Issuable 34 40
--------- --------
Primary Shares 58,191 53,121
========= ========
Primary Earnings per Common Share
Net Income before cumulative effect
of accounting change $ 1.49 $ .75
Cumulative effect of accounting change -- (.01)
--------- --------
Net Income $ 1.49 $ .74
========= ========
Fully Diluted Earnings*
Net Income before cumulative effect
of accounting change $ 88,369 $ 42,167
Dividends on Preferred Shares (1,137) (1,541)
--------- --------
Net income before cumulative effect
of accounting change applicable
to Common 87,232 40,626
Cumulative effect of accounting change -- (723)
Minority income adjustment assuming issuance
of a subsidiaries issuable securities -- (230)
--------- --------
Net Income Available to Common $ 87,232 $ 39,673
========= ========
Fully Diluted Shares
Weighted average number of Common and
Series A Common Shares Outstanding 57,289 52,860
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 163 193
Convertible Preferred Shares 1,033 309
Common Shares Issuable 34 40
--------- --------
Fully Diluted Shares 58,519 53,402
========= ========
Fully Diluted Earnings per Common Share
Net Income before cumulative effect
of accounting change $ 1.49 $ .75
Cumulative effect of accounting change -- (.01)
--------- --------
Net Income $ 1.49 $ .74
========= ========
* 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 Nine Months September 30, 1995
(Dollars In Thousands)
EARNINGS:
Income from Continuing Operations before
income taxes $ 157,802
Add (Deduct):
Minority Share of Losses (2,156)
Earnings on Equity Method (30,937)
Distributions from Minority Subsidiaries 7,604
Amortization of Non-Telephone Capitalized
Interest 20
Minority interest in majority-owned subsidiaries
that have fixed charges 16,758
---------
149,091
Add fixed charges:
Consolidated interest expense 39,058
Interest Portion (1/3) of Consolidated Rent Expense 3,827
Amortization of debt expense and discount on
indebtedness 133
---------
$ 192,109
=========
FIXED CHARGES:
Consolidated interest expense $ 39,058
Capitalized Interest 6,502
Interest Portion (1/3) of Consolidated Rent Expense 3,827
Amortization of debt expense and discount on indebtedness 133
---------
$ 49,520
=========
RATIO OF EARNINGS TO FIXED CHARGES 3.88
=========
Tax-Effected Redeemable Preferred Dividends $ 1,446
Fixed Charges 49,520
---------
Fixed Charges and Redeemable Preferred Dividends $ 50,966
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 3.77
=========
Tax-Effected Preferred Dividends $ 3,370
Fixed Charges 49,520
---------
Fixed Charges and Preferred Dividends $ 52,890
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 3.63
=========
<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, 1995, 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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 50,092
<SECURITIES> 735
<RECEIVABLES> 112,564
<ALLOWANCES> 4,053
<INVENTORY> 19,665
<CURRENT-ASSETS> 254,954
<PP&E> 3,128,394
<DEPRECIATION> 736,190
<TOTAL-ASSETS> 3,400,626
<CURRENT-LIABILITIES> 372,966
<BONDS> 874,086
<COMMON> 57,836
1,664
30,010
<OTHER-SE> 1,608,689
<TOTAL-LIABILITY-AND-EQUITY> 3,400,626
<SALES> 0
<TOTAL-REVENUES> 698,574
<CGS> 0
<TOTAL-COSTS> 595,033
<OTHER-EXPENSES> (93,452)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,191
<INCOME-PRETAX> 157,802
<INCOME-TAX> 69,433
<INCOME-CONTINUING> 88,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,369
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
</TABLE>
Exhibit 99.1
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Twelve Months Ended
September 30,
-------------------
1995 1994
----------------------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Cellular telephone $ 451,027 $ 299,156
Telephone 347,829 289,600
Radio paging 105,036 87,635
-------- ---------
Total operating revenues 903,892 676,391
-------- ---------
OPERATING EXPENSES
Cellular telephone 412,373 289,606
Telephone 250,700 204,620
Radio paging 112,068 86,093
-------- ---------
Total operating expenses 775,141 580,319
-------- ---------
OPERATING INCOME 128,751 96,072
-------- ---------
INVESTMENT AND OTHER INCOME
Interest and dividend income 12,763 10,071
Minority share of income (22,004) (6,859)
Cellular investment income, net of license cost
amortization 35,399 24,811
Gain on sale of cellular interests and other
investments 87,206 --
Other income, net (6,673) 504
-------- ---------
106,691 28,527
-------- ---------
INCOME BEFORE INTEREST AND INCOME TAXES 235,442 124,599
Interest expense 51,682 38,345
-------- ---------
INCOME BEFORE INCOME TAXES 183,760 86,254
Income tax expense 77,014 37,848
-------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES 106,746 48,406
Cumulative effect of accounting changes -- (723)
-------- ---------
NET INCOME 106,746 47,683
Preferred Dividend Requirement (1,933) (2,318)
-------- --------
NET INCOME AVAILABLE TO COMMON $ 104,813 $ 45,365
======== ========
WEIGHTED AVERAGE COMMON SHARES (000s) 57,592 52,365
EARNINGS PER COMMON SHARE:
Before cumulative effect of accounting changes $ 1.82 $ .88
Cumulative effect of accounting changes -- (.01)
--------- ---------
Net Income $ 1.82 $ .87
========= =========
DIVIDENDS PER COMMON AND SERIES A
COMMON SHARE $ .375 $ .355
========= =========
<PAGE>
