SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 1996
----------------
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 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 April 30, 1996
Common Shares, $1 par value 53,666,486 Shares
Series A Common Shares, $1 par value 6,894,053 Shares
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<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
1ST QUARTER REPORT ON FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-17
Consolidated Statements of Income -
Three Months Ended March 31, 1996 and 1995 18
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 19
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 20-21
Notes to Consolidated Financial Statements 22-24
Part II. Other Information 25
Signatures 26
<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 3/31/96 Compared to Three Months Ended 3/31/95
CONSOLIDATED
Telephone and Data Systems, Inc. ("TDS" or the "Company") reported net income
available to common of $33.3 million, or $.56 per share, in the first quarter of
1996, compared to $22.7 million, or $.39 per share, in the first quarter of
1995. Consolidated operating results for the first three months of 1996 compared
to 1995 primarily reflect:
o strong growth in cellular customer units resulting in substantial
increases in cellular revenue, operating income and operating cash flow;
o steady growth in telephone access lines and revenues;
o slower growth in pagers served and paging revenue and higher operating
costs resulting in a decline in paging operating income;
o significant gains and cash proceeds from sales and trades of non-
strategic cellular interests and other investments; and
o significant increases in expenses of American Portable Telecom, Inc. as
it continues to build its management team to develop and construct its
Personal Communications Services networks.
Net income available to common for the first quarter of 1996 and 1995 included
significant gains from the sales of non-strategic cellular interests and other
investments and increased broadband PCS development costs. Excluding these gains
and PCS development costs, along with the related income taxes and minority
interest, net income available to common would have been $18.2 million, or $.30
per share, in the first quarter of 1996, compared to $14.2 million, or $.24 per
share, in the first quarter of 1995.
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
(Dollars in thousands,
except per share amounts)
Net Income Available to Common As Reported $ 33,267 $ 22,701
Add: Broadband PCS Development Costs 3,695 266
Less: Effects of Gains (18,735) (8,794)
----------- -----------
As Adjusted $ 18,227 $ 14,173
=========== ===========
Earnings Per Share As Reported $ .56 $ .39
Add: Broadband PCS Development Costs .06 --
Less: Effects of Gains (.32) (.15)
----------- -----------
As Adjusted $ .30 $ .24
=========== ===========
Operating Revenues increased 25% ($53.4 million) during the first quarter of
1996 primarily as a result of increases in customer units served. Consolidated
cellular telephone, telephone and radio
2
<PAGE>
paging customer units increased 28% since March 31, 1995. Cellular telephone
revenues increased $48.2 million in 1996 on a 64% increase in customer units and
a strong increase in inbound roaming revenues. Telephone revenues increased $4.8
million in 1996 as a result of increased network usage, recovery of increased
costs of providing long-distance services, internal access line growth of 5%
since March 31, 1995 and the effects of acquisitions. Radio paging revenues
increased $400,000 in 1996 on a 14% increase in paging units in service.
Operating Expenses rose 29% ($51.6 million) in the first quarter of 1996 due
primarily to added expenses to serve the growing customer base. Cellular
telephone operating expenses increased $44.5 million during 1996 due to the
effects of additional marketing and selling expenses incurred to add new
customers as well as the costs of providing services to the increased customer
base. Telephone operating expenses increased $4.7 million during 1996 due to
growth in internal operations. Paging operating expenses increased $2.4 million
in 1996 due to additional costs to serve current customers and to add new
customers as well as additional 1996 expenses to restructure certain business
processes which began in the second half of 1995.
Operating Income increased 6% ($1.8 million) in the first quarter of 1996 due to
improved cellular operating results offset somewhat by the decline in paging
operating results.
Three Months Ended March 31,
----------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands)
Operating Income
Cellular telephone $ 11,822 $ 8,064 $ 3,758
Telephone 23,221 23,121 100
Radio paging (4,086) (2,029) (2,057)
----------- ----------- -----------
$ 30,957 $ 29,156 $ 1,801
=========== =========== ===========
Operating Margins
Cellular telephone* 8.2% 8.4%
Telephone** 27.3% 28.7%
Radio paging* (17.2%) (9.1%)
Consolidated 11.8% 13.9%
* Computed on Service Revenues
** Local Telephone Operating Margin
Management anticipates continued growth in consolidated customer units and
revenues as the business units continue their expansion and development
programs. The rate of revenue growth is expected to be somewhat slower than
historical trends as cellular and paging revenue per unit continues to decline.
Expenses should increase driven by customer growth, although at a slower rate
than revenues, yielding continued growth in operating income and operating cash
flow.
Investment and Other Income totaled $42.2 million in 1996 and $25.4 million in
1995.
Cellular Investment Income, the Company's share of income of cellular markets in
which the Company has a minority interest and follows the equity method of
accounting, increased 8%($800,000)in the first quarter of 1996 as income from
the cellular markets increased. Cellular investment income is net of
amortization of license costs relating to these minority interests.
Gain on Sale of Cellular Interests and Other Investments totaled $41.8 million
in the first quarter of 1996 compared to $19.5 million in 1995 as the Company
has sold or traded certain non-strategic cellular interests and sold other
investments.
3
<PAGE>
PCS Development Costs totaled $5.7 million in 1996 and $500,000 in 1995
representing expenses incurred by TDS and American Portable Telecom, Inc.
("American Portable") to participate in the Federal Communications Commission
("FCC")auction process, to build American Portable's management and operating
teams and to develop American Portable's strategic and operational plans for the
future deployment of personal communications services ("PCS"). The Company
expects to incur significant expenditures for the development of PCS activities
during 1996 and 1997.
Minority Share of Income includes (a) minority shareholders' share of USM's net
income, (b) minority partners' share of income or loss of majority-owned
cellular markets, (c) minority shareholders' share of income of majority-owned
telephone companies, and (d) minority shareholders' share of APP's loss.
Three Months Ended March 31,
----------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands)
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share $ (5,615) $ (4,472) $ (1,143)
Minority Partners' Share (2,112) (1,888) (224)
----------- ----------- ----------
(7,727) (6,360) (1,367)
Telephone Subsidiaries (586) (283) (303)
American Paging 946 481 465
----------- ----------- ----------
$ (7,367) $ (6,162) $ (1,205)
=========== =========== ==========
Interest Expense decreased 4% ($600,000) in the first quarter of 1996. The
decrease in interest expense was attributable to TDS capitalizing $6.5 million
of interest expense associated with the development of PCS licenses offset by a
$4.4 million increase in long-term interest expense and a $1.5 million increase
in short-term interest expense. Long-term debt, including current maturities,
increased to $908.6 million at March 31, 1996 from $670.3 million at March 31,
1995 while short-term notes payable increased to $204.3 million from $95.1
million, respectively.
Income Tax Expense increased 45% ($8.6 million) in 1996 compared with 1995,
reflecting the 45% increase in pretax income. The effective income tax rate was
45% in the first quarter of 1996 and 1995.
Net Income Available to Common was $33.3 million in the first quarter of 1996
and $22.7 million in the first quarter of 1995. The increase in 1996 reflects
the increase in gain on the sales of cellular interests and other investments of
$9.9 million (after income taxes and minority shareholders' share), and the
continued improvement in operating results of the cellular business offset
somewhat by increased paging losses and PCS development expenses.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in American Portable's major markets will reduce the rate
of growth in TDS's net income from levels which would otherwise be achieved
during the next few years.
Earnings Per Common Share were $.56 in the first quarter of 1996 and $.39 in the
first quarter of 1995. The increase in earnings per share reflects the 47%
increase in net income available to common, offset somewhat by the 4% increase
in weighted average common shares outstanding in 1996.
4
<PAGE>
CELLULAR TELEPHONE OPERATIONS
TDS provides cellular telephone service through United States Cellular
Corporation [AMEX: USM], an 80.9%-owned subsidiary. Consolidated results of
operations include 785,000 customer units in 134 markets at March 31, 1996. In
aggregate, including consolidated markets and minority-owned investments, USM
had rights to interests in 200 cellular telephone markets representing 24.2
million population equivalents at March 31, 1996.
Operating results for the first quarter of 1996 primarily reflect the rapid
customer growth in USM's consolidated markets. Operating revenue increases were
driven by the 64% growth in consolidated customer units since March 31, 1995.
Operating expenses increased due to increased marketing costs related to the
rapid customer growth, increased customer usage of USM's systems and the costs
associated with operating an increased number of cell sites. Operating cash flow
(operating income plus depreciation and amortization) increased 33% to $37.0
million in the first quarter of 1996 from $27.8 million in 1995. Operating
income increased 47% to $11.8 million in the first quarter of 1996 compared to
$8.1 million in 1995.
Three Months Ended March 31,
----------------------------------------------------
Change Change
Due To Excluding
Acquis- Acquis-
1996 1995 Change itions itions
---- ---- ------ -------- ---------
(Dollars in thousands, except per customer amounts)
Operating Revenues
Local service $ 93,266 $ 58,652 $ 34,614 $ 7,636 $ 26,978
Inbound roaming 38,948 29,623 9,325 1,327 7,998
Long-distance 11,055 6,523 4,532 720 3,812
Other 423 1,602 (1,179) (1,065) (114)
--------- --------- -------- -------- --------
Service Revenues 143,692 96,400 47,292 8,618 38,674
Equipment sales 4,274 3,348 926 358 568
--------- --------- --------- -------- --------
147,966 99,748 48,218 8,976 39,242
--------- --------- --------- -------- --------
Operating Expenses
System operations 23,578 13,202 10,376 2,167 8,209
Marketing and selling 30,903 19,922 10,981 3,300 7,681
Cost of equipment
sold 15,473 11,199 4,274 1,534 2,740
General and
administrative 41,053 27,667 13,386 2,823 10,563
Depreciation 16,935 12,264 4,671 608 4,063
Amortization 8,202 7,430 772 117 655
--------- --------- -------- -------- --------
136,144 91,684 44,460 10,549 33,911
--------- --------- -------- -------- --------
Operating Income $ 11,822 $ 8,064 $ 3,758 $ (1,573) $ 5,331
========= ========= ======== ======== ========
Cellular telephone revenues
as a percent of
total revenues 56% 48%
Additions to property,
plant and equipment $ 43,252 $ 37,375
Identifiable assets $ 1,958,084 $ 1,708,648
Consolidated Markets:
Customers 785,000 478,000
Market penetration 3.54% 2.17%
Cell sites in service 1,139 841
Average monthly service
revenue per customer $ 64.03 $ 71.25
Churn rate per month 2.1% 2.1%
Marketing cost per gross
customer addition $ 360 $ 386
5
<PAGE>
Operating Revenues increased 48%($48.2 million)in the first quarter of 1996.
The revenue increase is primarily attributable to increases in the number of
local retail customers, growth in inbound roaming revenues and the effect of
acquisitions. Average monthly revenue per customer was $64 in the first
quarter of 1996 and $71 in 1995. The decline in average monthly revenue per
customer was primarily a result of a decrease in monthly inbound roaming revenue
per customer.
Local service revenue, from local customers' usage of USM's systems, increased
59% ($34.6 million) in the first quarter of 1996. The revenue increases were
primarily the result of the 64% customer growth in consolidated markets. Average
monthly local retail revenue per customer was $42 in the first quarter of 1996
and $43 in 1995. The decline in average local revenue per customer in 1996 was
primarily a result of USM's use of incentive programs to increase lower-priced
weekend and off-peak usage. USM believes local retail revenue per customer will
continue to decrease due to the usage patterns of incrementally added customers.
This is part of an industry trend and is believed to be related to the tendency
of early customers in a market to be the heaviest users during peak business
hours. It also reflects the continued penetration of the consumer market, which
tends to include fewer peak business hour usage customers.
Inbound roaming revenue (charges to customers of other systems who use USM's
cellular systems when roaming) increased 31% ($9.3 million) in the first quarter
of 1996. The increase is attributable to an increase in the number of customers
from other systems using USM's systems as well as an increased number of cell
sites within those systems offset somewhat by a reduction in the average price
per minute. USM's average inbound roaming revenue per minute is also decreasing
due to price reductions negotiated with other cellular operators. The reduction
in roaming revenue rates along with USM's customer base increasing at a more
rapid rate than the rate of increase in roaming revenues has caused average
monthly inbound roaming revenue per customer to decline to $17 in the first
quarter of 1996 from $22 in 1995.
Long-distance and other revenue increased 41% ($3.4 million) in the first
quarter of 1996 as the volume of long-distance calls billed by USM increased.
Average monthly long-distance and other revenue per customer was $5 in the first
quarter of 1996 and $6 in 1995.
Equipment sales revenue reflects the sale of cellular telephone units. The
average revenue per telephone unit sold was $47 in the first quarter of 1996 and
$62 in 1995.
Operating Expenses increased 48% ($44.5 million) in the first quarter of 1996.
The increases were primarily due to increased marketing costs related to
increased customer activations, a larger customer base, net acquisitions (net
effect of acquisitions and divestitures) and increased depreciation and
amortization expense related to increases in fixed assets and license costs.
System operations expenses increased 79%($10.4 million) in the first quarter of
1996 as a result of increases in customer usage expenses and costs associated
with operating the increased number of cell sites. Also contributing to the
increase were $2.0 of additional costs related to fraudulent use of USM's
customers' cellular telephone numbers. USM has put procedures in place to combat
this fraud, which is primarily related to roaming usage, to reduce the effect on
future periods. 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 pass-through roaming revenue.
Customer usage expenses grew 154% ($8.3 million) in 1996 as minutes used on
USM's systems increased, primarily related to the 64% increase in customers and
increased inbound roaming usage, and as the amount
6
<PAGE>
of fraudulent usage increased. Maintenance, utility and cell site expenses grew
26% ($2.0 million) in the first quarter of 1996 reflecting the growth in the
number of cell sites to 1,139 from 841 at March 31, 1996 and 1995, respectively.
Marketing and selling expenses increased 55% ($11.0 million) in the first
quarter of 1996. Marketing and selling expenses consist primarily of personnel
costs, commissions, retail office expenses, agent expenses, advertising and
promotional expenses. These expenses follow the trend of increasing activations
which grew from 72,000 in the first quarter of 1995 to 117,000 in the most
recent quarter. Cost of equipment sold reflects the cost of increased unit sales
discussed above, offset somewhat by falling manufacturers' prices per unit. The
average cost of a telephone unit sold was $171 in 1996 and $206 in 1995. Cost
per gross customer addition (marketing and selling expenses and cost of
equipment sold less equipment revenues divided by gross customer additions)
decreased to $360 in 1996 from $386 in 1995.
General and administrative expenses increased 48% ($13.4 million) in the first
quarter of 1996. These expenses include the cost of operating USM's local
business offices and its corporate expenses. The increase includes the effects
of increases in expenses required to serve the growing customer base in existing
markets and an expansion of both local administrative office and corporate
staff, necessitated by growth in USM's business and the acquisition of
additional operations. USM is using an ongoing clustering strategy to combine
local operations wherever feasible in order to gain operational efficiencies and
reduce its administrative expenses. The increase also includes the effect of a
higher amount of bad debts, related to USM's increased rate of customer growth,
and the effect of increased non-income taxes levied by state and local taxing
authorities, which are increasingly using cellular services as a source for new
revenues.
Depreciation expense increased 38% ($4.7 million) in the first quarter of 1996,
reflecting an increase in average fixed assets of 41% since March 31, 1995 due
to the increase in cell sites built to improve coverage in USM's markets.
Amortization expense increased 10% ($800,000) primarily due to increases in
deferred information system costs.
Operating Income was $11.8 million in the first quarter of 1996 and $8.1 million
in 1995. Operating margin on service revenues declined slightly to 8.2% in the
first quarter of 1996 from 8.4% in 1995.
The Company expects service revenues to continue to grow in 1996 as customers
are added to USM's markets and as it realizes a full year of revenue from
customers and additional retail and roaming revenue from cell sites added in
1995. However, management anticipates that average monthly revenue per customer
will continue to decrease as local retail and inbound roaming revenue per minute
of use declines and as the growth rate of the Company's customer base exceeds
the growth rate of inbound roaming revenue, diluting the roaming contribution
per customer. The Company also expects expenses to continue to increase in 1996
as it incurs a full year of expenses for markets and cell sites added in 1995
and it incurs expenses associated with customer and system growth.
Additionally, management believes there exists a seasonality at USM in both
service revenues, which tend to increase more slowly in the first and fourth
quarters, and operating expenses, which tend to be higher in the fourth quarter
due to increased marketing activities and customer growth. This seasonality may
cause operating income to vary from quarter to quarter.
7
<PAGE>
TELEPHONE OPERATIONS
TDS manages its local landline telephone service through its wholly owned
subsidiary TDS Telecommunications Corporation ("TDS Telecom"). At March 31,
1996, TDS Telecom operated 102 telephone companies which served 454,000 access
lines in 28 states. It also operated a small, long-distance company. TDS Telecom
expands its operations through internal access line growth and acquisitions.
Operating results for the first quarter of 1996 primarily reflects an increase
in internal access line growth of 5% since March 31, 1995 and the effects of
acquisitions. Operating cash flow increased 4% to $44.0 million in the first
quarter of 1996 compared to $42.1 million in 1995. The rate of growth of
operating cash flow slowed in 1996 due to the effects of earnings pressures from
regulatory agencies and long-distance providers and increased operating
expenses. TDS Telecom continues to provide steadily growing operating cash flow
and earnings to support its construction activities.
Three Months Ended March 31
-----------------------------------------------------
Change Change
Due to Excluding
Acquis- Acquis-
1996 1995 Change itions itions
---- ---- ------ ------- --------
(Dollars in thousands, except per customer amounts)
Local Telephone Operations
Operating Revenues
Local service $ 25,131 $ 22,638 $ 2,493 $ 476 $ 2,017
Network access and
long-distance 48,506 45,349 3,157 944 2,213
Miscellaneous 9,840 10,566 (726) 140 (866)
---------- ---------- -------- ------- -------
83,477 78,553 4,924 1,560 3,364
---------- ---------- -------- ------- -------
Operating Expenses
Network operations 13,861 12,456 1,405 334 1,071
Depreciation and
Amortization 20,137 18,549 1,588 432 1,156
Customer operations 11,835 11,489 346 247 99
Corporate and other 14,895 13,504 1,391 371 1,020
---------- ---------- -------- ------- -------
60,728 55,998 4,730 1,384 3,346
---------- ---------- -------- ------- -------
Local Telephone
Operating Income 22,749 22,555 194 176 18
---------- ---------- -------- ------- -------
Long-distance Operations
Revenues 5,634 5,756 (122) -- (122)
Expenses 5,162 5,190 (28) -- (28)
---------- ---------- -------- ------- -------
Long-distance
Operating Income 472 566 (94) -- (94)
---------- ---------- -------- ------- -------
Operating Income $ 23,221 $ 23,121 $ 100 $ 176 $ (76)
========== ========== ======== ======= =======
Telephone revenues
as a percent of
total revenues 34% 40%
Additions to property,
plant and equipment $ 27,522 $ 24,104
Identifiable assets $1,080,160 $1,036,467
Companies 102 100
Access lines 454,000 410,000
Growth in access lines
from prior year-end:
Acquisitions 22,500 12,900
Internal growth 5,600 4,600
Average monthly revenue
per access line $ 64.04 $ 65.10
8
<PAGE>
Operating Revenues from local telephone operations increased 6% ($4.9 million)
in the first quarter of 1996. The increases in revenues were due to the effects
of acquisitions, increased network usage, internal access line growth and the
recovery of increased costs of providing long-distance services.
Acquisitions increased local telephone revenues 2% ($1.6 million).
Local service revenues increased 9% ($2.0 million) in the first quarter of 1996,
excluding the effects of acquisitions. Internal growth in access lines and sales
of custom-calling and other features increased local service revenues
approximately $1.7 million in 1996.
Network access and long-distance revenues increased 5% ($2.2 million) in the
first quarter of 1996, excluding the effects of acquisitions. Recovery of
increased costs of providing access to long-distance carriers increased revenues
$1.4 million in 1996. The remainder of the revenue increase was primarily due to
increased minutes of use and increases in access lines served.
Miscellaneous revenues, excluding the effects of acquisitions, decreased 8%
($900,000) in the first quarter of 1996. The decrease is primarily attributable
to the reduction in billing and collection revenue and lower sales of customer
premise equipment in the first quarter of 1996.
Operating Expenses from local telephone operations increased 8% ($4.7 million)
in the first quarter of 1996. The effects of acquisitions increased expenses 2%
($1.4 million).
Network operations expense increased 9% ($1.1 million) in the first quarter of
1996, net of acquisitions. Network operations expense consists of costs to
maintain the high-quality telecommunications networks which provide advanced
telecommunications services. The increase in 1996 was primarily due to salary
and work force changes. A portion of the increase is related to the centralized
network management center being developed to provide more effective network
monitoring, increased customer satisfaction and lower costs.
Depreciation and amortization expense increased 6% ($1.2 million) in the first
quarter of 1996, excluding the effects of acquisitions. The increase in
depreciation expense is primarily due to growth in plant and equipment.
Customer operations expense increased 1% ($100,000) in the first quarter of
1996, net of acquisitions. Customer operations expense includes costs for
marketing, sales, product management, as well as expenses for establishing and
servicing customer accounts. The increases were due primarily to salary and
workforce changes.
Corporate and other expenses increased 8% ($1.0 million) in the first quarter of
1996, net of acquisitions. Corporate and other expenses consist of costs
incurred for executive administration and management, accounting, human resource
management, information management, legal services and property and other
non-income taxes. The increase in 1996 relates to costs incurred to form a group
to explore and develop new products as well as salary and other work force
changes.
Long-distance Operations represents revenues and expenses from a small,
long-distance operation acquired in August 1994.
Operating Income from telephone operations increased $100,000 in the first
quarter of 1996. The local telephone operating margin, excluding long-distance
operations, was 27.3% in 1996 and 28.7% in 1995. The reduction in operating
margin in 1996 was caused by earnings pressures from regulatory agencies and
long-distance providers and increased operating expenses.
9
<PAGE>
Management expects TDS Telecom's revenues, operating income and operating cash
flow to continue to increase modestly in 1996 from steady growth in operations.
Continued pressures on revenue sources, however, may cause operating margins to
be somewhat reduced in future periods.
10
<PAGE>
RADIO PAGING OPERATIONS
TDS manages its radio paging business through American Paging, Inc. [AMEX: APP],
an 82.3%-owned subsidiary. APP provides wireless messaging communications to
802,100 subscribers in 14 states and the District of Columbia, covering a total
population base of 75 million.
During 1995, APP announced a plan to restructure key operating areas which will
extend into 1996. Upon completion of the plan, APP is targeting increased sales
through the direct channel, an improved customer mix, a lower level of
administrative costs and improved customer service.
As anticipated, growth in customer units and revenues have been slow during the
past few quarters due to the restructuring activities. APP anticipates continued
slower unit and revenue growth during the first half of 1996 as a result of work
force disruptions caused by the reengineering of the sales force and customer
service organization. While APP does not expect to see measurable benefits
before the end of the second quarter of 1996 as a result of its restructuring
efforts, it does expect to move toward industry operating levels during the last
half of 1996.
Three Months Ended March 31,
----------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands, except per unit amounts)
Service Operations
Revenues $ 23,708 $ 22,237 $ 1,471
------------ ----------- -----------
Costs and expenses
Cost of services 6,586 5,452 1,134
Selling and advertising 5,132 4,142 990
General and administrative 8,705 9,064 (359)
Depreciation and amortization 7,169 5,560 1,609
------------ ----------- ----------
27,592 24,218 3,374
------------ ----------- ----------
Service Operating (Loss) (3,884) (1,981) (1,903)
------------ ----------- ----------
Equipment Sales
Revenues 2,602 3,681 (1,079)
Cost of equipment sold 2,804 3,729 (925)
------------ ----------- ----------
Equipment Sales (Loss) (202) (48) (154)
------------ ----------- ----------
Operating (Loss) $ (4,086) $ (2,029) $ (2,057)
============= =========== ==========
Radio paging revenues as a percent of
total revenues 10% 12%
Additions to property and equipment $ 10,814 $ 9,101
Identifiable assets $ 156,885 $ 147,676
Pagers in service 802,100 705,100
Average monthly service
revenue per unit $ 10.03 $ 10.91
Transmitters in service 1,016 969
Churn rate per month 2.7% 2.3%
Marketing cost per gross
customer unit addition $ 63 $ 42
11
<PAGE>
Service Revenues increased 7% ($1.5 million) in the first quarter of 1996,
primarily as a result of growth in the number of pagers in service. Pagers in
service increased 14% (97,000, including 28,400 from acquisitions) since March
31, 1995. Service revenue growth was slower than paging unit growth due to
competitive pricing declines and a continuing shift in the distribution channel
mix to lower revenue producing reseller units.
Average monthly service revenue per unit declined 8% to $10.03 in the first
quarter of 1996 from $10.91 in the same period of 1995. The decline in average
revenue per unit was the result of competitive pricing pressures and a shift to
lower revenue producing reseller channels. The competitive pricing declines
accounted for 6% of the 8% decline in average revenue per unit. APP refocused
its marketing strategy in mid-1995 to the higher revenue producing direct
distribution channel in connection with its restructuring activities. APP is
committing additional resources to sales and sales support with the intent to
increase unit sales, revenue and productivity. Reseller units comprised 33% of
units in service at March 31, 1996 compared to 32% in 1995.
Service Operating Expenses increased 14% ($3.4 million) in the first quarter of
1996 primarily due to additional costs to serve the expanded customer base,
higher selling costs, restructuring charges and higher depreciation and
amortization expense. The first quarter of 1996 includes total restructuring
charges of $800,000.
Cost of services increased 21% ($1.1 million) in the first quarter of 1996 due
to additional costs to provide service to the increased customer base, and the
costs of maintaining, upgrading and expanding systems to improve system
reliability and coverage. APP's transmitters in service increased to 1,016 at
March 31, 1996 from 969 at March 31, 1995. Transmitters were added primarily for
continued expansion and upgrade of existing systems coupled with the retirement
of smaller, outdated systems to improve operating efficiencies.
Selling and advertising expense increased 24% ($1.0 million) in the first
quarter of 1996 due to the increased number of sales personnel and the
conversion of operations offices into sales offices. APP is committing
additional resources to sales and sales support with the intent to increase unit
sales, revenue and productivity. The cost per gross customer addition, excluding
customers added through acquisitions, was $63 in the first quarter of 1996
compared to $42 in the same period of 1995.
General and administrative expense decreased 4% ($400,000) in the first quarter
of 1996 due to the reduction in administrative staff related to restructuring
activities. During the first quarter of 1996, APP recorded additional
restructuring charges of $450,000 related to subleasing office space, employee
severance and out placement services, and for consulting services. Further
reductions are expected as duplicative staffing is reduced during the transition
of back office functions in APP's 17 service operating centers to a single
Customer Telecare Center.
Depreciation and amortization charges increased 29% ($1.6 million) in the first
quarter of 1995, reflecting increased investment in pagers and related
equipment, the effects of acquisitions and $350,000 in accelerated depreciation
for assets no longer required upon completion of the restructuring activities.
Operating (Loss) was $4.1 million in the first quarter of 1996 and $2.0 million
in the same period of 1995. The increase in operating loss reflects the increase
in operating expenses associated with the growth in the number of paging
customers served and the restructuring charges compounded by the slower increase
in service revenues.
12
<PAGE>
BROADBAND PERSONAL COMMUNICATIONS SERVICES
TDS manages its broadband personal communications services business through
American Portable Telecom, Inc. American Portable's licenses cover the Major
Trading Areas of Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh,
Kansas City and Columbus and account for approximately 27.3 million population
equivalents.
In April, 1996, American Portable issued 12,250,000 Common Shares at $17 per
share in an initial public offering. Upon completion of the offering, TDS held
82.8% of the total shares outstanding. American Portable shares are traded on
the NASDAQ market under the symbol "APTI".
Management anticipates that the construction of the cell sites will begin in the
second quarter of 1996, following the completion of detailed engineering and
site acquisition activities. Marketing and selling activities along with
commercial operations are anticipated to commence in early 1997.
PCS Development Costs include expenses incurred by TDS and American Portable to
participate in the FCC auction process, to build American Portable's management
and operating teams and to develop American Portable's strategic and operational
plans for the future deployment of personal communications services. American
Portable expects to incur significant expenditures for the development of PCS
activities during 1996.
Three Months Ended March 31,
-------------------------------
1996 1995
---- ----
(Dollars in thousands)
Additions to property and equipment $ 8,910 $ --
Identifiable assets $ 343,945 $ 289,268
============= =============
PARENT AND SERVICE COMPANY OPERATIONS
Other Income (Expense), Net includes the gross income of TDS's printing and
other service companies and costs of corporate operations.
Three Months Ended March 31,
------------------------------
1996 1995
---- ----
(Dollars in thousands)
Additions to property and equipment $ 3,463 $ 5,202
Identifiable assets $ 48,461 $ 68,618
============= =============
13
<PAGE>
FINANCIAL RESOURCES AND LIQUIDITY
TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid
growth has caused expenditures for construction, expansion and acquisition
programs to exceed internally generated cash flow in recent years. Accordingly,
TDS has obtained substantial funds from external sources to finance construction
of cellular telephone systems and to fund acquisitions in the past. Although the
steady internal cash flow from TDS Telecom and increasing internal cash flow
from USM have reduced the need for external financing, the development and
construction activities of American Portable will require substantial additional
funds from external sources.
Cash Flows From Operating Activities. TDS is generating substantial internal
funds from the rapid growth in customer units and revenues. Operating cash flow
(operating income plus depreciation and amortization) increased 14% to $84.0
million in the first quarter of 1996 from $73.4 million in 1995. The increase
represents primarily the 33% ($9.2 million) increase in cellular telephone
operating cash flow. 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 $42.5 million in the first quarter of
1996.
Three Months Ended March 31,
------------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands)
Operating cash flow
Cellular telephone $ 36,959 $ 27,758 $ 9,201
Telephone 43,983 42,096 1,887
Radio paging 3,083 3,531 (448)
------------- ------------- -------------
84,025 73,385 10,640
Other operating activities (42,478) (25,171) (17,307)
------------- ------------- -------------
$ 41,547 $ 48,214 $ (6,667)
============= ============= =============
Cash Flows from Financing Activities. TDS uses short-term debt to finance its
cellular telephone and radio paging operations, for acquisitions and for general
corporate purposes. TDS takes advantage of attractive opportunities to retire
short-term debt with the proceeds from long-term debt and equity sales and sales
of non-strategic assets. Cash flows from financing activities totaled $8.9
million in the first quarter of 1996 compared to $76.6 million in 1995.
Increases in short-term debt provided most of the Company's external financing
requirements during the first quarter of 1996. Increases in vendor financing
totaling $54.2 million and the sale of $39.2 million of TDS medium term notes
provided most of the Company's external financing requirements during the first
quarter of 1995.
Cash Flows From Investing Activities. TDS makes substantial investments each
year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities. Cash flows from investing activities
required $42.7 million in the first quarter of 1996 compared to $93.6 million in
1995, primarily for additions to property, plant and equipment totaling $94.0
million in 1996 and $75.8 million in 1995. The sales of non-strategic cellular
interests and other investments provided $71.9 million in 1996 and $32.2 million
in 1995.
Property, Plant and Equipment. The primary purpose of TDS's construction and
expansion program is to provide for normal growth, to upgrade service, to expand
into new communication areas, and to take advantage of service-enhancing and
cost-reducing technological developments. Additions to property, plant and
equipment totaled $94.0 million in the first quarter of 1996 consisting of $43.3
million for cellular plant and equipment, $27.5 million for telephone plant and
14
<PAGE>
equipment, $10.8 million for radio paging property and equipment, $8.9 million
of broadband PCS equipment and $3.5 million for other assets.
Acquisitions. TDS seeks to acquire cellular telephone, telephone and paging
interests which add value to the organization. During the first quarter of 1996,
the Company purchased controlling interests in a cellular market and two
telephone companies. The aggregate consideration for these acquisitions was
$73.6 million primarily consisting of 1.8 million TDS Common Shares.
TDS has entered into definitive agreements at March 31, 1996, to acquire three
telephone companies for an aggregate consideration of $42.8 million, consisting
of 869,000 TDS Common Shares and $2.5 million in cash, and is currently
negotiating agreements for the acquisition of additional cellular, telephone and
paging companies.
TDS and USM continue to assess the makeup of cellular holdings in order to
maximize the benefits derived from clustering USM's markets. As the number of
opportunities for acquisitions of cellular interests has decreased and as USM's
clusters have grown to realize greater economies of scale, USM's focus has
shifted toward exchanges and sales of non-strategic interests.
During the first quarter of 1996, USM sold four markets and a market partition,
and traded a majority interest in one market for a majority interest in another
market and cash. These transactions, along with sales of certain other
investments by the Company, generated net cash proceeds of $71.9 million.
At March 31, 1996, USM had agreements pending to sell controlling interests in
four markets and to settle litigation related to an investment interest sold in
1995. Pursuant to the agreements, USM will receive $115 million in cash and $20
million of notes receivable due in three years. All of the pending agreements
discussed above are expected to be completed during 1996. Certain of these
transactions will generate substantial gains for book and tax purposes.
LIQUIDITY
Management believes TDS has sufficient internal and external resources to
finance the anticipated requirements of its business development, construction
and acquisition programs.
TDS is generating substantial internal funds to finance business development and
construction programs. Operating cash flow for the twelve months ended March 31,
1996 increased to $334.1 million from $277.5 million in 1995.
Twelve Months Ended March 31,
------------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands)
Operating Income
Cellular telephone $ 141,414 $ 96,883 $ 44,531
Telephone 177,481 164,399 13,082
Radio paging 15,247 16,261 (1,014)
------------- ------------- -------------
$ 334,142 $ 277,543 $ 56,599
============= ============= =============
The Company's property, plant and equipment additions are anticipated to
aggregate approximately $434 million for 1996 (excluding PCS construction and
development expenditures) consisting of $240 million for cellular capital
additions, $125 million for telephone capital additions,
15
<PAGE>
$54 million for the radio paging property and equipment and $15 million for
other fixed asset expenditures.
USM plans to finance its cellular construction program using primarily
internally generated cash supplemented by proceeds from the sale of
non-strategic assets. TDS Telecom plans to finance its construction program
using internally generated cash supplemented by long-term financing from federal
government programs. American Paging plans to finance its property and equipment
expenditures primarily through internally generated cash and borrowings under
TDS's short-term lines of credit.
PCS Development. American Portable plans to construct networks in its six
primary Major Trading Areas. Management anticipates the construction of the cell
sites will begin in the second quarter of 1996, following the completion of
detailed engineering and site acquisition activities. Marketing and selling
activities along with commercial operations are anticipated to commence in early
1997.
American Portable anticipates construction, development and introduction of PCS
networks and services will require substantial capital and operating
expenditures over the next several years. While construction (including
microwave relocation), and other start-up activities may be impacted by many
factors, American Portable estimates that the aggregate funds required through
December 31, 1998 will total approximately $830 million ($420 million in 1996,
$340 million in 1997 and $70 million in 1998). This amount includes an estimated
$585 million of capital expenditures for construction of the PCS networks ($370
million in 1996, $205 million in 1997 and $10 million in 1998) and $245 million
of estimated working capital requirements.
TDS expects American Portable's 1996 capital expenditures and expenditures for
start-up and development activities to aggregate approximately $420 million.
These expenditures will be financed using a variety of resources, including but
not limited to, borrowings under TDS's short-term bank lines of credit, vendor
financing and equity investors in American Portable. In March 1996, American
Portable selected Nokia Telecommunications, Inc. ("Nokia") as its sole supplier
of infrastructure equipment during the initial build out of its PCS Networks.
Nokia has agreed in principle to provide up to $200 million in financing for the
equipment. American Portable sold 12,250,000 of its common shares, approximately
17.2% of total outstanding shares, at a price of $17 per share in an initial
public offering on April 25, 1996. The net proceeds from the offering, after
underwriters fees and estimated expenses, will be approximately $194 million.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in American Portable's major markets will reduce the rate
of growth in TDS's operating and net income from levels which would otherwise be
achieved during the next few years.
TDS and its subsidiaries have cash and temporary investments totaling $86.5
million and longer-term cash investments totaling $41.4 million at March 31,
1996. These investments are primarily the result of telephone operations'
internally generated cash. While certain regulated telephone subsidiaries' debt
agreements place limits on intercompany dividend payments, these restrictions
are not expected to affect the Company's ability to meet its cash obligations.
TDS and its subsidiaries also have access to a variety of external capital
sources. TDS and its subsidiaries had $469 million of bank lines of credit for
general corporate purposes at March 31, 1996, $444 million of which were
committed. Unused amounts of such lines totaled $268 million, $243 million of
which were committed. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.
16
<PAGE>
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. TDS and USM have
shelf registration statements covering the issuance of equity for acquisitions.
In addition, the Company has issued Common Shares for acquisitions pursuant to
registration statements filed specifically for particular acquisitions.
Management believes TDS's internal cash flows and funds available from cash and
cash investments provide substantial financial flexibility. TDS also has
substantial lines of credit and longer-term financing commitments to help meet
its short- and long-term financing needs. Moreover, TDS and its subsidiaries
have access to public and private capital markets and anticipate issuing debt
and equity securities when capital requirements (including acquisitions),
financial market conditions and other factors warrant.
17
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended
March 31,
------------------------
1996 1995
---- ----
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Cellular telephone $ 147,966 $ 99,748
Telephone 89,111 84,309
Radio paging 26,310 25,918
--------------- -------------
263,387 209,975
--------------- -------------
OPERATING EXPENSES
Cellular telephone 136,144 91,684
Telephone 65,890 61,188
Radio paging 30,396 27,947
--------------- -------------
232,430 180,819
--------------- -------------
OPERATING INCOME 30,957 29,156
--------------- -------------
INVESTMENT AND OTHER INCOME
Interest and dividend income 2,176 3,095
Cellular investment income, net of
license cost amortization 10,449 9,672
Gain on sale of cellular interests 41,758 19,488
PCS development costs (5,746) (469)
Other income (expense), net 886 (197)
Minority share of income (7,367) (6,162)
--------------- -------------
42,156 25,427
--------------- -------------
INCOME BEFORE INTEREST AND INCOME TAXES 73,113 54,583
Interest expense 11,860 12,414
--------------- -------------
INCOME BEFORE INCOME TAXES 61,253 42,169
Income tax expense 27,564 18,976
--------------- -------------
NET INCOME 33,689 23,193
Preferred Dividend Requirement (422) (492)
-------------- -------------
NET INCOME AVAILABLE TO COMMON $ 33,267 $ 22,701
============== =============
WEIGHTED AVERAGE COMMON SHARES (000s) 59,393 57,292
EARNINGS PER COMMON SHARE $ .56 $ .39
============== =============
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .10 $ .095
============== =============
The accompanying notes to financial statements are an integral
part of these statements.
18
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended
March 31,
------------------------
1996 1995
----- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 33,689 $ 23,193
Add (Deduct) adjustments to
reconcile net income
to net cash provided by
operating activities
Depreciation and amortization 56,913 47,139
Deferred taxes 6,432 6,018
Investment income (11,232) (11,240)
Minority share of income 7,367 6,162
Gain on sale of
cellular interests (41,758) (19,488)
Noncash interest expense 4,606 492
Other noncash expense 1,505 1,151
Change in accounts receivable 505 4,073
Change in accounts payable (24,266) (14,007)
Change in accrued taxes 18,657 11,313
Change in accrued interest (5,634) (4,174)
Change in other assets
and liabilities (5,237) (2,418)
------------- -------------
41,547 48,214
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 2,168 96,317
Repayments of long-term debt (7,080) (8,534)
Change in notes payable 19,952 (6,691)
Proceeds from the issuance of common stock 1,008 2,489
Minority partner capital distributions (751) (657)
Redemption of preferred stock (525) (534)
Dividends paid (6,451) (5,933)
Proceeds from the issuance of
subsidiaries stock 606 158
------------- -------------
8,927 76,615
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (93,961) (75,782)
Investments in and advances to cellular
minority partnerships (7,015) (3,578)
Distributions from partnerships 2,566 1,792
Investments in PCS licenses (6,364) (37,885)
Proceeds from investment sales 71,864 32,220
Change in other investments (2,610) (1,268)
Acquisitions, net of cash acquired 2,790 (13,928)
Change in temporary investments
and marketable securities (9,950) 4,874
----------- -------------
(42,680) (93,555)
----------- -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 7,794 31,274
CASH AND CASH EQUIVALENTS -
Beginning of period 55,116 24,733
----------- -------------
End of period $ 62,910 $ 56,007
=========== =============
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
ASSETS
(Unaudited)
March 31, 1996 December 31, 1995
-------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 62,910 $ 55,116
Temporary investments 23,545 25,735
Accounts receivable from
customers and others 150,248 145,344
Materials and supplies,
at average cost,
and other current assets 35,071 35,015
--------------- ---------------
271,774 261,210
--------------- ---------------
INVESTMENTS
Cellular limited partnership
interests 167,731 158,559
Cellular license acquisition
costs, net of amortization 1,103,435 1,075,820
PCS license acquisition costs,
net of amortization 362,835 356,561
Franchise costs and other costs
in excess of the underlying
book value of subsidiardies,
net 176,117 168,608
Other investments 94,038 87,726
--------------- ---------------
1,904,156 1,847,274
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT
Cellular telephone, net 548,120 530,027
Telephone, net 684,028 657,015
Radio paging, net 60,400 59,452
PCS, net 21,934 11,978
Other, net 33,843 34,938
--------------- ---------------
1,348,325 1,293,410
--------------- ---------------
OTHER ASSETS AND DEFERRED CHARGES 63,280 67,188
--------------- ---------------
TOTAL ASSETS $ 3,587,535 $ 3,469,082
=============== ===============
20
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
March 31, 1996 December 31, 1995
------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of
long-term debt
and preferred shares $ 36,538 $ 49,233
Notes payable 204,272 184,320
Accounts payable 76,655 122,886
Advance billings and customer
deposits 28,872 27,706
Accrued interest 5,983 11,573
Accrued taxes 22,043 2,525
Other current liabilities 29,171 29,481
--------------- ------------------
403,534 427,724
--------------- ------------------
DEFERRED LIABILITIES AND CREDITS 145,124 138,295
--------------- ------------------
LONG-TERM DEBT, excluding current
portion 873,621 858,857
--------------- ------------------
REDEEMABLE PREFERRED SHARES,
excluding current portion 360 1,587
---------------- ------------------
MINORITY INTEREST in subsidiaries 345,558 328,544
---------------- ------------------
NONREDEEMABLE PREFERRED SHARES 29,609 29,710
---------------- ------------------
COMMON STOCKHOLDERS' EQUITY
Common Shares,
par value $1 per share 53,251 51,137
Series A Common Shares,
par value $1 per share 6,893 6,893
Common Shares issuable (30,975
and 31,431 shares,
respectively) 1,461 1,496
Capital in excess of par value 1,493,559 1,417,513
Retained earnings 234,565 207,326
---------------- ----------------
1,789,729 1,684,365
---------------- ----------------
$ 3,587,535 $ 3,469,082
================ ================
The accompanying notes to financial statements are an integral
part of these statements.
21
<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, 1996 and December
31, 1995, and the results of operations and cash flows for the three
months ended March 31, 1996 and 1995. The results of operations for the
three months ended March 31, 1996 and 1995, are not necessarily indicative
of the results to be expected for the full year.
2. Certain amounts reported in prior periods have been reclassified to
conform to the current period presentation.
3. 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, 1996 consist of dilutive Common Share options.
4. Assuming that acquisitions accounted for as purchases during the period
January 1, 1995, to March 31, 1996, had taken place on January 1, 1995,
unaudited pro forma results of operations from continuing operations would
have been as follows:
Three Months Ended
March 31,
----------------------------
1996 1995
---- ----
(Dollars in thousands, except
Per share amounts)
Operating revenues $ 267,740 $ 221,841
Net income 33,751 20,176
Earnings per share $ .56 $ .33
22
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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.
TDS acquired certain cellular licenses, operating companies and telephone
companies in 1996 and 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,
------------------------
1996 1995
---- ----
(Dollar in thousands,
except per share amounts)
Property, plant and equipment $ 30,779 $ 32,152
Cellular licenses 50,347 87,953
Increase (decrease) in equity method
investment in cellular interests (1,845) (1,943)
Franchise costs 8,387 23,120
Long-term debt (14,304) (19,511)
Deferred credits (3,455) (769)
Other assets and liabilities,
excluding cash and cash equivalents 1,069 (2,548)
Minority interest (443) (1,151)
Common Shares issued and issuable (73,291) (99,692)
USM Stock issued and issuable (34) (3,683)
---------- -----------
(Increase) decrease in cash due
to acquisitions $ (2,790) $ 13,928
============ ===========
The following table summarizes interest and income taxes paid, and other noncash
transactions.
Three Months Ended
March 31,
-------------------------
1996 1995
---- ----
(Dollar in thousands,
except per share amounts)
Interest Paid $ 19,187 $ 16,367
Income Taxes Paid 2,534 1,819
Common Shares issued by TDS for
conversion of TDS Preferred Stock $ 3,974 $ 263
23
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Contingencies
The Company's material contingencies as of March 31, 1996, include the
collectibility of a $5.5 million note receivable under a long-term
financing agreement with a cellular company and a $10 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
Report on Form 10-K for the year ended December 31, 1995.
24
<PAGE>
PART II. OTHER INFORMATION
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) Reports on Form 8-K filed during the quarter ended March 31, 1996:
TDS filed a Report on Form 8-K dated January 10, 1996, which announced
a proposal by TDS to transfer its minority ownership interests in
certain cellular markets to United States Cellular Corporation or
approximately $116.7 million.
The Company also filed a Report on Form 8-K dated February 20, 1996,
which announced that a subsidiary of TDS, American Portable Telecom,
Inc., filed a registration statement with the Securities and Exchange
Commission covering an initial public offering of 11.0 million Common
Shares.
No other reports on Form 8-K were filed during the quarter ended March
31, 1996.
25
<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 14, 1996 MURRAY L. SWANSON
-------------------------- --------------------------
Murray L. Swanson,
Executive Vice President-Finance
(Chief Financial Officer)
Date May 14, 1996 GREGORY J. WILKINSON
------------------------- ---------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
26
<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, 1996 1995
- ------------------------------------------------------------------------------
Primary Earnings
Net Income $ 33,689 $ 23,193
Dividends on Preferred Shares (422) (492)
Minority income adjustment assuming issuance
of a subsidiary's issuable securities -- (95)
-------- --------
Net Income Available to Common $ 33,267 $ 22,606
======== ========
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 59,035 56,349
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 173 170
Convertible Preferred Shares 164 734
Common Shares Issuable 21 39
-------- --------
Primary Shares 59,393 57,292
======== ========
Primary Earnings per Common Share
Net Income $ .56 $ .39
======== ========
Fully Diluted Earnings*
Net Income $ 33,689 $ 23,193
Dividends on Preferred Shares (280) (343)
Minority income adjustment assuming issuance of a
subsidiary's issuable securities -- (95)
-------- --------
Net Income Available to Common $ 33,409 $ 22,755
======== ========
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 59,035 56,349
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 182 171
Convertible Preferred Shares 642 1,231
Common Shares Issuable 21 39
-------- --------
Fully Diluted Shares 59,880 57,790
======== ========
Fully Diluted Earnings per Common Share
Net Income $ .56 $ .39
======== ========
* 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%.
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
For the Three Months March 31, 1996
(Dollars In Thousands)
EARNINGS:
Income from Continuing Operations before
income taxes $ 61,253
Add (Deduct):
Minority Share of Losses (1,121)
Earnings on Equity Method (11,232)
Distributions from Minority Subsidiaries 2,566
Amortization of Non-Telephone Capitalized
Interest 2
Minority interest in majority-owned subsidiaries
that have fixed charges 5,980
---------
57,448
Add fixed charges:
Consolidated interest expense 11,714
Interest Portion (1/3) of Consolidated Rent Expense 1,608
Amortization of debt expense and discount on
indebtedness 146
---------
$ 70,916
=========
FIXED CHARGES:
Consolidated interest expense $ 11,714
Capitalized interest 6,538
Interest Portion (1/3) of Consolidated Rent Expense 1,608
Amortization of debt expense and discount on
indebtedness 146
---------
$ 20,006
=========
RATIO OF EARNINGS TO FIXED CHARGES 3.54
=========
Tax-Effected Redeemable Preferred Dividends $ 269
Fixed Charges 20,006
---------
Fixed Charges and Redeemable Preferred Dividends $ 20,275
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 3.50
=========
Tax-Effected Preferred Dividends $ 908
Fixed Charges 20,006
---------
Fixed Charges and Preferred Dividends $ 20,914
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 3.39
==========
<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, 1996, 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-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 62,910
<SECURITIES> 41,362
<RECEIVABLES> 114,214
<ALLOWANCES> 4,803
<INVENTORY> 17,996
<CURRENT-ASSETS> 271,774
<PP&E> 2,070,025
<DEPRECIATION> 721,700
<TOTAL-ASSETS> 3,587,535
<CURRENT-LIABILITIES> 403,534
<BONDS> 873,621
<COMMON> 60,144
360
29,609
<OTHER-SE> 1,729,585
<TOTAL-LIABILITY-AND-EQUITY> 3,587,535
<SALES> 0
<TOTAL-REVENUES> 263,387
<CGS> 0
<TOTAL-COSTS> 232,430
<OTHER-EXPENSES> (42,156)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,860
<INCOME-PRETAX> 61,253
<INCOME-TAX> 27,564
<INCOME-CONTINUING> 33,689
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,689
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
