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
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X For the quarterly period ended September 30, 1996
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, 1996
------------------------- ------------------------------
Common Shares, $1 par value 54,219,146 Shares
Series A Common Shares, $1 par value 6,907,109 Shares
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<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
3RD 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 2-15
Consolidated Statements of Income -
Three Months and Nine Months Ended
September 30, 1996 and 1995 16
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 17
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 18-19
Notes to Consolidated Financial Statements 20-22
Part II. Other Information 23
Signatures 24
<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 9/30/96 Compared to Nine Months Ended 9/30/95
CONSOLIDATED
Telephone and Data Systems, Inc. ("TDS" or the "Company") reported net income
available to common of $115.3 million, or $1.89 per share, in the first nine
months of 1996, compared to $86.9 million, or $1.49 per share, in the first nine
months of 1995. Consolidated operating results for the first nine months of
1996 compared to 1995 primarily reflect:
* strong growth in cellular customer units resulting in substantial increases
in cellular revenue, operating cash flow and operating income;
* steady growth in telephone access lines and revenues, higher operating
costs due to development of new service offerings and a centralized network
management center resulting in small increases in operating cash flow and
operating income;
* declining growth in pagers served in the nine months of 1996, reduced
paging revenue and higher operating costs, including additional
restructuring charges, resulting in a decrease in paging operating cash
flow and an increase in operating loss;
* significant gains and cash proceeds from sales and trades of non-strategic
cellular interests and other investments; and
* significant increases in Personal Communications Services
("PCS")development costs as American Portable Telecom, Inc. proceeds to
develop and construct its PCS networks.
Excluding gains on the sales of cellular interests and other investments, PCS
development costs and paging restructuring charges, along with the related
income taxes and minority interest, net income available to common would have
been $72.1 million, or $1.18 per share, in the first nine months of 1996,
compared to $52.8 million, or $.91 per share, in the first nine months of 1995.
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
(Dollars in thousands, except per share amounts)
Net Income Available to Common As Reported $ 115,281 86,916
Add: PCS Development Costs 10,797 4,641
Paging Restructuring Costs 4,238 1,013
Less: Effects of Gains (58,238) (39,777)
--------- ---------
As Adjusted $ 72,078 $ 52,793
========= =========
Earnings Per Share As Reported $ 1.89 $ 1.49
Add: PCS Development Costs .18 .08
Paging Restructuring Costs .07 .02
Less: Effects of Gains (.96) (.68)
-------- ---------
As Adjusted $ 1.18 $ .91
======== =========
2
<PAGE>
Operating Revenues increased 26% ($179.7 million) during the first nine months
of 1996 primarily as a result of increases in customer units served.
Consolidated cellular telephone, telephone and radio paging customer units
increased 22% (18% attributable to cellular telephone) since September 30,
1995.
Cellular telephone revenues increased 44% ($154.8 million) in 1996 on a 52%
increase in customer units and strong inbound roaming revenues. Cellular
customers increased to 940,000 at September 30, 1996 from 618,000 at September
30, 1995. Local retail revenue increased 53% ($109.3 million) in the first nine
months of 1996 due primarily to the 52% customer growth. Average monthly local
retail revenue per customer declined to $42.84 in the first nine months of 1996
from $45.05 in 1995, while average local minutes of use per retail customer
increased to 106 in 1996 from 93 in 1995. U.S. Cellular's use of incentive
programs in 1996 that encourage lower-priced weekend and off-peak usage, in
order to stimulate overall usage, resulted in an increase in average minutes of
use and a lower average revenue per minute of use. Inbound roaming revenue
(charges to customers of other systems who use U.S. Cellular's cellular systems
when roaming) increased 28% ($30.9 million) in the first nine months of 1996 due
to increased minutes of use. Average monthly inbound roaming revenue per
customer declined to $18.88 in 1996 compared to $23.62 in 1995. The decrease is
the result of roaming revenue growing at a slower rate than U.S. Cellular's
customer base (28% versus 52%) and negotiated reductions in roaming rates.
Long-distance and other revenue increased 46% ($12.9 million) in the first nine
months of 1996 primarily due to the increased volume of long-distance calls
billed by U.S. Cellular. Average monthly long-distance and other revenue per
customer was $5.53 in the first nine months of 1996 and $6.09 in 1995. Total
average monthly service revenue per customer was $67.25 in the first nine months
of 1996 and $74.75 in 1995. Equipment sales revenue increased 16% ($1.8 mill
ion) in 1996 reflecting the increase in the number of cellular telephone units
sold partially offset by a decrease in revenue per unit sold.
Telephone revenues increased 10% ($26.0 million) in 1996 as a result of the
effects of acquisitions ($12.1 million), recovery of increased costs of
providing long-distance services ($5.4 million), increased network usage ($3.4
million), internal access line growth of 6% since September 30, 1995 ($ 4.0
million) and increased sales of custom calling and advanced features ($2.0
million). The number of telephone access lines increased 14% to 479,700 at
September 30, 1996 from 422,000 at September 30, 1995. Average monthly revenue
per access line decreased to $66.36 for the first nine months of 1996 from
$67.31 in 1995.
Radio paging revenues decreased 1% ($1.2 million) in 1996. Service revenue
increased 3% ($1.8 million) on a 1% increase in paging units in service. The
number of pagers in service increased to 788,300 in 1996 from 776,900 in 1995.
Average revenue per unit decreased 7% to $9.92 in 1996 from $10.70 in 1995
reflecting a shift in distribution channel mix and competitive pricing declines.
Equipment sales revenue decreased $2.9 million reflecting the slow growth in
pager sales.
Operating Expenses rose 27% ($161.9 million) in the first nine months of 1996
due primarily to added expenses to serve the growing customer base.
Cellular telephone expenses increased 37% ($116.8 million) during 1996. System
operations expenses increased 52% ($27.3 million) in 1996 as a result of
increases in customer usage expenses and costs associated with the growing
number of cell sites within U.S. Cellular's systems. Customer usage expenses
grew 87% ($22.3 million) as minutes of use increased, primarily related to the
52% increase in customer units and increased roaming usage. Also contributing to
the increase was $9.3 million of additional costs related to fraudulent use of
U.S. Cellular's customers' telephone numbers. U.S. Cellular continues to
implement procedures in its markets to combat this fraud, which is primarily
related to roaming usage. Maintenance, utility and cell site expenses
3
<PAGE>
increased 19% ($5.1 million) reflecting primarily the increase in the number of
cell sites to 1,270 in 1996 from 1,041 in 1995. Marketing and selling expenses
incurred to add new customers increased 39% ($42.3 million), including a $11.2
million increase in cost of equipment sold. Cost per gross customer addition
declined to $368 in 1996 from $373 in 1995 as gross customer activations
increased to 373,000 in 1996 from 259,000 in 1995. General and administrative
expenses increased 34% ($32.2 million) due to the growing customer base in
existing markets and an expansion of local office and corporate staff
necessitated by the U.S. Cellular's growth. Depreciation and amortization
increased 23% ($14.9 million) primarily due to the increase in average fixed
assets since September 30, 1995.
Telephone expenses increased 13% ($25.4 million) during 1996 due to the effects
of acquisitions ($10.4 million), growth in internal operations ($4.8 million)
and increased depreciation and amortization ($3.7 million). The development of a
centralized network management center to provide more effective network
monitoring and maintenance and the development of new service offerings caused
expenses to increase $5.6 million. These expenditures are expected to begin
producing cost efficiencies and new revenues in the next several quarters and
beyond. Operating margin declined to 25.5% in 1996 from 27.8% in 1995.
Paging expenses increased 23% ($19.8 million) in 1996. During September 1995,
American Paging announced a plan to restructure key operating areas to increase
sales, improve customer mix, lower administrative costs and improve customer
service. Through this restructuring, American Paging has committed additional
resources to sales and sales support with the intent to increase unit sales,
service revenue and productivity. Although anticipated, American Paging has
experienced slower unit and revenue growth and increased operating expenses
through the third quarter as a result of continued work force disruptions
caused by the refocusing of the sales force on direct sales and reengineering of
the customer service organization. An additional $7.0 million of restructuring
charges were identified in the third quarter of 1996 once the customer service
functions were transferred to the new centralized customer service center. In
total, $9.3 million of restructuring charges were incurred during the first nine
months of 1996. Cost of services increased 25% ($4.4 million) primarily due to
increasing costs of serving the customer base, maintenance and repair of pagers
and increased re seller costs. Selling, general and administrative expenses
increased 24% ($9.7 million), including $4.0 million of restructuring charges
related to duplicate staffing, employee severance and legal and consulting fees.
Programming services performed during the conversion to a new customer service
center amounted to $1.3 million. Cost of equipment sold decreased 30% ($3.4
million) as a result of the slow growth in unit sales. Depreciation and
amortization increased 51% ($9.1 million) as a result of the write-offs of $2.8
million of obsolete inventory, $2.2 million for obsolete software and $300,000
for assets retired as a result of the restructuring and the increased investment
in fixed assets.
4
<PAGE>
Operating Income increased 17% ($17.8 million) in the first nine months of 1996
due to improved cellular operating results offset somewhat by the decline in
paging operating results.
Nine Months Ended September 30,
------------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands)
Operating Income
Cellular telephone $ 74,937 $ 36,883 $ 38,054
Telephone 73,711 73,036 675
Radio paging (27,347) (6,378) (20,969)
-------------- -------- --------
$ 121,301 $103,541 $ 17,760
============== ======== ========
Operating Margins
Cellular telephone* 15.1% 10.7%
Telephone 25.5% 27.8%
Radio paging* (38.5%) (9.2%)
Consolidated 13.8% 14.8%
* Computed on Service Revenues
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 continue 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. Management believes there exists a seasonality at U.S. Cellular 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.
Additionally, competitors licensed to provide PCS services have initiated
service in certain of the U.S. Cellular's markets in recent months. U.S.
Cellular anticipates that PCS operators will initiate service in several other
of its markets later in 1996 and 1997. U.S. Cellular's management is monitoring
these and other PCS providers' strategies, but cannot at this time anticipate
what effect, if any, this additional competition will have on U.S. Cellular's
future strategies and results.
Investment and Other Income totaled $136.6 million in 1996 and $93.5 million in
1995.
Gain on Sale of Cellular Interests and Other Investments totaled $136.0 million
in the first nine months of 1996 compared to $79.7 million in 1995 as the
Company has sold or traded certain non-strategic cellular interests and sold
other investments.
PCS Development Costs totaled $24.3 million in 1996 and $2.8 million in 1995.
American Portable Telecom, Inc. ("American Portable") has been devoting
substantially all of its efforts to recruiting an experienced management team,
developing and executing a business plan, raising capital and designing and
constructing its PCS networks. As of September 30, 1996, a total of 118
microwave paths have been cleared, with an additional 52 paths having pending
agreements with incumbents. Management anticipates that by year-end 1996,
sufficient paths will have been cleared to allow service launch in all six
markets. Over 500 cell sites have been secured as zoning and installation work
continues. The National Operations Center is substantially complete. Friendly
user (customer) trials are planned to begin late in the fourth quarter of 1996
and conclude in the first quarter of 1997, with roll-out of commercial service
after successful customer trials. The Company expects to incur significant
expenditures for the development of PCS activities during 1996 and 1997.
5
<PAGE>
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 31% ($9.1 million ) in the first nine months of 1996 as
income from the cellular markets increased. Cellular investment income is net of
amortization of license costs relating to these minority interests.
Minority Share of Income, the minority shareholders' share of U.S. Cellular's,
American Paging's, and American Portable's net income or loss and other minority
shareholders' and partners' share of subsidiaries' net income or loss, increased
20% ($4.0 million) in the first nine months of 1996 due primarily to the
increase in U.S. Cellular's net income offset somewhat by increased losses at
American Paging and American Portable. Minority shareholders' share of gains on
the sales of cellular interests was $12.9 million and $14.9 million in the first
nine months of 1996 and 1995, respectively.
Interest Expense decreased 23% ($8.8 million) in the first nine months of 1996.
TDS capitalized $21.2 million of interest expense associated with expenditures
for broadband and narrowband PCS licenses and capitalized construction costs in
1996 and $6.5 million in 1995. Long-term interest expense increased $6.7 million
in 1996 as a result of the completion of U.S. Cellular's convertible debt
offering in June of 1995.
Income Tax Expense increased 61% ($42.1 million) in 1996 compared with 1995. The
increase reflects additional income taxes of about $32.1 million due to the 44%
increase in pretax income and additional income tax expense of about $10.0
million due to tax gains in excess of book gains associated with the sale of
certain cellular interests. The effective income tax rate was 49% in the first
nine months of 1996 and 44% in 1995. The increase in the effective rate reflects
the additional income taxes related to the gain on sale of certain cellular
interests.
Net Income Available to Common increased $28.4 million to $115.3 million in the
first nine months of 1996 from $86.9 million in the first nine months of 1995.
Earnings Per Common Share were $1.89 in the first nine months of 1996 and $1.49
in the first nine months of 1995.
TDS anticipates that the development of American Portable and its entrance into
the PCS business is expected to reduce the rate of growth in TDS's net income
from levels which would otherwise be achieved during the next few years.
6
<PAGE>
Three Months Ended 9/30/96 Compared to Three Months Ended 9/30/95
CONSOLIDATED
Net income available to common for the third quarter of 1996 and 1995 included
significant gains from the sales of non-strategic cellular interests and certain
other investments, increased PCS development costs and paging restructuring
charges. Excluding these gains, PCS development costs and paging restructuring
charges, along with the related income taxes and minority interest, net income
available to common would have been $26.9 million, or $.44 per share, in the
third quarter of 1996, compared to $25.5 million, or $.44 per share, in the
third quarter of 1995.
Three Months Ended September 30,
--------------------------------
1996 1995
----------- -----------
(Dollars in thousands, except per share amounts)
Net Income Available to Common As Reported $ 22,200 $ 42,338
Add: PCS Development Costs 3,467 3,250
Paging Restructuring Costs 3,223 1,013
Less: Effects of Gains (1,982) (21,081)
----------- -----------
As Adjusted $ 26,908 $ 25,520
=========== ===========
Earnings Per Share As Reported $ .36 $ .72
Add: PCS Development Costs .06 .06
Paging Restructuring Costs .05 .02
Less: Effects of Gains (.03) (.36)
----------- -----------
As Adjusted $ .44 $ .44
=========== ===========
Operating Revenues increased 23% ($59.4 million) during the third quarter of
1996 for reasons generally the same as the first nine months. Cellular telephone
revenues increased 35% ($49.0 million) in 1996. Local retail revenue increased
45% ($36.1 million) in the third quarter of 1996, while inbound roaming revenue
increased 18% ($8.1 million). Average monthly service revenue per customer was
$67.88 in the third quarter of 1996 and $76.93 in 1995. Telephone revenues
increased 13% ($11.4 million) in the third quarter of 1996. Acquisitions
increased telephone revenues by 7% ($6.5 million) in the third quarter of 1996.
Average revenue per access line remained stable at $67.46 in the third quarter
of 1996 compared to $67.44 in 1995. Radio paging revenues decreased 4% ($1.0
million) in 1996. Average revenue per unit decreased 6% to $9.96 in 1996 from
$10.63 in 1995.
Operating Expenses rose 27% ($58.7 million) during the third quarter of 1996 for
reasons generally the same as the first nine months except for American Paging
which had an additional $7.0 million of restructuring expenses in the third
quarter of 1996. Cellular telephone expenses increased 28% ($33.9 million).
System operations expense increased 24% ($5.4 million), including $4.0 million
of costs related to fraudulent use of U.S. Cellular's customers' telephone
numbers. Marketing and selling expenses, including cost of equipment sold,
increased 40% ($15.8 million). Cost per gross customer addition increased to
$386 in the third quarter of 1996 from $366 in 1995. General and administrative
expenses increased 25% ($8.8 million). Telephone expenses increased 18% ($11.5
million). Acquisitions increased telephone expenses by $6.0 million while
depreciation expense increased $2.3 million. The development of a centralized
network management center to provide more effective network monitoring and
maintenance and the development of new service offerings caused expenses to
increase $2.2 million. Paging operating expenses increased 45% ($13.4 million).
Selling, general and admi nistrative expenses increased 54% ($7.4 million),
including $2.0 million of additional restructuring expenses. Depreciation and
amortization increased 86% ($5.7 million) primarily due to the $2.8 million
write-off of obsolete inventory and $2.2 million write-off of obsolete software.
7
<PAGE>
Operating Income increased 2% ($703,000) in the third quarter of 1996. Improved
cellular operating results were substantially offset by the decline in paging
results.
Three Months Ended September 30,
-----------------------------------------
1996 1995 Change
-----------------------------------------
(Dollars in thousands)
CONSOLIDATED OPERATING INCOME
Cellular Telephone Operations $ 33,094 $ 17,967 $ 15,127
Telephone Operations 24,863 24,932 (69)
Radio Paging Operations (16,694) (2,339) (14,355)
----------- ---------- --------
$ 41,263 $ 40,560 $ 703
=========== ========== ========
Operating Margins:
Cellular Telephone* 18.1% 13.4%
Telephone 24.4% 27.6%
Radio Paging* (70.2%) (9.7%)
Consolidated 13.1% 15.8%
* Computed on Service Revenues
Investment and Other Income totaled $12.5 million in 1996 and $47.6 million in
1995.
Gain on Sale of Cellular Interests and Other Investments totaled $7.8 million in
the third quarter of 1996 compared to $43.4 million in 1995 as the Company has
sold or traded certain non-strategic cellular interests and sold other
investments.
PCS Development Costs totaled $10.8 million in 1996 and $1.9 million in 1995
reflecting activities taking place to develop and construct PCS networks.
Cellular Investment Income increased 44% ($4.9 million), reflecting improvement
in U.S. Cellular's equity-method markets managed by others.
Minority Share of Income decreased 55% ($4.4 million) in the third quarter of
1996 due primarily to the increase in American Portable's and American Paging's
net losses, offset somewhat by the increase in U.S. Cellular's net income.
Minority shareholders' share of gains on the sales of cellular interests were
$435,000 and $8.2 million in the third quarter of 1996 and 1995, respectively.
Interest Expense decreased 23% ($2.8 million) in the third quarter of 1996. TDS
capitalized $7.1 million of interest expense associated with expenditures for
broadband and narrowband PCS licenses and capitalized construction costs in 1996
and $6.5 million in 1995. The remaining decrease is primarily attributable to
the reduction in average notes payable outstanding between 1996 and 1995.
Income Tax Expense decreased 35% ($11.7 million) in 1996 compared with 1995
primarily due to the $35.6 million decrease in gain on sales of cellular
interests and other investments. The effective income tax rate was 49% in the
third quarter of 1996 and 44% in 1995. The increase in the effective rate
reflects additional income taxes related to certain sales of cellular interests.
Net Income Available to Common decreased to $22.2 million in the third quarter
of 1996 from $42.3 million in 1995 reflecting the decrease of $19.1 million gain
on the sales of cellular interests and other investments (net-of-tax and
minority interest). Earnings Per Common Share were $.36 in 1996 and $.72 in
1995.
8
<PAGE>
BUSINESS SEGMENT HIGHLIGHTS
Telephone and Data Systems, Inc. is a diversified telecommunications company
with established cellular telephone, local telephone and radio paging operations
and developing personal communications services operations. Following are
operating highlights for each major business unit for the nine months ended
September 30, 1996 and the operating results for the nine months and three
months ended September 30, 1996 and 1995.
CELLULAR TELEPHONE OPERATIONS
TDS provides cellular telephone service through United States Cellular
Corporation [AMEX: USM], an 80.6%-owned subsidiary. Consolidated operating
results for the first nine months of 1996 compared to 1995 reflect:
* strong growth in customer units to 940,000 units in 130 markets from
618,000 units in 138 markets;
* a 44% increase in revenue related to the increase in customer units;
* and a 52% increase in operating cash flow and a 103% increase in
operating income.
TELEPHONE OPERATIONS
TDS manages its local landline telephone service through its wholly owned
subsidiary TDS Telecommunications Corporation ("TDS Telecom"). At September 30,
1996, TDS Telecom operated 105 telephone companies which served 479,700 access
lines in 28 states. Consolidated operating results for the first nine months of
1996 compared to 1995 reflect:
* steady growth in telephone access lines, 6% internal growth and 8%
growth due to acquisitions;
* a 10% increase in revenue with revenue per access line decreasing
slightly; and
* a 13% increase in operating costs including $5.6 million for the
development of a centralized network management center and new service
offerings.
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
788,300 subscribers in 21 states and the District of Columbia. Consolidated
operating results for the first nine months of 1996 compared to 1995 reflect:
* a 1% growth in pagers served, but a 1% decline in paging revenue; and
* a 23% increase in operating costs including $9.3 million from
restructuring costs, resulting in an increased operating loss.
PCS OPERATIONS
TDS manages its broadband personal communications services business through
American Portable Telecom, Inc. [NASDAQ: APTI], an 82.8%-owned subsidiary.
American Portable's licenses cover the Major Trading Areas of Minneapolis,
Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus and
account for approximately 27.3 million population equivalents. Results from the
first nine months of 1996 compared to 1995 reflect significant increases in PCS
development costs as American Portable proceeds to develop and construct its PCS
network.
9
<PAGE>
CELLULAR TELEPHONE OPERATIONS
Nine Months Ended September 30,
----------------------------------------------------------
Change Change
Due To Excluding
1996 1995 Change Acquisitions Acquisitions
---- ---- ------ ------------ -------------
(Dollars in thousands)
Operating Revenues
Local retail $ 316,900 $ 207,568 $ 109,332 $ 13,909 $ 95,423
Inbound roaming 139,689 108,837 30,852 (1,297) 32,149
Long-distance 39,309 24,832 14,477 1,148 13,329
Other 1,592 3,217 (1,625) (1,558) (67)
---------- ---------- ---------- ----------- -------------
Service Revenues 497,490 344,454 153,036 12,202 140,834
Equipment sales 12,790 10,985 1,805 534 1,271
---------- ---------- ---------- ----------- -------------
510,280 355,439 154,841 12,736 142,105
---------- ---------- ---------- ----------- -------------
Operating Expenses
System operations 79,728 52,413 27,315 1,774 25,541
Marketing and
selling 100,307 69,204 31,103 5,497 25,606
Cost of equipment
sold 49,631 38,393 11,238 2,840 8,398
General and
administrative 126,461 94,271 32,190 3,131 29,059
Depreciation and
amortization 79,216 64,275 14,941 199 14,742
----------- ---------- ---------- ----------- -------------
435,343 318,556 116,787 13,441 103,346
----------- ---------- ---------- ----------- -------------
Operating Income $ 74,937 $ 36,883 $ 38,054 $ (705) $ 38,759
=========== ========== ========== =========== =============
Consolidated Markets:
Market penetration 4.38% 2.78%
Churn rate per month 1.9% 2.0%
Three Months Ended September 30,
----------------------------------------------------------
Change Change
Due To Excluding
1996 1995 Change Acquisitions Acquisitions
---- ---- ------ ------------ ------------
(Dollars in thousands)
Operating Revenues
Local retail $ 115,671 $ 79,577 $ 36,094 $ (873) $ 36,967
Inbound roaming 52,256 44,181 8,075 (2,194) 10,269
Long-distance 14,720 10,274 4,446 (177) 4,623
Other 622 522 100 (485) 585
---------- ---------- ----------- ------------ -----------
Service Revenues 183,269 134,554 48,715 (3,729) 52,444
Equipment sales 4,325 4,013 312 (84) 396
---------- ---------- ----------- ------------ -----------
187,594 138,567 49,027 (3,813) 52,840
---------- ---------- ----------- ------------ -----------
Operating Expenses
System operations 27,339 21,972 5,367 (1,449) 6,816
Marketing and
selling 37,486 25,571 11,915 (55) 11,970
Cost of equipment
sold 18,241 14,356 3,885 (235) 4,120
General and
administrative 43,969 35,131 8,838 (1,049) 9,887
Depreciation and
amortization 27,465 23,570 3,895 (905) 4,800
---------- ---------- ----------- ------------ -----------
154,500 120,600 33,900 (3,693) 37,593
---------- ---------- ----------- ------------ -----------
Operating Income $ 33,094 $ 17,967 $ 15,127 $ (120) $ 15,247
========== ========== =========== ============ ===========
Consolidated Markets:
Market penetration 4.38% 2.78%
Churn rate per month 2.0% 2.1%
10
<PAGE>
TELEPHONE OPERATIONS
Nine Months Ended September 30,
---------------------------------------------------------
Change Change
Due to Excluding
1996 1995 Change Acquisitions Acquisitions
---- ---- ------ ------------ ------------
(Dollars in thousands)
Operating Revenues
Local service $ 81,037 $ 70,461 $ 10,576 $ 4,108 $ 6,468
Network access and
long-distance 172,170 160,816 11,354 6,228 5,126
Miscellaneous 35,630 31,532 4,098 1,795 2,303
--------- ---------- ---------- ------------ ------------
288,837 262,809 26,028 12,131 13,897
--------- ---------- ---------- ------------ ------------
Operating Expenses
Network operations 61,958 50,669 11,289 2,867 8,422
Depreciation and
Amortization 63,941 57,589 6,352 2,600 3,752
Customer operations 42,437 35,948 6,489 1,824 4,665
Corporate and other 46,790 45,567 1,223 3,096 (1,873)
--------- ---------- ---------- ------------ ------------
215,126 189,773 25,353 10,387 14,966
--------- ---------- ---------- ------------ ------------
Operating Income $ 73,711 $ 73,036 $ 675 $ 1,744 $ (1,069)
========= ========== ========== ============ ============
Growth in access lines from prior year-end:
Acquisitions 33,100 12,900
Internal growth 20,700 16,600
Three Months Ended September 30,
---------------------------------------------------------
Change Change
Due to Excluding
1996 1995 Change Acquisitions Acquisitions
---- ---- ------ ------------ ------------
(Dollars in thousands)
Operating Revenues
Local service $ 28,492 $ 24,070 $ 4,422 $ 2,081 $ 2,341
Network access and
long-distance 60,129 55,515 4,614 3,308 1,306
Miscellaneous 13,170 10,813 2,357 1,104 1,253
---------- ---------- ----------- ----------- ------------
101,791 90,398 11,393 6,493 4,900
---------- ---------- ----------- ----------- ------------
Operating Expenses
Network operations 22,861 17,831 5,030 1,777 3,253
Depreciation and
Amortization 23,036 19,494 3,542 1,319 2,223
Customer operations 15,532 11,927 3,605 1,105 2,500
Corporate and other 15,499 16,214 (715) 1,843 (2,558)
---------- ---------- ----------- ----------- ------------
76,928 65,466 11,462 6,044 5,418
---------- ---------- ----------- ----------- ------------
Operating Income $ 24,863 $ 24,932 $ (69) $ 449 $ (518)
========== ========== =========== =========== ============
Growth in access lines from prior quarter-end:
Acquisitions 800 0
Internal growth 7,900 6,000
11
<PAGE>
RADIO PAGING OPERATIONS
Nine Months Ended September 30,
--------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands, except per unit amounts)
Revenues
Service revenues $ 70,967 $ 69,212 $ 1,755
Equipment sales 8,178 11,114 (2,936)
--------- --------- ---------
Total Revenue 79,145 80,326 (1,181)
--------- --------- ---------
Costs and expenses
Cost of services 21,835 17,477 4,358
Selling, general and administrative 49,910 40,177 9,733
Cost of equipment sold 7,760 11,137 (3,377)
Depreciation and amortization 26,987 17,913 9,074
--------- --------- ---------
106,492 86,704 19,788
--------- --------- ---------
Operating (Loss) $ (27,347) $ (6,378) $ (20,969)
========= ========= =========
Churn rate per month 3.1% 2.5%
Marketing cost per gross customer unit addition $ 86 $ 45
Three Months Ended September 30,
---------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands, except per unit amounts)
Revenues
Service revenues $ 23,766 $ 24,109 $ (343)
Equipment sales 2,773 3,434 (661)
-------- -------- --------
Total Revenues 26,539 27,543 (1,004)
-------- -------- --------
Costs and expenses
Cost of services 7,716 6,052 1,664
Selling, general and administrative 20,999 13,643 7,356
Cost of equipment sold 2,194 3,558 (1,364)
Depreciation and amortization 12,324 6,629 5,695
-------- --------- --------
43,233 29,882 13,351
-------- --------- --------
Operating (Loss) $(16,694) $ (2,339) $(14,355)
======== ========= ========
Churn rate per month 3.9% 2.6%
Marketing cost per gross customer unit addition $ 103 $ 45
12
<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 in the past to finance
construction of cellular telephone systems and to fund acquisitions. Although
the steady internal cash flow from TDS Telecom and increasing internal cash flow
from U.S. Cellular 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 20% to $291.4
million in the first nine months of 1996 from $243.3 million in 1995. The
increase represents primarily the 52% ($53.0 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 $105.4 million in the
first nine months of 1996 and $84.3 million in 1995.
Nine Months Ended September 30,
--------------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands)
Operating cash flow
Cellular telephone $ 154,153 $ 101,158 $ 52,995
Telephone 137,652 130,625 7,027
Radio paging (360) 11,535 (11,895)
--------- --------- ---------
291,445 243,318 48,127
Other operating activities (105,418) (84,255) (21,163)
--------- --------- ---------
$ 186,027 $ 159,063 $ 26,964
========= ========= =========
Cash Flows from Financing Activities. TDS has used short-term debt to finance
its cellular telephone, radio paging and PCS 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. Cash flows from financing activities totaled $69.8 million in the first
nine months of 1996 compared to $342.7 million in 1995. American Portable
Telecom sold 12,250,000 common shares for net proceeds, after underwriters fees,
totaling $195.3 million in an initial public offer ing in the second quarter of
1996, providing most of the Company's external financing requirements during the
first nine months of 1996. TDS reduced its short-term debt by $89.4 million in
the first nine months of 1996. Increases in long-term debt, primarily $221.5
million received from the sale of convertible debt at U.S. Cellular, $58.7
million from vendor financing and $39.5 million from the sale of TDS medium-term
notes, and increases in short-term debt provided most of the Company's external
financing requirements during the first nine months 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 $198.2 million in the first nine months of 1996 compared to $476.4
million in 1995. Additions to property, plant and equipment totaled $347.7
million in 1996 and $264.9 million in 1995. Also in 1995, $319.0 million was
expended for broadband and narrowband PCS license purchases. The sales of
non-strategic cellular interests and other investments provided $ 212.5 million
in 1996 and $128.3 million in 1995.
Property, Plant and Equipment. The primary purpose of TDS's construction and
expansion
13
<PAGE>
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 $347.7 million in the first nine months of 1996 consisting of
$172.9 million for cellular plant and equipment, $91.1 million for telephone
plant and equipment, $26.3 million for radio paging property and equipment,
$51.3 million for broadband PCS property and equipment and $6.1 million for
other assets.
Acquisitions. TDS seeks to acquire cellular telephone, telephone and paging
interests which add value to the organization. During the first nine months of
1996, the Company purchased controlling interests in one cellular market and
five telephone companies and minority interests in several cellular markets.
The aggregate consideration for these acquisitions was $147.6 million primarily
consisting of 2.6 million TDS Common Shares and $33.9 million cash. TDS is
currently reviewing opportunities for the acquisition of additional cellular,
telephone and paging companies.
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 September
30, 1996 increased to $371.6 million from $310.8 million in 1995.
Twelve Months Ended September 30,
----------------------------------
1996 1995 Change
---- ---- ------
(Dollars in thousands)
Operating Cash Flow
Cellular telephone $185,208 $121,265 $ 63,943
Telephone 182,621 173,667 8,954
Radio paging 3,800 15,904 (12,104)
-------- -------- --------
$371,629 $310,836 $ 60,793
======== ======== ========
TDS and its subsidiaries have cash and temporary investments totaling $142
million and longer-term cash investments totaling $37 million at September 30,
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 $646 million of committed bank lines of
credit for general corporate purposes at September 30, 1996 of which $552
million was unused. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate. TDS has $238 million remaining on its
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 acquistions. In
addition, the Company has issued Common Shares for acquistions pursuant
to registration statements filed specifically for particular acquistions.
The Company's property, plant and equipment additions are anticipated to
aggregate approximately $412 million for 1996 (excluding PCS construction and
development expenditures as explained more fully below) consisting of $240
million for cellular capital additions, $125 million for telephone capita l
additions, $32 million for the radio paging property and equipment, including
capitalized interest and $15 million for other fixed asset expenditures.
14
<PAGE>
U.S. Cellular plans to finance its 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 borrowings under TDS's short-term lines of
credit.
PCS Development. American Portable is proceeding with planned microwave
relocation and cell site acquisition activities in each of its six major
markets. Management anticipates that by year-end 1996, sufficient paths will
have been cleared to allow service launch in all six markets. Service will be
launched with more than 500 cell sites in place, which will provide wide-area
metropolitan coverage. Friendly user (customer) trials are planned to begin late
in the fourth quarter of 1996 and conclude in the first quarter of 1997, with
roll-out of commercial service after successful customer trials.
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 $865 million ($345 million in 1996,
$415 million in 1997 and $105 million in 1998). This amount includes an
estimated $620 million of capital expenditures for construction of the PCS
networks ($300 million in 1996, $275 million in 1997 and $45 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 be financed using a variety of sources,
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 digital radio channel and switching infrastructure equipment
during the initial build out of its PCS networks. Nokia has agreed to provide up
to $200 million in financing for equipment purchases through a Credit Agreement
dated June 19,1996 ("Credit Agreement"). In April of 1996, 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. The net
proceeds from the offering, after underwriting discounts and commissions, was
$195 million. On November 4, 1996 American Portable issued $226.2 million in
aggregate principal amount at maturity Series A Zero Coupon Notes ("Notes") due
in 2006. The issue price of the Notes was 44.2% of the principal amount at
maturity or $100 million and there is no periodic payment of interest. The per
annum yield to maturity on the Notes is 8.34%.
TDS anticipates the development of American Portable and its entrance into the
PCS business will reduce the rate of growth in TDS's net income from levels
which would otherwise be achieved during the next few years.
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 sub sidiaries
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. However, the Company has
no agreements, commitments or understandings with respect to any such
transactions.
15
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30,
------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Cellular telephone $ 187,594 $ 138,567 $ 510,280 $ 355,439
Telephone 101,791 90,398 288,837 262,809
Radio paging 26,539 27,543 79,145 80,326
------------ ----------- --------- ---------
315,924 256,508 878,262 698,574
------------ ----------- --------- ---------
OPERATING EXPENSES
Cellular telephone 154,500 120,600 435,343 318,556
Telephone 76,928 65,466 215,126 189,773
Radio paging 43,233 29,882 106,492 86,704
------------ ----------- --------- ---------
274,661 215,948 756,961 595,033
------------ ----------- --------- ---------
OPERATING INCOME 41,263 40,560 121,301 103,541
------------ ----------- --------- ---------
INVESTMENT AND OTHER INCOME
Interest and dividend
income 3,925 3,998 10,048 9,803
Cellular investment income,
net of license cost
amortization 15,992 11,117 38,221 29,083
PCS development costs (10,805) (1,856) (24,312) (2,758)
Gain on sale of cellular
interests and other
investments 7,797 43,375 136,049 79,749
Other income (expense), net (786) (1,044) 979 (2,005)
Minority share of income (3,595) (7,965) (24,397) (20,420)
----------- ----------- ---------- ---------
12,528 47,625 136,588 93,452
----------- ----------- ---------- ---------
INCOME BEFORE INTEREST
AND INCOME TAXES 53,791 88,185 257,889 196,993
Interest expense 9,346 12,121 30,343 39,191
----------- ----------- ---------- ---------
INCOME BEFORE INCOME TAXES 44,445 76,064 227,546 157,802
Income tax expense 21,776 33,468 111,496 69,433
----------- ----------- ---------- ---------
NET INCOME 22,669 42,596 116,050 88,369
Preferred Dividend Requirement (469) (258) (769) (1,453)
----------- ----------- ---------- ---------
NET INCOME AVAILABLE TO
COMMON $ 22,200 $ 42,338 $ 115,281 $ 86,916
=========== =========== ========== =========
WEIGHTED AVERAGE COMMON
SHARES (000s) 61,321 59,038 60,856 58,191
EARNINGS PER COMMON SHARE $ .36 $ .72 $ 1.89 $ 1.49
=========== =========== ========== =========
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .10 $ .095 $ .30 $ .285
=========== =========== ========== =========
The accompanying notes to financial statements are an integral part of these
statements.
16
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 116,050 $ 88,369
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 180,201 148,441
Deferred taxes 45,122 15,930
Investment income (40,747) (30,937)
Minority share of income 24,397 20,420
Gain on sale of cellular interests (136,049) (79,749)
Noncash interest expense 11,952 7,685
Other noncash expense 5,168 6,503
Change in accounts receivable (27,724) (32,439)
Change in accounts payable (7,369) (7,990)
Change in accrued taxes 11,984 24,516
Change in accrued interest (5,457) (3,366)
Change in other assets and liabilities 8,499 1,680
-------- ---------
186,027 159,063
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 8,904 333,174
Repayments of long-term debt (23,161) (24,246)
Change in notes payable (89,434) 44,629
Proceeds from the issuance of common stock 2,723 6,346
Minority partner capital distributions (4,302) 373
Redemption of preferred stock (526) (534)
Dividends paid (19,638) (17,942)
Proceeds from the issuance of subsidiaries' stock 195,232 915
-------- --------
69,798 342,715
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (347,709) (264,905)
Investments in and advances to cellular
minority partnerships (14,931) (11,467)
Distributions from partnerships 14,959 7,616
Investments in PCS licenses (21,009) (318,963)
Proceeds from investment sales 212,549 128,312
Change in other investments (2,020) (2,486)
Acquisitions, net of cash acquired (33,892) (48,859)
Change in temporary investments and
marketable securities (6,140) 34,333
-------- --------
(198,193) (476,419)
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 57,632 25,359
CASH AND CASH EQUIVALENTS -
Beginning of period 55,116 24,733
--------- ---------
End of period $ 112,748 $ 50,092
========= =========
The accompanying notes to financial statements are an integral part of these
statements.
17
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 112,748 $ 55,116
Temporary investments 29,525 25,735
Accounts receivable from
customers and others 180,903 145,344
Materials and supplies, at average cost,
and other current assets 38,850 35,015
----------- -----------
362,026 261,210
----------- -----------
INVESTMENTS
Cellular limited partnership interests 194,596 158,559
Cellular license acquisition costs,
net of amortization 1,080,639 1,075,820
PCS license acquisition costs 377,143 356,561
Franchise costs and other costs in excess of
the underlying book value of
subsidiaries, net 177,825 168,608
Other investments 110,137 87,726
----------- -----------
1,940,340 1,847,274
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Cellular telephone, net 614,781 530,027
Telephone, net 735,085 657,015
PCS, net 121,840 11,978
Radio paging, net 56,843 59,452
Other, net 32,023 34,938
----------- -----------
1,560,572 1,293,410
----------- -----------
OTHER ASSETS AND DEFERRED CHARGES 70,480 67,188
----------- -----------
TOTAL ASSETS $3,933,418 $3,469,082
=========== ===========
18
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt
and preferred shares $ 37,854 $ 49,233
Notes payable 98,236 184,320
Accounts payable 122,420 122,886
Advance billings and customer deposits 32,614 27,706
Accrued interest 6,167 11,573
Accrued taxes 22,005 2,525
Other current liabilities 51,196 29,481
----------- -----------
370,492 427,724
----------- -----------
DEFERRED LIABILITIES AND CREDITS 186,979 138,295
----------- -----------
LONG-TERM DEBT, excluding current portion 890,545 858,857
----------- -----------
REDEEMABLE PREFERRED SHARES, excluding
current portion 359 1,587
----------- -----------
MINORITY INTEREST in subsidiaries 431,619 328,544
----------- -----------
NONREDEEMABLE PREFERRED SHARES 29,038 29,710
----------- -----------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share 54,190 51,137
Series A Common Shares, par value $1 per share 6,898 6,893
Common Shares issuable (30,975 and 31,431
shares, respectively) 1,461 1,496
Capital in excess of par value 1,658,100 1,417,513
Retained earnings 303,737 207,326
----------- -----------
2,024,386 1,684,365
----------- -----------
$3,933,418 $3,469,082
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
19
<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 accorda
nce 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, 1996 and December
31, 1995, and the results of operations and cash flows for the nine months
ended September 30, 1996 and 1995. The results of operations for the nine
months ended September 30, 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
September 30, 1996 consist of dilutive Common Share options and dilutive
convertible Preferred Shares.
4. Assuming that acquisitions accounted for as purchases during the period
January 1, 1995, to September 30, 1996, had taken place on January 1, 1995,
unaudited pro forma results of operations from continuing operations would
have been as follows:
Nine Months Ended
September 30,
--------------------------
1996 1995
---- ----
(Dollars in thousands, except
per share amounts)
Operating revenues $855,533 $733,987
Net income 118,052 81,035
Earnings per share $ 1.90 $ 1.30
20
<PAGE>
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.
Nine Months Ended
September 30,
--------------------------------------
1996 1995
---- ----
(Dollars in thousands, except
per share amounts)
Property, plant and equipment $ 55,692 $ 54,223
Cellular licenses 94,454 119,364
Increase (decrease) in equity method
investment in cellular interests 8,356 (19)
Franchise costs 12,847 23,473
Long-term debt (22,979) (8,933)
Deferred credits (7,363) (214)
Other assets and liabilities,
excluding cash and cash equivalents 9,613 (2,618)
Minority interest (3,036) (1,912)
Common Shares issued and issuable (113,658) (121,864)
U.S. Cellular Stock issued and issuable (34) (12,641)
--------------- -------------------
Decrease in cash due to acquisitions $ 33,892 $ 48,859
=============== ===================
The following table summarizes interest and income taxes paid, and other noncash
transactions.
Nine Months Ended
September 30,
--------------------------------------
1996 1995
---- ----
(Dollars in thousands, except
per share amounts)
Interest Paid $ 56,733 $ 41,612
Income Taxes Paid 65,466 27,629
Common Shares issued by TDS for
conversion of TDS Preferred Stock $ 4,545 $ 13,653
21
<PAGE>
6. Contingencies
The Company's material contingencies as of September 30, 1996, include the
collectibility of a $5.5 million note receivable under a long-term
financing agreement with a cellular company and a $10.0 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.
7. Business Segment Information
The following tables summarize business segment identifiable assets at
September 30, 1996, and 1995, and business segment construction
expenditures for the nine months and three months ended September 30, 1996,
and 1995.
Identifiable Assets September 30,
-------------------------------------------
1996 1995
---- ----
(Dollars in thousands)
Cellular Telephone $ 2,067,259 $ 1,833,984
Telephone 1,164,783 1,022,439
PCS 431,103 299,013
Radio Paging 158,804 152,841
Other 111,353 92,349
-------------------- --------------------
$ 3,933,302 $ 3,400,626
==================== ====================
Additions To Property, Plant and Equipment
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
Cellular Telephone $ 67,147 $ 60,706 $172,916 $160,679
Telephone 36,389 27,065 91,131 74,746
PCS 28,882 185 51,337 185
Radio Paging 4,302 3,290 26,330 20,231
Other (5,695) 2,849 5,995 9,064
----------- ---------- -------- --------
$ 131,025 $ 94,095 $347,709 $264,905
=========== ========== ======== ========
8. Subsequent Event
On November 4, 1996, American Portable issued $226.2 million in aggregate
principal amount at maturity Series A Zero Coupon Notes ("Notes") due in
2006. The issue price of the Notes was 44.2% of the principal amount at
maturity or $100 million, and there is no periodic payment of interest.
The per annum yield to maturity on the Notes is 8.34% (computed on a
semi-annual bond equivalent basis) calculated from November 4, 1996.
22
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.1 - Deferred Compensation Agreement for H. Donald Nelson
dated July 15, 1996.
Exhibit 11 - Computation of earnings per common share.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30, 1996:
TDS filed a Current Report on Form 8-K dated July 1, 1996, which included
a copy of the new $500 million revolving credit agreement, with First
National Bank of Boston, as Agent.
No other reports on Form 8-K were filed during the quarter ended September 30,
1996.
23
<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 13, 1996 /s/ MURRAY L. SWANSON
------------------- --------------------------------
Murray L. Swanson,
Executive Vice President-Finance
(Chief Financial Officer)
Date November 13, 1996 /s/ GREGORY J. WILKINSON
------------------- ---------------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
24
<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, 1996 1995
- --------------------------------------------------------------------------------
Primary Earnings
Net Income $ 22,669 $ 42,596
Dividends on Preferred Shares (469) (258)
-------- --------
Net Income Available to Common $ 22,200 $ 42,338
======== ========
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 61,084 57,805
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 161 154
Convertible Preferred Shares 45 1,048
Common Shares Issuable 31 31
-------- --------
Primary Shares 61,321 59,038
======== ========
Primary Earnings per Common Share
Net Income $ .36 $ .72
======== ========
Fully Diluted Earnings*
Net Income $ 22,669 $ 42,596
Dividends on Preferred Shares (331) (110)
-------- --------
Net Income Available to Common $ 22,338 $ 42,486
======== ========
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 61,084 57,805
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 161 160
Convertible Preferred Shares 512 1,542
Common Shares Issuable 31 31
-------- --------
Fully Diluted Shares 61,788 59,538
======== ========
Fully Diluted Earnings per Common Share
Net Income $ .36 $ .71
======== ========
* 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, 1996 1995
- --------------------------------------------------------------------------------
Primary Earnings
Net Income $ 116,050 $ 88,369
Dividends on Preferred Shares (769) (1,453)
--------- ---------
Net Income Available to Common $ 115,281 $ 86,916
========= =========
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 60,243 57,289
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 170 160
Convertible Preferred Shares 415 708
Common Shares Issuable 28 34
--------- --------
Primary Shares 60,856 58,191
========= ========
Primary Earnings per Common Share
Net Income $ 1.89 $ 1.49
========= =========
Fully Diluted Earnings*
Net Income $ 116,050 $ 88,369
Dividends on Preferred Shares (347) (1,137)
--------- ---------
Net Income Available to Common $ 115,703 $ 87,232
========= =========
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 60,243 57,289
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 176 163
Convertible Preferred Shares 887 1,033
Common Shares Issuable 28 34
--------- ---------
Fully Diluted Shares 61,334 58,519
========= =========
Fully Diluted Earnings per Common Share
Net Income $ 1.89 $ 1.49
========= =========
* 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>
<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, 1996, and for the nine months 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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 112,748
<SECURITIES> 37,445
<RECEIVABLES> 137,927
<ALLOWANCES> 6,410
<INVENTORY> 19,569
<CURRENT-ASSETS> 362,026
<PP&E> 2,362,609
<DEPRECIATION> 802,038
<TOTAL-ASSETS> 3,933,418
<CURRENT-LIABILITIES> 370,492
<BONDS> 890,545
<COMMON> 61,088
359
29,038
<OTHER-SE> 1,963,298
<TOTAL-LIABILITY-AND-EQUITY> 3,933,418
<SALES> 0
<TOTAL-REVENUES> 878,262
<CGS> 0
<TOTAL-COSTS> 756,961
<OTHER-EXPENSES> (136,588)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,343
<INCOME-PRETAX> 227,546
<INCOME-TAX> 111,496
<INCOME-CONTINUING> 116,050
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,050
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.89
</TABLE>
UNITED STATES CELLULAR CORPORATION
EXECUTIVE DEFERRED COMPENSATION
AGREEMENT
THIS AGREEMENT, entered into this 15th day of July, 1996, by and
between H. Donald Nelson, (hereinafter referred to as "Executive") and
United States Cellular Corporation, (hereinafter referred to as "Company"),
a Delaware corporation, located at 8410 West Bryn Mawr Avenue, Suite 700,
Chicago, IL, 60631-3486.
W I T N E S S E T H:
WHEREAS, the Executive is now and will in the future be rendering
valuable services to the Company, and the Company desires to ensure the
continued loyalty, service and counsel of the Executive; and
WHEREAS, the Executive desires to defer a portion of his or her salary
and bonus until retirement, resignation, disability or death, or to a specific
date greater than one year from the date of this agreement.
NOW, THEREFORE, in consideration of the covenants and agreements herein
set forth, and for other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto covenant and agree as follows:
1. Deferred Compensation Agreement. The Company agrees to
establish and maintain a book reserve(the "Deferred
Compensation Account") for the purpose of measuring the amount
of deferred compensation payable under this Agreement. Credits
shall be made to the Deferred Compensation Account as follows:
(a) On each issuance of the Executive's semi-monthly
payroll check, (scheduled for the 15th and the last
day of each month), during the Executive's continued
active employment with the Company, there shall be
deducted an amount equivalent to eight percent of the
Executive's gross compensation for the pay period
which will be credited to the Deferred Compensation
Account. The first deduction will occur on the
Executive's semi-monthly payroll check dated August
15, 1996. The deferral percentage selected by the
Executive will also be applied to all normal bonus
payments.
(b) Commencing on September 30, 1996, and on the last day
of each month thereafter during the
Executive's continued employment with the Company,
there shall be credited to the Deferred Compensation
Account (before any amount is credited for the month
then ending pursuant to paragraph 1(a)), interest
compounded monthly computed at a rate equal to
one-twelfth (1/12) of the sum of (a) the average
thirty (30) year Treasury
<PAGE>
Bond rate of interest (as
published in the Wall Street Journal for the last day
of the preceding month) plus (b) 1.25 percentage
points. Quarterly reports which specify the amount
credited to the Executive's Deferred Compensation
Account during the previous period(amount deferred
plus interest) and the then current balance, shall be
provided to the Executive.
(c) The Deferred Compensation percentage elected in
section 1(a) shall be deducted and credited to the
Deferred Compensation Account for all compensation
paid to the Executive, including bonus and
retroactive pay increases.
(d) The Executive may terminate participation in the
Agreement with respect to the deferral of future
compensation at any time. In the event the Executive
elects to make such a discontinuance, he or she shall
remain eligible to receive the benefits under Section
2 with respect to amounts already deferred.
Previously deferred amounts are not payable until
retirement, resignation, disability, death or the
date specified by the Executive in paragraph 2 (g)
(ii). After a discontinuance, Executive may not again
elect to participate with respect to future deferrals
until a subsequent calendar year.
(e) The Deferred Compensation percentage selected in 1(a)
shall be in effect for the entire plan year unless
participation is terminated. The Executive may not
elect to change the percentage until a new plan year
commences.
2. Payment of Deferred Compensation.
(a) In the event the Executive terminates his/her
employment for whatever reason, the Company must
compute the "Ending Balance" in the Deferred
Compensation Account. This Ending Balance shall
include all deferrals and interest as of the last day
of the preceding month, and any deferrals made in the
current month. In the event that the Executive
becomes disabled, his/her employment shall for these
purposes be deemed to terminate on the first day of
the month in which he/she begins to receive long term
disability payments provided by the Company's
insurance carrier (thus, the Ending Balance shall be
computed as of the preceding month). Payment of
deferred compensation under these events will be in
accordance with the Executive's payment method
election in paragraph 2(e).
(b) The Executive must elect the payment method for
receiving his/her Ending Balance either in a lump sum
or in an indicated number of installments. This
determination must be made at the time of execution
of the agreement in Section 2(e) and will apply to
all deferrals. Any amendment changing the method of
payment must be made at least two (2) years prior to
the selected payment date or (2) years prior to
termination of employment, whichever occurs first, to
be considered effective.
<PAGE>
(c) In the event the Executive chooses the installment
option, the Executive must inform the Company of the
number of installments he or she wishes to receive.
The installments will be paid quarterly (not to
exceed 20 quarters) commencing with the fifteenth day
of the quarter following the quarter in which the
date specified in 2(g)occurs.. Installments will
then be paid on the fifteenth day of each succeeding
calendar quarter until the Ending Balance and all
accrued interest, which includes interest earned
during the installment period, has been paid. If the
Executive chooses the lump sum option, such sum must
be paid within forty-five (45) days after the date
specified in 2(g).
(d) If the Executive dies prior to the total distribution
of the Ending Balance, the Company shall pay an
amount equal to the then current balance including
accrued interest in the Deferred Compensation Account
in a lump sum within forty-five (45)days following
the Executive's death to the Executive's Designated
Beneficiary (as hereinafter defined). However, if the
Executive is married at the time of death, the
Executive may designate (at the time of entering this
Agreement or upon a subsequent marriage) that the
payments specified in 2(c) shall continue to the
spouse. If such spouse dies before all payments are
made, the procedures in 3(a) and 3(b) shall apply.
(e) Payment of Deferred Compensation Election
(choose one option):
i) ____ Lump sum distribution; or
ii) __X__ Installment method. The amount of each
installment shall be equal to one-tenth
(cannot be less than one-twentieth) of the
Ending Balance plus accrued interest
compounded monthly for the preceding
calendar quarter.
(f) The Executive must elect the deferral date for
receiving his/her Ending Balance. This date is to be
either retirement, or a specific date greater than
one year from the date of this agreement. This
determination must be made at the time of execution
of the agreement in Section 2(g) and will apply to
all deferrals.
(g) Election of Deferral Date (choose one option):
i) __X__ Retirement; or
ii) ____ Specific Date: (must be greater than one
year from the date of this agreement)
<PAGE>
(h) In the event of an unforeseeable emergency, the
Executive may make withdrawals from the Deferred
Compensation Account in an amount equal to that which
is reasonably necessary to satisfy the emergency. An
unforeseeable emergency means a severe financial
hardship to the Executive resulting from a sudden and
unexpected illness or accident of the Executive or of
a dependent (as defined in Internal Revenue Codess.
152(a)) of the Executive, loss of the Executive's
property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising
as a result of events beyond the control of the
Executive. The circumstances that will constitute an
emergency will depend upon the facts of each case,
but, in any case, payment may not be made to the
extent that such hardship is or may be relieved (a)
through reimbursement or compensation by insurance or
otherwise; (b) by liquidation of the Executive's
assets, to the extent the liquidation of such assets
would not itself cause severe financial hardship; or
(c) by cessation of deferrals under this
Agreement. Examples of what are not considered to be
unforeseeable emergencies include the need to send an
Executive's child to college or the desire to
purchase a home.
In the event the Company approves the payment of a
withdrawal due to an unforeseeable emergency, such
payment shall be made by the Company to the Executive
in a lump sum within forty-five (45) days after
approval of such request.
3. Designation of Beneficiaries.
(a) The Executive may designate a beneficiary to receive
any amount payable pursuant to paragraph 2(c) (the
"Designated Beneficiary") by executing or filing with
the Company during his/her lifetime, a Beneficiary
Designation in the form attached hereto. The
Executive may change or revoke any such designation
by executing and filing with the Company during his/
her lifetime a new Beneficiary Designation. If the
Executive is married and names someone other than
his/her spouse (e.g., child) as beneficiary, the
spouse must consent by signing the designated area of
the Beneficiary Designation form in the presence of a
Notary Public.
(b) If any Designated Beneficiary predeceases the
Executive, or if any corporation, partnership, trust
or other entity which is a Designated Beneficiary is
terminated, dissolved, becomes insolvent, is
adjudicated bankrupt prior to the date of the
Executive's death, or if the Executive fails to
designate a beneficiary, then the following persons
in the order set forth below shall receive the entire
amount specified in paragraph 2(c) above, which the
previous Designated Beneficiary would have been
entitled to receive:
i) Executive's spouse, if living; otherwise
ii) Executive's then living descendants, per
stirpes; and otherwise;
iii) Executive's estate
<PAGE>
4. Miscellaneous.
(a) The right of the Executive or any other person to any
payment of benefits under this Agreement may not be
assigned, transferred, pledged or encumbered.
(b) If the Company finds that any person to whom any
amount is payable under this Agreement is unable to
care for his/her affairs because of illness or
accident, or is under any legal disability which
prevents the Executive from caring for his or her
affairs, any payment due (unless a prior claim
therefor shall have been made by a duly
appointed guardian, committee or other legal
representative) may be made to the spouse, a child,
a parent, or a brother or sister of such person, or
to any party deemed by the Company to have incurred
expenses for such person otherwise entitled to
payment, in such manner and proportions as the
Company may determine. Any such lump sum payment, as
discussed in 2(d), shall be a complete discharge of
the liability of the Company under this Agreement for
such payment.
(c) This Agreement shall be construed in accordance with
and governed by the laws of the State of Illinois.
(d) The Executive is considered to be a general unsecured
creditor of the Company with regard to the deferred
compensation amounts to which this Agreement
pertains.
(e) The deferred amounts under this Agreement are
unfunded for tax and ERISA purposes.
(f) The Company must deduct from all payments made
hereunder all applicable federal or state taxes
required to be withheld from such payments.
(g) This Agreement contains the entire understanding of
the Company and the Executive with respect to the
subject matter hereof.
(h) In the event any provision of this Agreement is held
illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining parts of
the Agreement, and the Agreement must be construed
and enforced as if the illegal or invalid provision
had not been included.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
UNITED STATES CELLULAR CORPORATION
("COMPANY"):
By: /s/ Douglas S. Arnold
EXECUTIVE:
By: /s/ H. Donald Nelson
<PAGE>
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
For the Nine Months September 30, 1996
(Dollars In Thousands)
EARNINGS:
Income from Continuing Operations before
income taxes $ 257,889
Add (Deduct):
Minority Share of Losses (8,530)
Earnings on Equity Method (40,747)
Distributions from Minority Subsidiaries 14,959
Amortization of Non-Telephone Capitalized
Interest 2
Minority interest in majority-owned subsidiaries
that have fixed charges 23,729
---------
247,302
Add fixed charges:
Consolidated interest expense 29,925
Interest Portion (1/3) of Consolidated Rent Expense 4,823
Amortization of debt expense and discount on
indebtedness 417
---------
$ 282,467
=========
FIXED CHARGES:
Consolidated interest expense $ 29,925
Capitalized interest 21,192
Interest Portion (1/3) of Consolidated Rent Expense 4,823
Amortization of debt expense and discount on indebtedness 417
---------
$ 56,357
=========
RATIO OF EARNINGS TO FIXED CHARGES 5.01
=========
Tax-Effected Redeemable Preferred Dividends $ 769
Fixed Charges 56,357
---------
Fixed Charges and Redeemable Preferred Dividends $ 57,126
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 4.94
=========
Tax-Effected Preferred Dividends $ 2,680
Fixed Charges 56,357
---------
Fixed Charges and Preferred Dividends $ 59,037
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 4.78
=========
<PAGE>
