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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________ to _______________________
Commission File Number 1-8251
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TELEPHONE AND DATA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Iowa 36-2669023
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 North LaSalle Street, Chicago, Illinois 60602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-1900
Not Applicable
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(Former address of 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1997
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Common Shares, $1 par value 53,180,638 Shares
Series A Common Shares, $1 par value 6,922,265 Shares
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<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------
1ST QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-10
Consolidated Statements of Income -
Three Months Ended March 31, 1997 and 1996 11
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 12
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 13-14
Notes to Consolidated Financial Statements 15-19
Part II. Other Information 20
Signatures 21
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
Telephone and Data Systems, Inc. ("TDS" or the "Company") continued to make
substantial progress during the first quarter of 1997 with excellent growth in
the cellular business, rapid build-out in the PCS business and steady results in
the telephone business. Customer units have increased 19% to over 2.4 million,
which drove a 23% increase in revenues, a 24% increase in operating cash flow
and a 37% increase in operating income. Net income to common declined
73% to $9.1 as a result of a reduction in gains on the sale of cellular
interests and other investments and an increase in PCS development expenses.
United States Cellular Corporation ("U.S. Cellular"), TDS' 80.9%-owned cellular
subsidiary, continued its rapid growth during the first quarter of 1997.
Customer units increased 48% to 1,164,000. The increase in customer units drove
a 29% increase in revenues, a 45% increase in operating cash flow and a 98%
increase in operating income.
TDS Telecommunications Corporation ("TDS Telecom"), TDS' wholly owned telephone
subsidiary, continued to provide solid growth in revenues, operating cash flow
and operating income. Telephone access lines increased 9% to 493,000 in the
first quarter of 1997 resulting in a 22% increase in revenues, a 17% increase in
operating cash flow and a 17% increase in operating income.
Aerial Communications, Inc. ("Aerial"), TDS' 82.8%-owned PCS subsidiary,
announced the launch of service in Columbus, Ohio, its first commercial market,
on March 27, 1997. It is expected that the remaining five markets will be
launched in the second quarter. Across the six markets, Aerial will launch
service with approximately 600 cell sites in service. Upon completion of all
phases of its build-out in 1997, more than 1,000 cell sites are planned to be in
service. PCS development costs (included in "Investment and Other Income
(Expense)") increased to $21.6 million in the first quarter of 1997 from $5.7
million in 1996.
American Paging, Inc. ("American Paging"), TDS' 82.1%-owned paging subsidiary,
saw its units in service decline 4% to 767,400 resulting in a 7% decline in
revenues. The decrease in revenues combined with an increase in operating
expenses caused operating losses to decrease as compared to 1996. American
Paging's new management team reported slight improvement in key
indicators as it strives to reduce personnel turnover, complete significant
restructuring of key business processes, and overcome competitive pressures.
RESULTS OF OPERATIONS
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Three Months Ended 3/31/97 Compared to Three Months Ended 3/31/96
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Telephone and Data Systems, Inc. ("TDS" or the "Company") reported net income
available to common of $9.1 million, or $.15 per share, in the first quarter of
1997, compared to $33.3 million,
2
<PAGE>
or $.56 per share, in the first quarter of 1996. Net income in the first
quarter of 1996 was significantly impacted by gains on the sale of cellular
interests and other investments. Aerial's PCS development expenses negatively
impacted both periods as it prepared for the launching of its six
PCS networks. Excluding gains on the sales of cellular interests and other
investments and PCS development costs along with the related income taxes and
minority interest, net income available to common would have been $20.7 million,
or $.34 per share, in the first quarter of 1997, compared to $16.8 million, or
$.28 per share, in the first quarter of 1996. Results of core business
operations primarily reflects significant cellular business unit growth and
solid telephone operations growth offset somewhat by paging losses.
The table below summarizes the effects of the gains and PCS development costs
(along with the related impact on income taxes and minority interest) on net
income available to common and earnings per share.
Three Months Ended March 31,
-----------------------------
1997 1996
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(Dollars in thousands,
except per share amounts)
Net Income Available to Common
Core Business $ 20,689 $ 16,788
Gains -- 20,308
PCS Development Costs (11,553) (3,829)
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$ 9,136 $ 33,267
============ =============
Earnings Per Share
Core Business $ .34 $ .28
Gains -- .34
PCS Development Costs (.19) (.06)
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$ .15 $ .56
============ ============
Operating Revenues increased 23% ($59.1 million) during the first quarter of
1997 primarily as a result of a 19% increase in customer units served to over
2.4 million units at March 31, 1997. Cellular represented 16% ($40.9 million) of
the total increase in revenues and most of the increase in customer units, while
telephone represented 8% ($19.9 million) of the total increase in revenues.
Beginning on January 1, 1997, U.S. Cellular changed its income statement
presentation of certain credits for free or reduced-price airtime or access
given to customers on their monthly bills. The forgone revenues are now
reported as a reduction of local retail revenue instead of marketing and
selling expense (for new customers) and general and administrative expense (for
current customers). Amounts in the affected revenue and expense categories have
been reclassified for previous years, throughout this Form 10-Q. Operating
income and net income are not affected by this change.
Cellular revenues increased 29% ($40.9 million) in 1997 on a 48% increase in
customer units and strong inbound roaming revenues. Cellular customers
increased to 1,164,000 at March 31, 1997 from 785,000 at March 31, 1996. Total
average monthly service revenue per customer was $53.50 in the first quarter of
1997 and $62.11 in 1996. Average monthly service revenue per customer
continues to decline due to competitive pressures, incentive programs being
offered, consumer market penetration and roaming revenues increasing at a slower
rate than the U.S. Cellular customer base.
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Local retail revenue increased 36% ($32.1 million) in the first quarter of 1997
due primarily to the 48% customer growth. Average monthly local retail revenue
per customer declined to $36.05 in the first quarter of 1997 from $39.64 in
1996. Average local minutes of use per retail customer increased to 100 in 1997
from 96 in 1996, while average local retail revenue per minute totaled $.36 in
1997 compared to $.41 in 1996. U.S. Cellular's use of incentive programs in 1996
and 1997 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. Average revenue per minute also
declined due to increased amounts of bill credits given to customers as
incentives to become or remain customers. Inbound roaming revenue (charges to
customers of other systems who use U.S. Cellular's cellular systems when
roaming) increased 16% ($6.4 million) in the first quarter of 1997. The growth
in roaming revenue is due to a 24% increase in minutes used offset somewhat by
negotiated reductions in roaming rates. Average inbound roaming revenue per
minute totaled $.88 in 1997 and $.94 in 1996. Average monthly inbound
roaming revenue per customer declined to $13.51 in 1997 compared to $17.36 in
1996. The decrease is related to both the decrease in roaming revenue per
minute and the faster growth of U.S. Cellular's customer base as compared to the
growth of inbound roaming revenues.
Telephone revenues increased 22% ($19.9 million) in 1997 due to growth in
telephone operations ($14.8 million) and growth in other operations ($5.1
million). Telephone operations revenues increased as a result of the effects of
acquisitions ($6.7 million), recovery of increased costs of providing long-
distance services ($3.2 million), internal access line growth of 6% since March
31, 1996 ($1.6 million), increased sale of customer premise equipment ($1.5
million) and increased network usage ($1.3 million). The number of telephone
access lines increased 9% (6% internal growth and 3% acquisitions) to 493,000 at
March 31, 1997 from 454,000 at March 31, 1996. Average monthly revenue per
access line increased to $66.92 for the first quarter of 1997 from $63.98 in
1996. Other operations include the revenues of a recently acquired cellular
interest as well as TDS Telecom's new business ventures, mainly a long-distance
provider, an Internet access provider and certain other non-telephone
operations.
Radio paging revenues decreased 7% ($1.7 million) in 1997 due primarily to
decreases in the number of paging units in service and the average revenue per
unit ($1.4 million). The number of pagers in service decreased 4% to 767,400 in
1997 from 802,100 in 1996. Average revenue per unit decreased 4% to $9.63 in
1997 from $10.03 in 1996 reflecting competitive pricing declines and
a shift in distribution channel mix.
Operating Expenses rose 21% ($47.8 million) in the first quarter of 1997 due
primarily to added expenses to serve the growing customer base. Cellular
represented 13% ($29.3 million) of the total increase in operating expenses,
while telephone represented 7% ($15.9 million) of the increase.
Cellular expenses increased 22% ($29.3 million) during 1997. System operations
expenses increased 32% ($7.7 million) in 1997 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 38% ($5.2
million) as minutes of use increased, primarily related to the 48% increase in
customer units and increased roaming usage. Also contributing to the increase
were an additional $1.0 million of fraud-related costs in 1997. 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
increased 25% ($2.4 million) reflecting primarily the increase in the number of
cell sites to 1,377 in 1997 from 1,139 in 1996. Marketing and selling
4
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expenses incurred to add new customers increased 28% ($12.2 million), including
a $2.5 million increase in cost of equipment sold. Cost per gross customer
addition declined to $319 in 1997 from $330 in 1996 while gross customer
activations increased to 157,000 in 1997 from 117,000 in 1996. General and
administrative expenses increased 11% ($4.5 million) due to the growing
customer base in existing markets and an expansion of local office and corporate
staff necessitated by U.S. Cellular's growth. Depreciation and amortization
increased 20% ($5.0 million) primarily due to the increase in average fixed
assets since March 31, 1996.
Telephone expenses increased 24% ($15.9 million) during 1997 due to growth in
telephone operations ($10.4 million) and to growth in other operations ($5.5
million). Telephone operations increased primarily due to the effects of
acquisitions ($4.5 million), growth in internal operations ($2.1 million) and
increased depreciation and amortization ($1.6 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 $1.4 million. These expenditures are expected to begin
producing cost efficiencies and new revenues in the next several quarters and
beyond. Other operations include the expenses of a recently acquired cellular
interest as well as TDS Telecom's new business ventures.
Paging expenses increased 9% ($2.6 million) in 1997 reflecting increased
selling, general and administrative expenses primarily due to increases in the
sales force ($1.9 million), increased cost of service primarily due to
third-party reseller expense associated with increasing nationwide units in
service ($842,000), and increased depreciation and amortization expense
($535,000) offset somewhat by reduced cost of equipment sold ($641,000) due to
decreases in pager sales.
Operating Income increased 37% ($11.3 million) in the first quarter of 1997 due
to strong (98%) growth in cellular operating results and steady (17%) growth in
telephone results offset somewhat by a decline in paging operating results. The
strong growth in cellular operating income is reflected in the cellular and
consolidated margin improvements. The telephone margin decreased due to
the impact of TDS Telecom's new business ventures. The paging margin decreased
due to the decline in units in service and higher operating costs.
Three Months Ended March 31,
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1997 1996 Change
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(Dollars in thousands)
Operating Income
Cellular $ 23,445 $ 11,822 $ 11,623
Telephone 27,226 23,221 4,005
Radio paging (8,411) (4,086) (4,325)
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$ 42,260 $ 30,957 $ 11,303
========= ========= =========
Operating Margins
Cellular 12.7% 8.2%
Telephone 25.0% 26.1%
Radio paging (34.2%) (15.5%)
Consolidated 13.3% 11.9%
Operating income is expected to decrease significantly in 1997, beginning in the
second quarter, with the inclusion of Aerial's revenues and expenses in
operating income upon commencement of PCS operations. Aerial began service in
the Columbus MTA March 27, 1997, and expects to
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<PAGE>
launch service in its five remaining MTAs during the second quarter.
Management believes there exists a seasonality at U.S. Cellular in both service
revenue, 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.
Competitors licensed to provide PCS services have initiated service in certain
of U.S. Cellular's markets in recent months. U.S. Cellular anticipates that
PCS operators will initiate service in several other of its markets in 1997 and
1998. U.S. Cellular's management is monitoring these and other wireless
communications providers' strategies to determine what effect, if any, this
additional competition will have on U.S. Cellular's future strategies and
results.
Investment and Other Income (Expense) totaled $(5.0) million in 1997 and $42.2
million in 1996.
Gain on Sale of Cellular Interests and Other Investments totaled $41.8 million
in the first quarter of 1996 as the Company has sold or traded certain non-
strategic cellular interests and sold other investments. There were no asset
sales in the first quarter of 1997.
PCS Development Costs totaled $21.6 million in 1997 and $5.7 million in 1996.
The increase is associated with the costs to launch PCS service in Aerial
markets. As Aerial launches service in its markets in the second quarter of
1997, its expenses will be included in operating expenses.
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 68% ($7.2 million) in the first quarter of 1997 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 includes the minority shareholders' share of U.S.
Cellular's, Aerial Communications' and American Paging's net income or loss,
minority partners' share of U.S. Cellular's operating markets and other minority
shareholders' and partners' share of subsidiaries' net income or loss. The
decrease is primarily related to the minority share in Aerial's loss. Minority
shareholders of American Paging are not allocated losses in 1997 as American
Paging's shareholders' equity is negative.
Three Months Ended March 31,
-----------------------------------
1997 1996 Change
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(Dollars in thousands)
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share $ (3,521) $ (5,615) $ 2,094
Minority Partners' Share (2,865) (2,112) (753)
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(6,386) (7,727) 1,341
Aerial Communications 3,849 -- 3,849
American Paging -- 946 (946)
Telephone Subsidiaries and Other (222) (586) 364
---------- --------- ---------
$ (2,759) $ (7,367) $ 4,608
========== ========= =========
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<PAGE>
Interest Expense increased 16% ($2.0 million) in the first quarter of 1997
primarily due to the increase in short- and long-term debt outstanding.
Interest expense is expected to increase significantly through the end of the
year as the Company discontinues capitalizing interest on broadband PCS licenses
when Aerial commences PCS operations.
Income Tax Expense decreased 50% ($13.7 million) in 1997 compared with 1996
primarily due to the decrease in pretax income. The effective income tax rate
was 59% in the first quarter of 1997 and 45% in 1996. The effective income tax
rate is calculated by dividing income tax expense by pretax income.
Expenses not deductible for tax purposes, such as amortization of intangibles
related to tax free acquisitions of telephone and cellular interests, and
certain other book/tax differences impact the calculation of income tax expense.
Income tax expense from these items were about the same in 1997 and 1996.
However, dividing such income tax expense by a decreasing pretax income
increased the effective income tax rate for 1997 by approximately 10 percentage
points as compared to 1996. Increased state income tax expense has also caused
the effective tax rate to increase.
Net Income Available to Common decreased $24.1 million to $9.1 million in the
first quarter of 1997 from $33.3 million in the first quarter of 1996. Earnings
Per Common Share were $.15 in the first quarter of 1997 and $.56 in the first
quarter of 1996.
Net income available to common included significant PCS development costs in
1997 and 1996 as well as significant gains from the sale of cellular interests
and other investments in 1996 as explained previously.
TDS anticipates that start-up and development of high-quality networks and the
marketing of systems in Aerial's 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.
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<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. Accordingly, TDS has
obtained substantial funds from external sources to finance construction of
cellular systems, to acquire PCS licenses, to build-out PCS markets 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, Aerial's development and construction activities 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 24% to $104.3
million in the first quarter of 1997 from $84.0 million in 1996. The increase
is due primarily to the 45% ($16.6 million) growth in cellular operating cash
flow. Cash flows for other operating activities (investment and other income,
interest and income tax expense, and changes in working capital and other assets
and liabilities) required $49.6 million in the first quarter of 1997 and $42.5
million in 1996.
Three Months Ended March 31,
----------------------------------
1997 1996 Change
---------- ---------- ---------
(Dollars in thousands)
Operating cash flow
Cellular $ 53,606 $ 36,959 $ 16,647
Telephone 51,389 43,983 7,406
Radio paging (707) 3,083 (3,790)
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104,288 84,025 20,263
Other operating activities (49,560) (42,478) (7,082)
---------- ---------- ---------
$ 54,728 $ 41,547 $ 13,181
========== ========== =========
Cash Flows from Financing Activities. TDS has used short-term debt to finance
its PCS and radio paging operations, for acquisitions and for general corporate
purposes. TDS has taken advantage of attractive opportunities from time-to-time
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
$90.9 million in the first quarter of 1997 compared to $8.9 million in 1996.
Increases in short-term debt provided most of the Company's external financing
requirements during the first quarter of 1997 and 1996. The 1997 borrowings
were used primarily to fund expenditures for PCS construction and development
activities and for stock repurchases.
In December 1996, the Company authorized the repurchase of up to 3 million TDS
Common Shares over a period of three years. Through March 31, 1997, TDS has
purchased, on the open market, 728,100 TDS Common Shares for $28.9 million and
had commitments to purchase an additional 69,600 TDS Common Shares for $2.7
million. TDS also purchased 350,000 U.S. Cellular Common Shares for $9.8
million in the first quarter of 1997.
Cash Flows From Investing Activities. TDS makes substantial investments each
year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities as a basis for creating long-term value
for shareowners. Cash flows from investing
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activities required $147.4 million in the first quarter of 1997 compared to
$42.7 million in 1996, primarily for additions to property, plant and equipment
totaling $169.0 million in 1997 and $96.3 million in 1996. The sales of
non-strategic cellular interests and other investments provided $71.9
million in 1996.
Property, Plant and Equipment. The primary purpose of TDS's construction and
expansion program is to provide for significant customer 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 $169.0 million in the first quarter
of 1997 consisting primarily of $53.1 million for cellular plant and equipment,
$23.9 million for telephone plant and equipment and $84.6 million for PCS
property and equipment.
Acquisitions. TDS continually reviews attractive opportunities for the
acquisition of additional cellular and telephone companies which add value to
the organization. As the number of opportunities for outright acquisitions of
cellular interests has decreased and as U.S. Cellular's clusters have grown to
realize greater economies of scale, U.S. Cellular's focus has shifted toward
exchanges and sales of non-strategic interests.
In February 1997, U.S. Cellular announced that it had entered into an exchange
agreement with BellSouth Corporation, pursuant to which U.S. Cellular will
receive majority interests in twelve contiguous markets adjacent to its Iowa and
Wisconsin/Illinois clusters. In exchange, U.S. Cellular will transfer its
majority interests in ten markets, minority interests in 13 markets, pay cash
and incur certain income tax costs,
the amounts of which are dependent upon certain factors. U.S. Cellular will
receive majority interests representing approximately 3.9 million population
equivalents ("pops") in the transaction, and will divest majority interests
representing approximately 1.9 million pops and minority interests
representing 1.4 million pops. The transaction is subject to various regulatory
and other approvals.
LIQUIDITY
TDS anticipates that the aggregate resources required for 1997 will include
approximately $810 million for capital spending, consisting of $300 million for
cellular capital additions, $130 million for telephone capital additions, $345
million for PCS capital additions and $35 million for the radio paging property
and equipment, and $255 million for working capital and operating expenses for
Aerial. The Company anticipates financing these expenditures with internally
generated funds and short-term and intermediate-term financing.
TDS is generating substantial internal funds from the rapid growth in customer
units and revenues. Operating cash flow for the twelve months ended March 31,
1997 increased $71.8 million, or 21%, to $405.9 million from $334.1 million in
1996.
Twelve Months Ended March 31,
------------------------------------
1997 1996 Change
---------- ---------- ----------
(Dollars in thousands)
Operating cash flow
Cellular $ 212,852 $ 141,414 $ 71,438
Telephone 199,731 177,482 22,249
Radio paging (6,639) 15,247 (21,886)
---------- ---------- ----------
$ 405,944 $ 334,143 $ 71,801
========== ========== ==========
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U.S. Cellular plans to finance its cellular construction program using primarily
internally generated cash supplemented by short-term and intermediate-term
financing. TDS Telecom plans to finance its construction program using
internally generated cash supplemented by long-term financing from federal
government programs. Aerial plans to finance its construction expenditures and
working capital requirements with short-term and intermediate-term financing,
vendor financing and sales of minority equity interests in MTAs to strategic
investors.
TDS and its subsidiaries have cash and temporary investments totaling $85.8
million and longer-term cash investments totaling $38.2 million at March 31,
1997. 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 $655 million of bank lines of credit for
general corporate purposes at March 31, 1997. Unused amounts of such lines
totaled $356 million. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.
The Company anticipates requiring additional funding to finance Aerial's
expected capital expenditures and working capital requirements, to finance
acquisitions and for general corporate purposes. The timing and amount of such
funding requirements will depend on the timing of the completion of Aerial's
construction and operational plans, the timing of acquisitions, and other
relevant factors. There can be no assurance that sufficient funds will be
available to the Company on terms or at prices acceptable to the Company. If
sufficient funding is not made available to the Company on terms and prices
acceptable to the Company, the Company would have to reduce its construction,
development and acquisition programs. TDS and its subsidiaries anticipate
accessing public and private capital markets to issue debt and equity securities
only when capital requirements, financial market conditions and other factors
warrant.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about the Company's beliefs and expectations are
forward-looking statements. These statements contain potential risks
and uncertainties and, therefore, actual results may differ materially.
TDS undertakes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
markets in which TDS operates; advances in telecommunications technology;
changes in the telecommunications regulatory environment; pending and future
litigation; availability of future financing; start-up of PCS operations; and
unanticipated changes in growth in cellular customers, penetration rates, churn
rates and the mix of products and services offered in our markets. Readers
should evaluate any statements in light of these important factors.
10
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TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Unaudited
---------
Three Months Ended
March 31,
-----------------------------
1997 1996
------------ -----------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Cellular telephone $ 184,584 $ 143,642
Telephone 109,014 89,111
Radio paging 24,580 26,310
------------ ------------
318,178 259,063
------------ ------------
OPERATING EXPENSES
Cellular telephone 161,139 131,820
Telephone 81,788 65,890
Radio paging 32,991 30,396
------------ ------------
275,918 228,106
------------ ------------
OPERATING INCOME 42,260 30,957
------------ ------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income 3,418 2,176
Cellular investment income, net of
license cost amortization 17,601 10,449
Gain on sale of cellular interests
and other investments -- 41,758
PCS development costs (21,614) (5,746)
Other income (expense), net (1,637) 886
Minority share of income (2,759) (7,367)
------------ ------------
(4,991) 42,156
------------ ------------
INCOME BEFORE INTEREST AND INCOME TAXES 37,269 73,113
Interest expense 13,814 11,860
------------ ------------
INCOME BEFORE INCOME TAXES 23,455 61,253
Income tax expense 13,838 27,564
------------ ------------
NET INCOME 9,617 33,689
Preferred Dividend Requirement (481) (422)
------------ ------------
NET INCOME AVAILABLE TO COMMON $ 9,136 $ 33,267
============ ============
WEIGHTED AVERAGE COMMON SHARES (000s) 61,352 59,393
EARNINGS PER COMMON SHARE $ .15 $ .56
============ ============
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .105 $ .10
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
11
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
-------------------------
1997 1996
---------- -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,617 $ 33,689
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 62,028 53,068
Deferred taxes 3,730 6,432
Investment income (19,154) (11,232)
Minority share of income 2,759 7,367
Gain on sale of cellular interests
and other investments -- (41,758)
Noncash interest expense 5,805 4,606
Other noncash expense 5,240 5,350
Change in accounts receivable (185) 505
Change in accounts payable (8,598) (15,375)
Change in accrued taxes 4,988 9,766
Change in accrued interest (4,259) (5,634)
Change in other assets and liabilities (7,243) (5,237)
---------- -----------
54,728 41,547
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 2,840 2,168
Repayments of long-term debt (8,373) (7,080)
Change in notes payable 140,866 19,952
Dividends paid (6,880) (6,451)
Repurchase of Common Shares (28,878) --
Purchase of subsidiary common stock (9,801) --
Other financing activities 1,106 338
---------- -----------
90,880 8,927
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (169,024) (96,320)
Investments in and advances to cellular
minority partnerships (6,146) (7,015)
Distributions from partnerships 9,297 2,566
Investments in PCS licenses (4,745) (6,364)
Proceeds from investment sales -- 71,864
Change in other investments (2,239) (251)
Acquisitions, net of cash acquired -- 2,790
Change in temporary investments and marketable
securities 25,478 (9,950)
---------- -----------
(147,379) (42,680)
---------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,771) 7,794
CASH AND CASH EQUIVALENTS -
Beginning of period 57,633 55,116
---------- -----------
End of period $ 55,862 $ 62,910
========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
12
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
March 31, 1997 December 31, 1996
-------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 55,862 $ 57,633
Temporary investments 29,978 61,664
Accounts receivable from customers
and others 179,734 181,212
Materials and supplies, at average cost,
and other current assets 52,654 45,561
------------- -------------
318,228 346,070
------------- -------------
INVESTMENTS
Cellular license acquisition costs,
net of amortization 1,083,058 1,088,409
Cellular minority interests 221,822 206,390
PCS license acquisition costs 387,468 382,723
Franchise costs and other costs in
excess of the underlying book value
of subsidiaries, net 181,049 181,845
Other investments 90,967 84,537
------------- -------------
1,964,364 1,943,904
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Cellular telephone, net 680,938 650,754
Telephone, net 768,625 774,388
PCS, net 413,454 322,723
Radio paging, net 45,762 51,472
Other, net 36,366 29,552
------------- -------------
1,945,145 1,828,889
------------- -------------
OTHER ASSETS AND DEFERRED CHARGES 88,129 82,106
------------- -------------
TOTAL ASSETS $ 4,315,866 $ 4,200,969
============= =============
The accompanying notes to financial statements
are an integral part of these statements.
13
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
March 31, 1997 December 31, 1996
-------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt
and preferred shares $ 38,389 $ 38,197
Notes payable 299,468 160,537
Accounts payable 209,204 205,427
Advance billings and customer deposits 33,043 32,434
Accrued interest 7,518 11,777
Accrued taxes 8,851 3,194
Other current liabilities 57,795 57,701
-------------- --------------
654,268 509,267
-------------- --------------
DEFERRED LIABILITIES AND CREDITS 217,828 214,906
-------------- --------------
LONG-TERM DEBT, excluding current portion 983,911 982,232
-------------- --------------
REDEEMABLE PREFERRED SHARES, excluding
current portion 279 280
-------------- --------------
MINORITY INTEREST in subsidiaries 427,231 432,343
-------------- --------------
NONREDEEMABLE PREFERRED SHARES 28,720 29,000
-------------- --------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share 54,306 54,237
Series A Common Shares,
par value $1 per share 6,917 6,917
Common Shares issuable
(20,480 and 30,977 shares, respectively) 961 1,461
Capital in excess of par value 1,661,115 1,661,093
Treasury Shares, at cost (797,700 shares) (31,643) --
Retained earnings 311,973 309,233
-------------- ---------------
2,003,629 2,032,941
-------------- ---------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 4,315,866 $ 4,200,969
============== ===============
The accompanying notes to financial statements
are an integral part of these statements.
14
<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, 1997 and December
31, 1996, and the results of operations and cash flows for the
three months ended March 31, 1997 and 1996. The results of operations for
the three months ended March 31, 1997 and 1996, 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, 1997 consist of dilutive Common Share options.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" in March 1997
which will become effective in December 1997. Earnings per share would
not change if the SFAS No. 128 was in effect as of January 1, 1996.
4. Assuming that acquisitions accounted for as purchases during the period
January 1, 1996, to March 31, 1997, had taken place on January 1, 1996,
unaudited pro forma results of operations from continuing operations would
have been as follows (there were no acquisitions from January 1, 1997 to
March 31, 1997):
Three Months Ended
March 31, 1996
-----------------------------
(Dollars in thousands, except
per share amounts)
Operating revenues $ 269,769
Net income 35,653
Earnings per share $ .57
5. Supplemental Cash Flow Information
Cash and cash equivalents include cash and those short-term, highly liquid
investments with
15
<PAGE>
original maturities of three months or less. Those investments with
original maturities of more than three months to twelve months are
classified as temporary investments. Temporary investments are stated at
cost, which approximates market. Those investments with original
maturities of more than 12 months are classified as marketable securities
and are stated at amortized cost.
TDS acquired certain cellular licenses, operating companies and telephone
companies in 1996. In conjunction with these acquisitions, the following
assets were acquired and liabilities assumed and Common Shares issued.
Three Months Ended
March 31, 1996
-----------------------------
(Dollars in thousands, except
per share amounts)
Property, plant and equipment $ 30,779
Cellular licenses 50,347
Decrease in equity method investment in
cellular interests (1,845)
Franchise costs 8,387
Long-term debt (14,304)
Deferred credits (3,455)
Other assets and liabilities,
excluding cash and cash equivalents 1,069
Minority interest (443)
Common Shares issued and issuable (73,291)
USM Stock issued and issuable (34)
------------
Increase in cash due to acquisitions $ (2,790)
=============
The following table summarizes interest and income taxes paid, and other noncash
transactions.
Three Months Ended
March 31,
---------------------------
1997 1996
----------- ------------
(Dollar in thousands)
Interest Paid $ 16,924 $ 19,277
Income Taxes Paid 4,209 2,534
Common Shares issued by TDS for
conversion of TDS Preferred Stock $ 261 $ 3,974
16
<PAGE>
6. Business Segment Information
The following tables summarize business segment information for the three
months ended or at March 31, 1997, and 1996.
CELLULAR OPERATIONS
Three Months Ended or at
March 31,
-------------------------------
1997 1996
------------- -------------
(Dollars in thousands)
Operating Revenues
Local service $ 121,027 $ 88,942
Inbound roaming 45,340 38,948
Long-distance and other 18,217 15,752
------------- -------------
184,584 143,642
------------- -------------
Operating Expenses
System operations 31,229 23,578
Marketing and selling 37,040 27,408
Cost of equipment sold 17,994 15,473
General and administrative 44,715 40,224
Depreciation 21,509 16,935
Amortization 8,652 8,202
------------- -------------
161,139 131,820
------------- -------------
Operating Income $ 23,445 $ 11,822
============= =============
Additions to property, plant
and equipment $ 53,062 $ 45,611
Identifiable assets $ 2,164,997 $ 1,958,084
17
<PAGE>
TELEPHONE OPERATIONS
Three Months Ended or at
March 31,
-------------------------
1997 1996
---------- ----------
(Dollars in thousands)
Telephone Operations
Operating Revenues
Local service $ 29,861 $ 25,229
Network access and long-distance 56,592 48,506
Miscellaneous 11,709 9,664
---------- ----------
98,162 83,399
---------- ----------
Operating Expenses
Network operations 17,701 14,077
Depreciation and Amortization 23,293 20,137
Customer operations 14,897 11,514
Corporate and other 15,090 14,817
---------- ----------
70,981 60,545
---------- ----------
Telephone Operating Income 27,181 22,854
---------- ----------
Other Operations
Revenues 11,084 6,034
Expenses 11,039 5,667
---------- ----------
Other Operating Income 45 367
---------- ----------
Intercompany Eliminations
Revenue (232) (322)
Expenses (232) (322)
---------- -----------
Operating Income $ 27,226 $ 23,221
========== ===========
Additions to property, plant and equipment $ 23,904 $ 27,522
Identifiable assets $1,173,614 $ 1,080,160
RADIO PAGING OPERATIONS
Three Months Ended or at
March 31,
------------------------
1997 1996
---------- -----------
(Dollars in thousands)
Operating revenues $ 24,580 $ 26,310
---------- -----------
Costs and expenses
Cost of services 6,861 6,019
Selling, general and administrative 16,263 14,404
Cost of equipment sold 2,163 2,804
Depreciation and amortization 7,704 7,169
---------- -----------
32,991 30,396
---------- -----------
Operating (Loss) $ (8,411) $ (4,086)
========== ===========
Additions to property, plant and equipment $ 2,954 $ 10,814
Identifiable assets $ 147,874 $ 156,885
18
<PAGE>
OTHER OPERATIONS
Three Months Ended or at
March 31,
--------------------------
1997 1996
---------- -----------
(Dollars in thousands)
Additions to property, plant and equipment
PCS $ 84,608 $ 8,910
Other $ 4,496 $ 3,463
Identifiable assets
PCS $ 738,741 $ 343,945
Other $ 90,640 $ 48,461
19
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information
- --------------------------
In December 1996, TDS authorized the repurchase of up to 3 million TDS
Common Shares over a period of three years. Through March 31, 1997,
TDS has repurchased, on the open market, 728,100 TDS Common Shares for
$28.9 million and had commitments to purchase an additional 69,600 TDS
Common Shares for $2.7 million. In addition, TDS also purchased
350,000 U.S. Cellular Common Shares for $9.8 million in the first
quarter of 1997. The share repurchases were financed primarily by
borrowings under TDS' short-term lines of credit.
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, 1997:
No reports on Form 8-K were filed during the quarter ended March
31, 1997.
20
<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 13, 1997 MURRAY L. SWANSON
------------- --------------------------------
Murray L. Swanson,
Executive Vice President-Finance
(Chief Financial Officer)
Date May 13, 1997 GREGORY J. WILKINSON
------------- --------------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
21
<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, 1997 1996
- -------------------------------------------------------------------------------
Primary Earnings
Net Income $ 9,617 $ 33,689
Dividends on Preferred Shares (481) (422)
---------- ----------
Net Income Available to Common $ 9,136 $ 33,267
========== ==========
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 61,184 59,035
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 141 173
Convertible Preferred Shares -- 164
Common Shares Issuable 27 21
---------- ----------
Primary Shares 61,352 59,393
========== ==========
Primary Earnings per Common Share
Net Income $ .15 $ .56
========== ==========
Fully Diluted Earnings*
Net Income $ 9,617 $ 33,689
Dividends on Preferred Shares (481) (280)
---------- ----------
Net Income Available to Common $ 9,136 $ 33,409
========== ==========
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 61,184 59,035
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 144 182
Convertible Preferred Shares -- 642
Common Shares Issuable 27 21
---------- ----------
Fully Diluted Shares 61,355 59,880
========== ==========
Fully Diluted Earnings per Common Share
Net Income $ .15 $ .56
========== ==========
* This calculation is submitted in accordance with Securities Act of 1934
Release No. 9083 although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
For the Three Months March 31, 1997
(Dollars In Thousands)
EARNINGS:
Income from Continuing Operations before
income taxes $ 23,455
Add (Deduct):
Minority Share of Losses (3,986)
Earnings on Equity Method (17,254)
Distributions from Minority Subsidiaries 9,294
Amortization of Non-Telephone Capitalized
Interest 1
Minority interest in majority-owned subsidiaries
that have fixed charges 3,613
------------
15,123
Add fixed charges:
Consolidated interest expense 13,666
Interest Portion (1/3) of Consolidated Rent Expense 2,225
Amortization of debt expense and discount on
indebtedness 148
------------
$ 31,162
============
FIXED CHARGES:
Consolidated interest expense $ 13,666
Capitalized interest 7,051
Interest Portion (1/3) of Consolidated Rent Expense 2,225
Amortization of debt expense and discount on indebtedness 148
------------
$ 23,090
============
RATIO OF EARNINGS TO FIXED CHARGES 1.35
============
Tax-Effected Redeemable Preferred Dividends $ 74
Fixed Charges 23,090
------------
Fixed Charges and Redeemable Preferred Dividends $ 23,164
============
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 1.35
============
Tax-Effected Preferred Dividends $ 1,173
Fixed Charges 23,090
------------
Fixed Charges and Preferred Dividends $ 24,263
============
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 1.28
============
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Telephone and Data Systems, Inc. as of
March 31, 1997, and for the three months 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 55,862
<SECURITIES> 38,236
<RECEIVABLES> 141,179
<ALLOWANCES> 5,484
<INVENTORY> 32,795
<CURRENT-ASSETS> 318,228
<PP&E> 2,824,345
<DEPRECIATION> 879,200
<TOTAL-ASSETS> 4,315,866
<CURRENT-LIABILITIES> 654,268
<BONDS> 983,911
<COMMON> 61,223
279
28,720
<OTHER-SE> 1,942,406
<TOTAL-LIABILITY-AND-EQUITY> 4,315,866
<SALES> 0
<TOTAL-REVENUES> 318,178
<CGS> 0
<TOTAL-COSTS> 275,918
<OTHER-EXPENSES> 4,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,814
<INCOME-PRETAX> 23,455
<INCOME-TAX> 13,838
<INCOME-CONTINUING> 9,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,617
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
