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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, 1998
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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, 1998
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Common Shares, $1 par value 54,036,216 Shares
Series A Common Shares, $1 par value 6,939,280 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 2-12
Consolidated Statements of Income -
Three Months Ended March 31, 1998 and 1997 13
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 14
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 15-16
Notes to Consolidated Financial Statements 17-24
Part II. Other Information 25
Signatures 26
<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
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AND FINANCIAL CONDITION
-----------------------
Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified
telecommunications company which provides high-quality telecommunications
services to over 2.5 million cellular telephone, local telephone and personal
communications service ("PCS") customer units. TDS's long-term business
development strategy is to expand its operations through internal growth and
acquisitions, and to explore and develop telecommunications businesses that
management believes utilize TDS's expertise in customer-based
telecommunications.
TDS reported a 35% increase in revenues for the first quarter of 1998 on a 52%
growth in customers since March 31, 1997. United States Cellular Corporation
("U.S. Cellular") revenues increased 33% primarily due to a 56% increase in
customer units. TDS Telecommunications Corporation ("TDS Telecom") reported a
10% increase in revenues on a 7% increase in access lines and increased activity
in its new business ventures. Aerial Communications, Inc. ("Aerial") reported
revenues of $30.7 million in the first quarter of 1998 and 165,000 customer
units at March 31, 1998. Aerial launched service at the end of the first quarter
1997. Expenses incurred by Aerial prior to the launch of operations were
reported as PCS Development Costs included in Investment and Other Income
(Expense).
Consolidated cash flow and operating income were down due to Aerial's rapidly
increasing operating costs as it continues the challenge of attracting new
customers. U.S. Cellular's cash flow and operating income increased 46% and 41%,
respectively, reflecting the increase in customers and the effects of
acquisitions. TDS Telecom's cash flow and operating income declined by 7% and
25%, respectively, reflecting increased operating expenses in the telephone
operations and start-up costs in the new business ventures.
Investment and other income totaled $223.9 million, consisting primarily of
$221.4 million of gains from the sale of cellular interests and other
investments recorded in the first quarter of 1998. Interest expense increased
129% as a result of the increase in short- and long-term debt balances. Net
income available to common increased seven fold over the first quarter of 1997
due mainly to significant gains recorded on the sale of cellular interests and
other investments.
TDS completed the transfer of substantially all of the assets and certain,
limited liabilities of American Paging, Inc. to TSR Wireless Holdings, LLC,
effective March 31, 1998, pursuant to a previously announced asset contribution
agreement.
RESULTS OF OPERATIONS
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Three Months Ended 3/31/98 Compared to Three Months Ended 3/31/97
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Telephone and Data Systems, Inc. reported net income available to common of
$73.7 million, or
2
<PAGE>
$1.20 per share - diluted, in the first quarter of 1998, compared to $9.1
million, or $.15 per share - diluted, in the first quarter of 1997. Net income
for 1998 included significant gains from the sale of cellular interests and
other investments totaling $112.5 million, or $1.84 per share. Net income from
U.S. Cellular increased to $15.9 million, or $.26 per share, in 1998, from $14.9
million, or $.24 per share, in 1997. Net income from TDS Telecom decreased to
$5.2 million, or $.09 per share, in 1998 from $8.9 million, or $.15 per share,
in 1997, primarily due to the $6.6 million decrease in operating income. Net
income from Corporate, American Paging and Other increased to $11.9 million, or
$.19 per share, in 1998 from $3.8 million, or $.06 per share, in 1997 due
primarily to increase in the tax benefit associated with Aerial's losses. The
business units compute their federal income taxes as if they filed a separate
return. Any income tax benefits used on a consolidated basis not used by the
business units are recorded by TDS, the parent company. TDS and the business
units have tax allocation agreements and policies under which the business units
are able to carry forward any losses and credits and use them to offset any
future income tax liability to TDS. Aerial's activities reduced net income by
$71.7 million, or $1.18 per share, in 1998 compared to $18.5 million, or $.30
per share in 1997.
The table below summarizes the effects of the business units and gains (along
with the related impact on income taxes and minority interest) on net income
available to common and earnings per share - diluted.
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1998 1997
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(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net Income Available to Common
U.S. Cellular $ 15,855 $ 14,947
TDS Telecom 5,203 8,921
Aerial (71,680) (18,490)
Corporate, American Paging and Other 11,868 3,758
Gains 112,484 --
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$ 73,730 $ 9,136
============= =============
Diluted Earnings Per Share
U.S. Cellular $ .26 $ .24
TDS Telecom .09 .15
Aerial (1.18) (.30)
Corporate, American Paging and Other .19 .06
Gains 1.84 --
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$ 1.20 $ .15
============= =============
</TABLE>
U.S. Cellular's operating results were impacted by the effects of acquisitions,
sales and exchanges, primarily those related to the exchange of markets with
BellSouth Corporation ("BellSouth"). The markets acquired in that transaction,
net of the markets divested, generated increases in overall revenues, operating
expenses, operating cash flow and operating income. These increases were
primarily due to the increase in the U.S. Cellular's customer base as a result
of the exchange.
However, the results of certain of U.S. Cellular's existing markets which are
adjacent to the markets acquired were negatively impacted by the effects of the
exchange. Specifically, inbound roaming revenue and, to a lesser extent,
operating cash flow suffered the most negative impact
3
<PAGE>
in these markets. This impact was primarily due to the change in the nature and
pricing of transactions in which customers from the acquired markets use their
wireless phones when roaming in U.S. Cellular's existing markets. Prior to the
exchange, U.S. Cellular's existing markets recorded inbound roaming revenue at
premium rates; after the exchange, those markets recorded an intercompany
transfer amount which is eliminated in U.S. Cellular's consolidated financial
statements.
Overall, U.S. Cellular's revenues, operating cash flow and operating income were
positively impacted by the effects of the BellSouth exchange.
Operating Revenues increased 35% ($102.0 million) during the first quarter of
1998 primarily as a result of a 52% increase in customer units served. U.S.
Cellular represented 59% ($60.6 million) of the total increase in revenues as
customer units increased by 653,000 units, or 56%, for the twelve months ended
March 31, 1998, to 1,817,000 units. Aerial represented 30% ($30.7 million) of
the increase as it added over 165,000 units in its first twelve months of
operations. TDS Telecom represented 11% ($10.6 million) of the total increase in
revenues. Access lines increased 7% for the twelve month period ended March 31,
1998 to 528,900 access lines.
U.S. Cellular revenues increased 33% ($60.6 million) in 1998 reflecting a 56%
increase in customer units. Local retail revenue increased 41% ($49.1 million)
in the first quarter of 1998 due primarily to the 56% customer growth. Average
local minutes of use per retail customer decreased by 5% to 95 in 1998 from 100
in 1997, while average local retail revenue per minute totaled $.34 in 1998
compared to $.36 in 1997. U.S. Cellular's use of incentive programs in 1997 and
1998 that encourage lower-priced weekend and off-peak usage, in order to
stimulate overall usage, resulted in a lower average revenue per minute of use.
Average revenue per minute also declined due to increased amounts of bill
credits given to new and current 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 2% ($900,000) in
the first quarter of 1998. Roaming transactions between U.S. Cellular's existing
markets and the acquired markets, and vice versa, are considered intracompany
transactions in 1998, the revenue from those roaming transactions is recorded as
an offset to customer usage expense in the current year. Roaming traffic
involving the same markets would have been recorded as inbound roaming revenue
and customer usage expense in 1997. The 32% increase in roaming minutes used was
offset by negotiated reductions in roaming rates. Average inbound roaming
revenue per minute declined by 22% to $.69 in 1998 from $.88 in 1997. The
addition of the acquired markets also caused the elimination of certain inbound
roaming revenues between U.S. Cellular's existing markets and the acquired
markets.
Total average monthly service revenue per customer decreased 17% ($8.84) to
$44.66 in the first quarter of 1998 from $53.50 in 1997. Average monthly local
retail revenue per customer declined 11% ($3.91) to $32.14 in 1998 from $36.05
in 1997 due primarily to competitive pressures, incentive programs being offered
to new and current customers to become or remain customers, consumer market
penetration and the effects of acquisitions. The recently acquired markets
produced a lower amount of revenue per customer (approximately 20%), thereby
reducing the average retail revenue per customer. Average monthly inbound
roaming revenue per customer declined 35% ($4.78) to $8.73 in 1998 compared to
$13.51 in 1997. This decrease is related to the decrease in roaming revenue per
minute, the faster growth of U.S. Cellular's customer base as compared to the
growth of inbound roaming revenues and the
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<PAGE>
elimination of certain inbound roaming revenues between U.S. Cellular's existing
markets and the acquired markets.
TDS Telecom revenues increased 10% ($10.6 million) in 1998 due to growth in
telephone operations ($8.7 million) and growth in other services ($2.2 million).
Telephone operations revenues increased primarily as a result of the recovery of
increased costs of providing long-distance services ($2.1 million), increased
sale of customer premise equipment ($1.7 million), effects of acquisitions ($1.6
million), internal access line growth of 5% since March 31, 1997 ($1.5 million),
and increased network usage ($1.3 million). The number of telephone access lines
increased by 7% (5% from internal growth and 2% from acquisitions) to 528,900 at
March 31, 1998 from 493,000 at March 31, 1997. Average monthly revenue per
access line increased by 2% to $68.48 for the first quarter of 1998 from $67.24
in 1997. The other services increase was primarily driven by increases in
revenues in the LAN wiring business of $1.4 million and from the Internet access
provider of $900,000.
Aerial revenues totaled $30.7 million in 1998, consisting of service revenue of
$24.1 million and equipment sales revenues of $6.6 million. Average revenue per
customer declined to approximately $57 in the first quarter of 1998 as compared
to over $70 in the third and fourth quarter of 1997. During the first quarter, a
number of subscribers were deactivated for non-payment. Despite churn, including
Aerial-initiated deactivations, Aerial added over 40,000 customer units in the
first quarter of 1998 and had over 165,000 customers in service at March 31,
1998. Aerial did not have any revenues in the first quarter of 1997.
Operating Expenses rose 70% ($168.2 million) in the first quarter of 1998 due
primarily to added expenses at Aerial for the development of its markets and
added expenses to serve the growing customer base. Aerial represented 60%
($100.1 million) of the total increase in operating expenses, while cellular
represented 30% ($50.9 million) and telephone represented 10% ($17.2 million) of
the total increase.
U.S. Cellular expenses increased 32% ($50.9 million) during 1998. System
operations expenses increased 18% ($5.7 million) in 1998 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 19% ($3.7 million) primarily due to the increase in net outbound roaming
expense and the effects of acquisitions. Net outbound roaming usage expense is
the result of U.S. Cellular providing a larger service footprint to its
customers while charging them local rates, which are lower than roaming rates it
is charged by other carriers, as an incentive to become or remain customers.
Maintenance, utility and cell site expenses increased 17% ($2.1 million)
reflecting primarily the increase in the number of cell sites to 1,786 in 1998
from 1,377 in 1997.
Marketing and selling expenses increased 27% ($15.0 million), including a $2.8
million increase in cost of equipment sold reflecting costs incurred to add new
customers, increased advertising to promote the United States Cellular brand and
cellular wireless communications and the effects of acquisitions. Cost per gross
customer addition declined to $313 in 1998 from $324 in 1997 while gross
customer activations increased to 198,000 in 1998 from 157,000 in 1997. General
and administrative expenses increased 34% ($15.1 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 and the effects of acquisitions.
Depreciation and amortization increased 50% ($15.1 million) primarily due to the
increase in average fixed assets
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<PAGE>
since March 31, 1997 as well as a reduction in useful lives of certain assets
beginning in 1998 which increased depreciation expense by $3.5 million and the
effects of acquisitions.
TDS Telecom expenses increased 22% ($17.2 million) during 1998 due to growth in
telephone operations ($11.5 million) and to growth in other services ($6.0
million). Telephone operations increased primarily due to increased depreciation
and amortization ($2.3 million), the effects of acquisitions ($1.5 million),
increased sales of customer premise equipment ($1.3 million), increased costs to
support and maintain information systems ($1.2 million) and increased costs of
maintaining the centralized network management center ($1.0 million). The
remaining increase is due to growth in internal operations, including wage and
salary increases, staffing and inflation. Other services increased primarily due
to the growth in the LAN wiring business of $2.9 million, development activities
at a start-up competitive local exchange carrier of $2.1 million and growth at
the Internet access provider of $900,000.
Aerial's expenses totaled $100.1 million in 1998. Expenses incurred in the first
quarter of 1997 prior to the launch of service totaled $21.6 million and were
reported as PCS Development Costs as part of Investment and Other Income
(Expense). System operations expenses totaled $15.0 million reflecting the costs
of operating Aerial's network, primarily cell site expenses, landline
interconnection charges and wages. Marketing and selling expenses incurred to
add new customers totaled $17.4 million while cost of equipment sold totaled
$22.8 million. General and administrative expenses totaled $14.2 million
reflecting the expenses associated with the management and operating teams as
well as overhead expenses. Customer service expenses totaled $10.9 million
primarily for the staffing to support the PCS markets. Depreciation and
amortization totaled $19.7 million.
Operating Income was a $(27.2) million loss in the first quarter of 1998
compared to $41.9 million income in 1997 reflecting the increased expenses of
Aerial's development activities. Aerial incurred an operating loss of $69.3
million in the first quarter of 1998 which offset the U.S. Cellular and TDS
Telecom operating income. U.S. Cellular's operating income increased 41% to
$33.2 million in the first quarter of 1998 and its operating income margin
increased to 13.5% in 1998 from 12.7% in 1997. TDS Telecom's operating income
declined $6.6 million to $20.3 million reflecting $3.8 million of additional
operating losses from other services, primarily the CLEC business and the LAN
wiring business, and a $2.8 million decrease in telephone operating income. TDS
Telecom's operating margin decreased to 17.5% in 1998 from 25.5% in 1997 due to
the impact of new business ventures and higher operating costs.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------
1998 1997 Change
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Income (Loss)
from Ongoing Operations
U.S. Cellular $ 33,155 $ 23,445 $ 9,710
TDS Telecom 20,315 26,907 (6,592)
Aerial (69,313) -- (69,313)
----------- ----------- -----------
(15,843) 50,352 (66,195)
American Paging Operating (Loss) (11,406) (8,411) (2,995)
----------- ----------- -----------
Operating Income (Loss) $ (27,249) $ 41,941 $ (69,190)
=========== =========== ===========
</TABLE>
6
<PAGE>
TDS completed the transfer of substantially all of the assets and certain,
limited liabilities of American Paging, Inc. to TSR Wireless Holdings, LLC
pursuant to a previously announced asset contribution agreement. American
Paging's revenues are netted against its expenses with the resulting operating
loss reported as American Paging Operating (Loss). American Paging's revenues
totaled $17.8 million and $24.6 million for the three months ended March 31,
1998 and 1997, respectively, and expenses totaled $29.2 million and $33.0
million, respectively. Effective in the second quarter of 1998, TDS will follow
the equity method of accounting for its interest in TSR Wireless Holdings, LLC
and will report these results as a component of Investment and Other Income
(Expense).
Investment and Other Income (Expense) totaled $223.9 million in 1998 and $(4.7)
million in 1997.
Gain on Sale of Cellular Interests and Other Investments totaled $221.4 million
in the first quarter of 1998 as the Company has sold or traded certain
non-strategic minority cellular interests. There were no asset sales in the
first quarter of 1997.
PCS Development Costs totaled $21.6 million in 1997 reflecting the costs prior
to the launch of PCS service in Aerial markets.
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, decreased 24% ($4.3 million) in the first quarter of 1998 primarily
due to the transfer of minority interests to BellSouth in the fourth quarter of
1997. 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 and Aerial's net income or loss, the minority partners' share of U.S.
Cellular's operating markets and other minority shareholders' and partners'
share of subsidiaries' net income or loss. The increase in minority share of
income in the first quarter is primarily due to the gains from the sale of
cellular interests at U.S. Cellular, which accounted for $(20.9) million of the
$(24.5) million of U.S. Cellular's minority shareholders' share of income.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1998 1997 Change
----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Minority Share of (Income) Loss
United States Cellular
Minority Shareholders' Share $ (24,535) $ (3,521) $ (21,014)
Minority Partners' Share (1,182) (2,865) 1,683
----------- ---------- -----------
(25,717) (6,386) (19,331)
Aerial Communications 15,241 3,849 11,392
Telephone Subsidiaries and Other (1,077) (222) (855)
----------- ---------- -----------
$ (11,553) $ (2,759) $ (8,794)
=========== ========== ===========
</TABLE>
Interest Expense increased $17.8 million to $31.6 million in the first quarter
of 1998 primarily due to a reduced amount of capitalized interest ($6.9
million), the increase in short-term debt
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<PAGE>
($4.2 million), the increase in U.S. Cellular's long-term debt ($4.5 million)
and the increase in Aerial's long-term debt ($2.2 million). The Company
capitalized $132,000 of interest in the first quarter of 1998 and $7.1 million
in 1997 related to qualifying license and construction costs.
Minority Interest in Income of Subsidiary Trust totaled $4.9 million in the
first quarter of 1998. This preferred dividend requirement is the result of the
issuance of Company-Obligated Mandatorily Redeemable Preferred Securities
("Preferred Securities") in November 1997 and February 1998. In February 1998,
TDS Capital II, a subsidiary trust of TDS, issued 6,000,000 of its 8.04%
Preferred Securties at $25 per Preferred Security. The sole asset of TDS Capital
II is $154.6 million principal amount of TDS's 8.04% Subordinated Debentures due
March 31, 2038.
Income Tax Expense increased $72.1 million in 1998 to $86.0 million primarily
due to the significant gains on the sale of cellular interests and other
investments.
Net Income Available to Common increased $64.6 million to $73.7 million in the
first quarter of 1998 from $9.1 million in the first quarter of 1997. The gains
from the sale of cellular interests and other investments totaled $112.5 million
in 1998. Earnings Per Common Share - Diluted was $1.20 in the first quarter of
1998 and $.15 in the first quarter of 1997. Gains from the sale of cellular
interests and other investments contributed $1.84 per share.
Management believes operating expenses tend to be higher in the fourth quarter,
particularly at U.S. Cellular, due to increased marketing activities and
customer growth. This seasonality may cause operating income to be lower in the
fourth quarter. PCS competitors have initiated service in certain of U.S.
Cellular's markets over the past two years. U.S. Cellular expects PCS
competitors to complete initial deployment of PCS in portions of all of its
market clusters by the end of 1998. U.S. Cellular has increased its advertising
to promote the United States Cellular brand and to distinguish its service from
other wireless communications providers. U.S. Cellular's management continues to
monitor other wireless communications providers' strategies to determine what
effects additional competition will have on U.S. Cellular's future strategies
and results. TDS anticipates that Aerial will continue to incur operating losses
and generate negative cash flow as it continues to build its customer base
reducing TDS's cash flow, operating and net income during 1998.
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 the build-out of PCS markets,
to fund acquisitions and for general corporate purposes. Although increasing
internal cash flow from U.S. Cellular and steady internal cash flow from TDS
Telecom 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 U.S. Cellular and TDS Telecom. Cash flows from operating activities
totaled $28.1 million in the first quarter of 1998 compared to $54.7 million in
1997. The launch of Aerial's operations required substantial funds reducing cash
flows from operating activities in 1998. U.S. Cellular's operating cash flow
(operating income plus depreciation and amortization) totaled $78.4 million
8
<PAGE>
in the first quarter of 1998 (up 46%) while TDS Telecom's operating cash flow
totaled $47.1 million (down 7%). Aerial's start-up activities resulted in an
operating cash outflow of $49.6 million for the first quarter of 1998. 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 $44.3 million in the first quarter of 1998 and $48.9
million in 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1998 1997 Change
---- ---- ------
(Dollars in thousands)
<S> <C> <C> <C>
Operating cash flow
U.S. Cellular $ 78,422 $ 53,606 $ 24,816
TDS Telecom 47,130 50,765 (3,635)
Aerial (49,617) -- (49,617)
American Paging (3,511) (707) (2,804)
---------- ----------- ----------
72,424 103,664 (31,240)
Other operating activities (44,311) (48,936) 4,625
---------- ----------- ----------
$ 28,113 $ 54,728 $ (26,615)
========== =========== ==========
</TABLE>
Cash Flows from Financing Activities. TDS has used short-term debt to finance
its PCS operations, for acquisitions and for general corporate purposes. TDS has
taken advantage of attractive opportunities from time-to-time to reduce
short-term debt with proceeds from long-term debt and equity sales, and sales of
non-strategic assets.
Cash flows from financing activities totaled $54.2 million in the first quarter
of 1998 compared to $90.9 million in 1997. In 1998, TDS received $145.1 million
on the sale of 8.04% Trust Originated Preferred Securities(sm) ("TOPrS(sm)")1.
The proceeds from the issuance of the Trust Originated Securities provided most
of the Company's external financing during the first quarter of 1998 and were
used to reduce notes payable balances. Increases in short-term debt provided
most of the Company's external financing requirements during the first quarter
of 1997. The 1997 borrowings were used primarily to fund expenditures for PCS
construction and development activities and for stock repurchases.
In the first quarter of 1998, TDS expended $5.7 million for the purchase of
American Paging common shares pursuant to a tender offer. In the first quarter
of 1997, TDS purchased, on the open market, 728,100 TDS Common Shares for $28.9
million and 350,000 U.S. Cellular Common Shares for $9.8 million.
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 activities required $66.5 million in
the first quarter of 1998 compared to $147.4 million in 1997. Capital
expenditures required $125.3 million in 1998 and $169.0 million in 1997.
Aerial's capital expenditures have decreased in 1998 because it has completed
its initial build out program. Acquisitions, net of cash acquired, required
$52.3 million in 1998. The sales of non-strategic cellular interests and other
investments provided $96.4 million in 1998 reducing total cash flows
- --------
1 (sm) "Trust Originated Preferred Securities" and "TOPrS" are service
marks of Merrill Lynch & Co., Inc.
9
<PAGE>
required for investing activities in 1998.
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. Capital expenditures totaled $125.3
million in the first quarter of 1998 consisting primarily of $69.1 million for
cellular plant and equipment, $30.7 million for telephone plant and equipment
and $29.7 million for PCS property and equipment. Capital expenditures totaled
$169.0 million in 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.
LIQUIDITY
TDS anticipates that the aggregate resources required for 1998 will include
approximately $545 million for capital spending, consisting of $330 million for
cellular capital additions, $140 million for telephone capital additions and $75
million for PCS capital additions. In addition, Aerial's working capital and
operating expenses will require an estimated $185 million. The Company
anticipates financing these expenditures with internally generated funds and
short-term financing.
U.S. Cellular plans to finance its cellular construction program using primarily
internally generated cash supplemented by short-term financing. U.S. Cellular's
operating cash flow totaled $286.7 million for the twelve months ended March 31,
1998, up 35% ($73.9 million) from 1997. U.S. Cellular had $500 million of bank
lines of credit for general corporate purposes at March 31, 1998, all of which
was unused. These line of credit agreements provide for borrowings at the London
InterBank Offered Rate ("LIBOR") plus 26.5 basis points.
TDS Telecom plans to finance its construction program using primarily internally
generated cash supplemented by long-term financing from federal government
programs and short-term financing. Operating cash flow totaled $193.0 million
for the twelve months ended March 31, 1998, down 2% ($4.9 million) from 1997. At
March 31, 1998, TDS Telecom telephone subsidiaries had $114.7 million in
unadvanced loan funds from federal government programs to finance the telephone
construction program.
Aerial plans to finance its construction expenditures and working capital
requirements with short-term financing. Aerial is currently negotiating
for additional financing, although there can be no assurance that
these negotiations will be completed on terms or prices
acceptable to it. Aerial issued 10-year 8.05% zero coupon notes for $100 million
in February 1998 in satisfaction of all outstanding obligations (aggregating
approximately $84 million) and certain future obligations (aggregating
approximately $16 million) of Aerial under the Nokia Credit Agreement.
TDS and its subsidiaries had cash and temporary investments totaling $84.2
million and longer-term cash investments totaling $19.7 million at March 31,
1998. 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 had
10
<PAGE>
$650 million of bank lines of credit for general corporate purposes at March 31,
1998. Unused amounts of such lines totaled $200 million. These line of credit
agreements provide for borrowings at negotiated rates up to the prime rate.
Management believes that TDS's internal cash flows and funds available from cash
and cash equivalents, lines of credit, and longer-term financing commitments
provide sufficient financial flexibility. However, the timing and amounts of
capital expenditures and acquisitions as well as working capital requirements
and amounts needed for general corporate purposes may vary throughout the year.
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.
Recent Developments
At a Special Meeting on April 27, 1998, Shareholders of the Company approved a
proposal (the "Tracking Stock Proposal") and two related proposals which would,
among other things, change the state of incorporation of TDS from Iowa to
Delaware and permit TDS to issue shares of tracking stock which are intended to
reflect the performance of the Company's interest in its three principal
business units: TDS Telecom, U.S. Cellular and Aerial. The reincorporation of
TDS into Delaware is expected to take place in mid to late May, following the
receipt of regulatory approvals.
On April 17, 1998, the Board of Directors of the Company determined to take
certain action at the 1998 Annual Meeting of Shareholders, subject to approval
by shareholders of the Tracking Stock Proposal on April 27, 1998. Since the
Tracking Stock Proposal was approved at the Special Meeting on April 27, 1998,
the Board of Directors will submit a proposal to shareholders at the Company's
1998 Annual Meeting, currently expected to occur in July 1998, to consider
certain amendments to the Restated Certificate of Incorporation of TDS Delaware
(the "Restated Certificate"), which are intended to improve the corporate
governance provisions of the Tracking Stock Proposal in certain respects. The
amendments that will be considered at the 1998 Annual Meeting are as follows:
1. The Restated Certificate would be amended to require a vote by the
holders of a majority of the Common Shares and Series A Common Shares,
each voting separately as a class, in connection with any merger or
consolidation of TDS that requires a shareholder vote.
2. The Restated Certificate would be amended to require a class vote
by the holders of a majority of the Common Shares to increase the
authorized number of Common Shares, and to require a class vote by the
holders of a majority of the Series A Common Shares to increase the
authorized number of Series A Common Shares.
3. The Restated Certificate would be amended to provide that TDS
would be subject to the provisions of Section 203 of the Delaware
General Corporation Law.
In connection with the Tracking Stock Proposal, TDS had made offers to each of
U.S. Cellular
11
<PAGE>
and Aerial to acquire the common stock of such corporations which TDS does not
own, in exchange for tracking stock of TDS which would be intended to reflect
the separate performance of U.S. Cellular and Aerial, respectively.
TDS has held several meetings and substantive negotiations with the special
committee of the board of directors of Aerial relating to the proposed Aerial
Merger. Following the most recent meeting with TDS, the special committee of the
board of directors of Aerial advised TDS that it had determined to recommend
that the board of directors of Aerial reject the offer by TDS to acquire the
publicly-held shares of Aerial which TDS does not own. The Aerial special
committee has advised TDS that it would be prepared to consider a revised
proposal which "contains increased protections designed to preserve Aerial's
inherent value for its public stockholders and also embodies an increased equity
interest in the Aerial Group tracking stock for the Aerial public stockholders."
TDS intends to make a revised proposal to the Aerial special committee and to
continue to seek an agreement to acquire the Aerial Common Shares that it does
not own on mutually acceptable terms.
With respect to the U.S. Cellular Merger, TDS has met once with, but has not yet
held substantive negotiations with, the special committee of the board of
directors of U.S. Cellular, which is continuing to conduct due diligence.
However, the special committee of the board of directors of U.S. Cellular has
expressed significant reservations relating to the offer by TDS to acquire the
publicly-held shares of U.S. Cellular that TDS does not own. TDS intends to
continue to seek an agreement to acquire the U.S. Cellular Common Shares that it
does not own on mutually acceptable terms.
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.
12
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Unaudited
---------
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1997
---- ----
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
OPERATING REVENUES
U.S. Cellular $ 245,157 $ 184,584
TDS Telecom 116,215 105,571
Aerial 30,746 --
--------------- ------------
392,118 290,155
--------------- ------------
OPERATING EXPENSES
U.S. Cellular 212,002 161,139
TDS Telecom 95,900 78,664
Aerial 100,059 --
--------------- ------------
407,961 239,803
--------------- ------------
Operating Income (Loss) from
Ongoing Operations (15,843) 50,352
American Paging Operating (Loss) (11,406) (8,411)
--------------- ------------
OPERATING INCOME (LOSS) (27,249) 41,941
--------------- ------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income 3,437 3,418
Cellular investment income, net of
license cost amortization 13,605 17,920
Gain on sale of cellular interests and other
investments 221,442 --
PCS development costs -- (21,614)
Other income (expense), net (3,049) (1,637)
Minority share of income (11,553) (2,759)
--------------- ------------
223,882 (4,672)
--------------- ------------
INCOME BEFORE INTEREST AND INCOME TAXES 196,633 37,269
Interest expense 31,613 13,814
Minority interest in income of subsidiary trust 4,896 --
--------------- -------------
INCOME BEFORE INCOME TAXES 160,124 23,455
Income tax expense 85,954 13,838
--------------- -------------
NET INCOME 74,170 9,617
Preferred Dividend Requirement (440) (481)
--------------- -------------
NET INCOME AVAILABLE TO COMMON $ 73,730 $ 9,136
=============== =============
WEIGHTED AVERAGE COMMON SHARES (000s) 60,750 61,184
EARNINGS PER COMMON SHARE - Basic $ 1.21 $ .15
=============== =============
EARNINGS PER COMMON SHARE - Diluted $ 1.20 $ .15
=============== =============
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .11 $ .105
=============== =============
<FN>
The accompanying notes to financial statements are an integral
part of these statements.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 74,170 $ 9,617
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 99,673 62,028
Deferred taxes 79,114 3,730
Investment income (14,551) (19,154)
Minority share of income 11,553 2,759
Gain on sale of cellular interests and
other investments (221,442) --
Noncash interest expense 8,424 5,805
Other noncash expense 4,166 5,240
Change in accounts receivable (61) (185)
Change in accounts payable (12,945) (8,598)
Change in accrued taxes 1,276 4,988
Change in accrued interest (8,853) (4,259)
Change in other assets and liabilities 7,589 (7,243)
----------- ----------
28,113 54,728
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 1,848 2,840
Repayments of long-term debt (5,496) (8,373)
Change in notes payable (75,670) 140,866
Trust preferred securities 145,050 --
Dividends paid (7,141) (6,880)
Repurchase of Common Shares -- (28,878)
Purchase of subsidiary common stock (5,738) (9,801)
Other financing activities 1,365 1,106
----------- ----------
54,218 90,880
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (125,314) (169,024)
Investments in and advances to cellular
minority partnerships (5,430) (6,146)
Distributions from partnerships 4,554 9,297
Investments in PCS licenses -- (4,745)
Proceeds from investment sales 96,432 --
Other investing activities (3,135) (2,239)
Acquisitions, net of cash acquired (52,275) --
Change in temporary investments and marketable
securities 18,630 25,478
----------- ----------
(66,538) (147,379)
----------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 15,793 (1,771)
CASH AND CASH EQUIVALENTS -
Beginning of period 51,008 57,633
----------- ----------
End of period $ 66,801 $ 55,862
=========== ==========
<FN>
The accompanying notes to financial statements are an integral
part of these statements.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<CAPTION>
(Unaudited)
March 31, 1998 December 31, 1997
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 66,801 $ 51,008
Temporary investments 17,429 24,559
Accounts receivable from customers and others 240,066 247,298
Materials and supplies, at average cost,
and other current assets 62,285 85,419
------------- -------------
386,581 408,284
------------- -------------
INVESTMENTS
Cellular license acquisition costs, net 1,175,668 1,190,917
Cellular minority interests 105,427 138,367
PCS license acquisition costs, net 317,917 319,918
Franchise costs and other costs in excess of
the underlying book value of subsidiaries,
net 184,839 180,669
Marketable equity securities 248,482 1,621
Other investments 190,256 141,092
------------- -------------
2,222,589 1,972,584
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Cellular telephone, net 955,550 940,253
Telephone, net 840,979 830,767
PCS, net 618,937 604,104
Radio paging, net -- 43,230
Other, net 35,780 47,299
------------- -------------
2,451,246 2,465,653
------------- -------------
OTHER ASSETS AND DEFERRED CHARGES 140,692 125,080
------------- -------------
TOTAL ASSETS $ 5,201,108 $ 4,971,601
============= =============
<FN>
The accompanying notes to financial statements are an integral
part of these statements.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
(Unaudited)
March 31, 1998 December 31, 1997
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt
and preferred shares $ 16,091 $ 16,115
Notes payable 450,615 527,587
Accounts payable 211,370 239,783
Advance billings and customer deposits 29,218 33,640
Accrued interest 9,441 18,284
Accrued taxes 8,360 6,961
Other current liabilities 54,012 63,515
------------- ---------------
779,107 905,885
------------- ---------------
DEFERRED LIABILITIES AND CREDITS 323,863 235,646
------------- ---------------
LONG-TERM DEBT, excluding current portion 1,292,311 1,264,218
------------- ---------------
REDEEMABLE PREFERRED SHARES, excluding
current portion 175 180
------------- ---------------
MINORITY INTEREST in subsidiaries 419,564 416,566
------------- ---------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES of Subsidiary Trust
Holding Solely Company Subordinated
Debentures (a) 300,000 150,000
------------- ---------------
NONREDEEMABLE PREFERRED SHARES 27,924 30,987
------------- ---------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share 54,737 54,443
Series A Common Shares, par value $1 per
share 6,936 6,936
Common Shares issuable (12,584 and 10,480
shares, respectively) 549 499
Capital in excess of par value 1,667,551 1,663,749
Unrealized gains on securities 18,628 683
Treasury Shares, at cost (770,132 and
794,576 shares, respectively) (29,768) (30,682)
Retained earnings 339,531 272,491
------------- ---------------
2,058,164 1,968,119
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,201,108 $ 4,971,601
============= ===============
<FN>
(a) As described in Note 5, the sole asset of TDS Capital I is $154.6 million
principal amount of 8.5% subordinated debentures due 2037 from TDS. The sole
asset of TDS Capital II is $154.6 million principal amount of 8.04% subordinated
debentures due 2038 from TDS.
The accompanying notes to financial statements are an integral
part of these statements.
</FN>
</TABLE>
16
<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, 1998 and December
31, 1997, and the results of operations and cash flows for the three
months ended March 31, 1998 and 1997. The results of operations for the
three months ended March 31, 1998 and 1997, are not necessarily indicative
of the results to be expected for the full year.
2. At a Special Meeting on April 27, 1998, Shareholders of the Company
approved a proposal (the "Tracking Stock Proposal") and two related
proposals which would, among other things, change the state of
incorporation of TDS from Iowa to Delaware and permit TDS to issue shares
of tracking stock which are intended to reflect the performance of the
Company's interest in its three principal business units: TDS Telecom,
U.S. Cellular and Aerial. The reincorporation of TDS into Delaware is
expected to take place in mid to late May, following the receipt of
regulatory approvals.
On April 17, 1998, the Board of Directors of the Company determined to
take certain action at the 1998 Annual Meeting of Shareholders, subject to
approval by shareholders of the Tracking Stock Proposal on April 27, 1998.
Since the Tracking Stock Proposal was approved at the Special Meeting on
April 27, 1998, the Board of Directors will submit a proposal to
shareholders at the Company's 1998 Annual Meeting, currently expected to
occur in July 1998, to consider certain amendments to the Restated
Certificate of Incorporation of TDS Delaware (the "Restated Certificate"),
which are intended to improve the corporate governance provisions of the
Tracking Stock Proposal in certain respects. The amendments that will be
considered at the 1998 Annual Meeting are as follows:
1. The Restated Certificate would be amended to require a vote by
the holders of a majority of the Common Shares and Series A Common
Shares, each voting separately as a class, in connection with any
merger or consolidation of TDS that requires a shareholder vote.
2. The Restated Certificate would be amended to require a class
vote by the holders of a majority of the Common Shares to increase
the authorized number of Common Shares, and to require a class
vote by the holders of a majority of the Series A Common Shares to
increase the authorized number of Series A Common Shares.
3. The Restated Certificate would be amended to provide that TDS
would be subject to
17
<PAGE>
the provisions of Section 203 of the Delaware General Corporation
Law.
In connection with the Tracking Stock Proposal, TDS had made offers to
each of U.S. Cellular and Aerial to acquire the common stock of such
corporations which TDS does not own, in exchange for tracking stock of TDS
which would be intended to reflect the separate performance of U.S.
Cellular and Aerial, respectively.
TDS has held several meetings and substantive negotiations with the
special committee of the board of directors of Aerial relating to the
proposed Aerial Merger. Following the most recent meeting with TDS, the
special committee of the board of directors of Aerial advised TDS that it
had determined to recommend that the board of directors of Aerial reject
the offer by TDS to acquire the publicly-held shares of Aerial which TDS
does not own. The Aerial special committee has advised TDS that it would
be prepared to consider a revised proposal which "contains increased
protections designed to preserve Aerial's inherent value for its public
stockholders and also embodies an increased equity interest in the Aerial
Group tracking stock for the Aerial public stockholders." TDS intends to
make a revised proposal to the Aerial special committee and to continue to
seek an agreement to acquire the Aerial Common Shares that it does not own
on mutually acceptable terms.
With respect to the U.S. Cellular Merger, TDS has met once with, but has
not yet held substantive negotiations with, the special committee of the
board of directors of U.S. Cellular, which is continuing to conduct due
diligence. However, the special committee of the board of directors of
U.S. Cellular has expressed significant reservations relating to the offer
by TDS to acquire the publicly-held shares of U.S. Cellular that TDS does
not own. TDS intends to continue to seek an agreement to acquire the U.S.
Cellular Common Shares that it does not own on mutually acceptable terms.
3. TDS completed the transfer of substantially all of the assets and certain,
limited liabilities of American Paging, Inc. to TSR Wireless Holdings, LLC
pursuant to a previously announced asset contribution agreement. American
Paging's revenues totaled $17.8 million and $24.6 million for the three
months ended March 31, 1998 and 1997, respectively, and expenses totaled
$29.2 million and $33.0 million, respectively. Effective in the second
quarter of 1998, TDS will follow the equity method of accounting for its
interest in TSR Wireless Holdings, LLC and will report these results as a
component of Investment and Other Income (Expense).
18
<PAGE>
4. Marketable Equity Securities
The following table lists the Company's marketable equity securities at
March 31, 1998.
<TABLE>
<CAPTION>
Cumulative Net
Fair Market Original Unrealized Tax Unrealized
Value Cost Gain Effect Gain
--------- --------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment in Air Touch $ 241,889 $ 217,946 $ 23,943 $ 8,637 $ 15,306
Other 6,593 1,142 5,451 2,129 3,322
--------- --------- --------- --------- ---------
$ 248,482 $ 219,088 $ 29,394 $ 10,766 $ 18,628
========= ========= ========= ========= =========
</TABLE>
The cumulative unrealized gain, net of taxes, is included in Common
Shareholders' Equity.
5. Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Company Subordinated Debentures
In February 1998, TDS Capital II, a subsidiary trust (the "Trust") of TDS,
issued 6,000,000 of its 8.04% Company-Obligated Mandatorily Redeemable
Preferred Securities (the "Preferred Securities") at $25 per Preferred
Security. Net proceeds from the issuance totaled $145.1 million and were
used to retire short-term debt.
The sole asset of TDS Capital II is $154.6 million principal amount of
TDS's 8.04% Subordinated Debentures due March 31, 2038 or such date to
which the maturity is extended by TDS, but in no event later than March
31, 2047. There is a full and unconditional guarantee by TDS of the
Trust's obligations under the Preferred Securities issued by the Trust.
However, TDS's obligations are subordinate and junior in right of payment
to certain other indebtedness of TDS. TDS has the right to defer payment
of interest on the Subordinated Debentures by extending the interest
payment period, at any time, for up to 20 consecutive quarters. If
interest payment on the Subordinated Debentures are so deferred,
distributions on the Preferred Securities will also be deferred. During
any deferral, distributions will continue to accrue with interest thereon.
In addition, during any such deferral, TDS may not declare or pay any
dividend or other distribution on, or redeem or purchase, any of its
common stock.
The Subordinated Debentures are redeemable by TDS, in whole or in part,
from time to time, on or after March 31, 2003, or, in whole but not in
part, at any time in the event of certain income tax circumstances. If the
Subordinated Debentures are redeemed, the Trust must redeem Preferred
Securities on a pro rata basis having an aggregate liquidation amount
equal to the aggregate principal amount of the Subordinated Debentures so
redeemed. In the event of the dissolution, winding up or termination of
the Trust the holders of Preferred Securities will be entitled to receive,
for each Preferred Security, a liquidation amount of $25 plus accrued and
unpaid distributions thereon to the date of payment, unless, in connection
with the dissolution, winding up or termination, Subordinated Debentures
are distributed to the holders of the Preferred Securities.
The Preferred Securities are accounted for and reported in the Company's
financial statements in the same manner as the 8.5% Trust Originated
Preferred Securities issued by TDS Capital I in 1997.
19
<PAGE>
6. Long-term Debt
Aerial sold $220 million principal amount at maturity of 10-year zero
coupon 8.05% yield to maturity debt in February 1998 at an issue price of
$100 million. The unsecured notes are due in 2008 and there is no periodic
payment of interest. The proceeds were paid to Aerial's equipment vendor
in satisfaction of all then outstanding obligations and future obligations
up to $100 million. The notes are fully and unconditionally guaranteed by
TDS. The notes are subject to optional redemption beginning in 2003 at
redemption prices which reflect original issue discount accrued since
issuance.
7. Gains from Sale of Cellular Interests and Other Investments
Gains from the sale of cellular interest and other investments in 1998
primarily reflects gains recorded on the sale of the Company's minority
interests in twelve markets to AirTouch Communications Inc. ("AirTouch")
for AirTouch common shares and cash.
8. Other Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which
requires companies to report all of the changes in shareholder's equity,
except those resulting from investment by owners or distribution to owners
("Comprehensive Income"). The Company's Comprehensive Income includes Net
Income and Unrealized Gains from Marketable Equity Securities that are
classified as "available-for-sale". The following table summarizes the
Company's Comprehensive Income.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Net Income $ 74,170 $ 9,617
Other Comprehensive Income -
Unrealized gains on securities,
net of tax of $10,301 17,944 --
------------ ------------
$ 92,114 $ 9,617
============ ============
</TABLE>
9. Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share," effective December
31, 1997. Earnings per Common Share for March 31, 1997 has been restated
to conform to current period presentation.
20
<PAGE>
The amounts used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common and Series A Common
Shares of dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
----------------------
(Dollars and shares
in thousands)
<S> <C> <C>
Net Income $ 74,170 $ 9,617
Less: Preferred Dividends (440) (481)
---------- ---------
Net Income Available to Common used in Earnings
per Share-Basic 73,730 9,136
Reduction in preferred dividends if Preferred Shares
converted into Common Shares 402 --
Minority income adjustment (51) (51)
---------- ---------
Net Income Available to Common used in Earnings
per Share-Diluted $ 74,081 $ 9,085
========== =========
Weighted Average Number of Common Shares
used in Earnings per Share-Basic 60,750 61,184
Effect of Dilutive Securities:
Common Shares outstanding if Preferred
Shares converted 927 --
Stock options and stock appreciation rights 136 137
Common Shares issuable 14 27
---------- ---------
Weighted Average Number of Common Shares
used in Earnings per Share-Diluted 61,827 61,348
========== =========
</TABLE>
For 1997, Preferred Shares convertible into 951,000 Common Shares were not
included in computed diluted Earnings per Common Share because their
effects were antidilutive.
The minority income adjustment reflects the additional minority share of
U.S. Cellular's income computed as if all of U.S. Cellular's issuable
securities were outstanding.
10. Acquisition Effects
Assuming that acquisitions accounted for as purchases during the period
January 1, 1997, to March 31, 1998, had taken place on January 1, 1997,
unaudited pro forma results of operations from continuing operations would
have been as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
--------- ----------
(Dollars in thousands, except
per share amounts)
<S> <C> <C>
Operating revenues $ 392,118 $ 313,361
Net income 74,115 11,001
Earnings per share - Basic 1.21 .17
Earnings per share - Diluted $ 1.20 $ .17
</TABLE>
21
<PAGE>
11. Supplemental Cash Flow Information
Cash and cash equivalents include cash and those short-term, highly liquid
investments with 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 1998. In conjunction with these acquisitions, the following
assets were acquired and liabilities assumed and Common Shares issued.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
-------------------------------
(Dollars in thousands, except
per share amounts)
<S> <C>
Property, plant and equipment $ 7,825
Cellular licenses 34,080
Equity method investment in cellular interests 4,927
Franchise costs 5,304
Long-term debt (4,634)
Deferred credits (991)
Other assets and liabilities,
excluding cash and cash equivalents 7,972
Decrease in Minority interest 7,820
Common Shares issued (10,028)
----------------------
Decrease in cash due to acquisitions $ 52,275
======================
</TABLE>
The following table summarizes interest and income taxes paid, and other noncash
transactions.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
---- ----
(Dollar in thousands)
<S> <C> <C>
Interest Paid $ 31,089 $ 19,231
Income Taxes Paid 8,347 4,209
Common Shares issued by TDS for
conversion of TDS Preferred Stock $ 3,063 $ 261
</TABLE>
22
<PAGE>
12. Business Segment Information
The following tables summarize business segment information for the three
months ended or at March 31, 1998, and 1997.
<TABLE>
U.S. CELLULAR OPERATIONS
<CAPTION>
Three Months Ended or at
March 31,
------------------------------
1998 1997
------------- --------------
(Dollars in thousands)
<S> <C> <C>
Operating Revenues
Local service $ 170,085 $ 121,027
Inbound roaming 46,206 45,340
Long-distance and other 28,866 18,217
------------- -------------
245,157 184,584
------------- -------------
Operating Expenses
System operations 36,943 31,229
Marketing and selling 50,001 37,802
Cost of equipment sold 20,748 17,994
General and administrative 59,043 43,953
Depreciation 35,920 21,509
Amortization 9,347 8,652
------------- ------------
212,002 161,139
------------- ------------
Operating Income $ 33,155 $ 23,445
============= ============
Additions to property, plant and equipment $ 69,093 $ 53,062
Identifiable assets $ 2,714,381 $ 2,164,997
</TABLE>
<TABLE>
AERIAL OPERATIONS
<CAPTION>
Three Months Ended or at
March 31,
------------------------------
1998 1997
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Operating Revenues $ 30,746 $ --
------------- -------------
Operating Expenses
Systems operations 15,016 --
Marketing and selling 17,432 --
Cost of equipment sold 22,820 --
General and administrative 14,196 --
Customer service 10,899 --
Depreciation 17,807 --
Amortization 1,889 --
------------- ------------
100,059 --
------------- ------------
Operating (Loss) $ (69,313) $ --
============= ============
Additions to property, plant and
equipment $ 29,685 $ 84,608
Identifiable assets $ 962,886 $ 738,741
</TABLE>
23
<PAGE>
<TABLE>
TDS TELECOM OPERATIONS
<CAPTION>
Three Months Ended or at
March 31,
----------------------------
1998 1997
---------- ------------
(Dollars in thousands)
<S> <C> <C>
Telephone Operations
Operating Revenues
Local service $ 32,551 $ 29,861
Network access and long-distance 60,846 56,592
Miscellaneous 13,897 12,179
---------- -----------
107,294 98,632
---------- -----------
Operating Expenses
Network operations 20,678 18,030
Depreciation and Amortization 26,007 23,293
Customer operations 17,509 14,897
Corporate and other 18,948 15,456
---------- -----------
83,142 71,676
---------- -----------
Telephone Operating Income 24,152 26,956
---------- -----------
Other Operations
Revenues 9,400 7,171
Expenses 13,237 7,220
---------- -----------
Other Operating Income (3,837) (49)
---------- -----------
Intercompany Eliminations
Revenues (479) (232)
Expenses (479) (232)
---------- -----------
Operating Income $ 20,315 $ 26,907
========== ===========
Additions to property, plant and equipment $ 30,739 $ 23,904
Identifiable assets $1,305,207 $ 1,173,614
</TABLE>
<TABLE>
OTHER OPERATIONS
<CAPTION>
Three Months Ended or at
March 31,
-----------------------------
1998 1997
------------ -------------
(Dollars in thousands)
<S> <C> <C>
Additions to property, plant and equipment
Other $ (4,203) $ 7,450
Identifiable assets
Other $ 218,634 $ 238,514
</TABLE>
24
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibit 11 - Computation of earnings per common share is included
herein as footnote 9 to the financial statements.
(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, 1998:
TDS filed a Current Report on Form 8-K on January 29, 1998 dated January
28, 1998, which included a news release that announced the Company's
fourth quarter of 1997 financial results.
TDS filed a Current Report on Form 8-K on February 12, 1998, dated
February 10, 1998, which included a news release that announced the
definitive agreement between the Company and American Paging, Inc. for
TDS to acquire all of the issued and outstanding shares of common stock
of American Paging not already owned by TDS for $2.50 per share in cash.
TDS filed a Current Report on Form 8-K on March 26, 1998, dated March
24, 1998, which included a news release that announced the Company's
filing of a registration statement with the Securities and Exchange
Commission for an offering of its TDS Telecommunications Group Common
Shares, a class of common stock of TDS, pending the approval of the
reincorporation into Delaware by shareholders, which will track the
performance of the TDS Telecom Group.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------
(Registrant)
Date May 12, 1998 MURRAY L. SWANSON
--------------------------- --------------------------
Murray L. Swanson,
Executive Vice President-Finance
(Chief Financial Officer)
Date May 12, 1998 GREGORY J. WILKINSON
-------------------------- ---------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
26
<PAGE>
<TABLE>
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
For the Three Months March 31, 1998
(Dollars In Thousands)
<S> <C>
EARNINGS:
Income from Continuing Operations before
income taxes $ 160,124
Add (Deduct):
Minority Share of Losses (15,319)
Earnings on Equity Method (13,930)
Distributions from Minority Subsidiaries 4,554
Amortization of Capitalized Interest 526
Minority interest in majority-owned subsidiaries
that have fixed charges 24,828
------------
160,783
Add fixed charges:
Consolidated interest expense 36,509
Interest Portion (1/3) of Consolidated Rent Expense 3,620
------------
$ 200,912
============
FIXED CHARGES:
Consolidated interest expense $ 36,509
Capitalized interest 132
Interest Portion (1/3) of Consolidated Rent Expense 3,620
------------
$ 40,261
============
RATIO OF EARNINGS TO FIXED CHARGES 4.99
============
Tax-Effected Redeemable Preferred Dividends $ 48
Fixed Charges 40,261
------------
Fixed Charges and Redeemable Preferred Dividends $ 40,309
============
RATIO OF EARNINGS TO FIXED CHARGES
AND REDEEMABLE PREFERRED DIVIDENDS 4.98
============
Tax-Effected Preferred Dividends $ 863
Fixed Charges 40,261
------------
Fixed Charges and Preferred Dividends $ 41,124
============
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 4.89
============
</TABLE>
<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, 1998, and for the three months then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 66,801
<SECURITIES> 268,221
<RECEIVABLES> 197,413
<ALLOWANCES> 19,173
<INVENTORY> 33,863
<CURRENT-ASSETS> 386,581
<PP&E> 3,474,978
<DEPRECIATION> 1,023,732
<TOTAL-ASSETS> 5,201,108
<CURRENT-LIABILITIES> 779,107
<BONDS> 1,292,311
175
27,924
<COMMON> 61,673
<OTHER-SE> 1,996,491
<TOTAL-LIABILITY-AND-EQUITY> 5,201,108
<SALES> 0
<TOTAL-REVENUES> 392,118
<CGS> 0
<TOTAL-COSTS> 407,961
<OTHER-EXPENSES> (212,476)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,509
<INCOME-PRETAX> 160,124
<INCOME-TAX> 85,954
<INCOME-CONTINUING> 74,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,170
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.20
</TABLE>
