-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pp3MEkwLqykLRAv1qRYeaHvc3hEnm3sFDKHalDesR8eOBvEwxsHT7pvTfLW5Jq6f X+WVkwSg4JeEnMEbWO8TZg== 0001051512-99-000016.txt : 19990517 0001051512-99-000016.hdr.sgml : 19990517 ACCESSION NUMBER: 0001051512-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0001051512 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 362669023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14157 FILM NUMBER: 99623297 BUSINESS ADDRESS: STREET 1: 30 NORTH LASALLE STREET STREET 2: 8401 GREENWAY BLVD CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3126301900 MAIL ADDRESS: STREET 1: 30 NORTH LASALLE STREET STREET 2: 8401 GREENWAY BLVD CITY: CHICAGO STATE: IL ZIP: 60602 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 ----------------------------------------- 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 001-14157 - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-2669023 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30 North LaSalle Street, Chicago, Illinois 60602 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-1900 Not Applicable -------------------------------------------------------- (Former address of principal executive offices) (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 1999 -------------------------------- ----------------------------- Common Shares, $.01 par value 53,816,748 Shares Series A Common Shares, $.01 par value 6,951,770 Shares - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- 1ST QUARTER REPORT ON FORM 10-Q ------------------------------- INDEX ----- Page No. ------- Part I. Financial Information Management's Discussion and Analysis of Results of Operations and Financial Condition 2-17 Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998 18 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 19 Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 20-21 Notes to Consolidated Financial Statements 22-27 Part II. Other Information 28 Signatures 29 PART I. FINANCIAL INFORMATION ----------------------------- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ------------------------------------------------------------- AND FINANCIAL CONDITION ----------------------- Telephone and Data Systems, Inc. ("TDS" or the "Company") is a diversified telecommunications company which provides high-quality telecommunications services to 3.2 million cellular telephone, telephone and personal communications service ("PCS") customers. TDS's long-term business development strategy is to expand its existing operations through internal growth and acquisitions, and to explore and develop telecommunications businesses that management believes utilize TDS's expertise in customer-based telecommunications. The Company conducts substantially all of its cellular telephone operations through its 80.9%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular"), its telephone operations through its wholly-owned subsidiary, TDS Telecommunications Corporations ("TDS Telecom"), and its PCS operations through its 82.2%-owned subsidiary, Aerial Communications, Inc. ("Aerial"). TDS Telecom provides service through its 105 incumbent local exchange ("ILEC") companies and its developing competitive local exchange ("CLEC") companies. In December 1998, TDS announced that it was pursuing a tax-free spin-off of its 82.2% interest in Aerial, as well as reviewing other alternatives. See Liquidity--Corporate Restructuring. RESULTS OF OPERATIONS - --------------------- Three Months Ended 3/31/99 Compared to Three Months Ended 3/31/98 - ----------------------------------------------------------------- Operating Revenues increased 30% ($115.4 million) during the first quarter of 1999 primarily as a result of a 27% increase in customers served. U.S. Cellular contributed 70% ($80.8 million) of the total increase in revenues as customers served increased by 453,000, or 25%, since March 31, 1998, to 2,270,000. Aerial contributed 17% ($19.8 million) of the increase as customers served increased by 165,600, or 100%, since March 31, 1998, to 331,600. TDS Telecom contributed 13% ($14.8 million) of the total increase in revenues. ILEC access lines increased 5% since March 31, 1998 to 554,900 access lines. CLEC access lines totaled 43,500 at March 31, 1999 compared to 5,500 at March 31, 1998. TDS Telecom began CLEC operations in early 1998. Operating Expenses rose 18% ($72.1 million) in the first quarter of 1999 reflecting growth in operations. U.S. Cellular contributed 86% ($61.9 million) and TDS Telecom contributed 14% ($9.9 million) of the total increase in operating expenses while Aerial expenses remained flat. Operating Income was $29.2 million in the first quarter of 1999 compared to a loss of ($25.5) million in 1998. U.S. Cellular's operating income increased 57% to $52.1 million in the first quarter of 1999 and its operating income margin, as a percentage of service revenues, increased to 16.5% in 1999 from 14.0% in 1998. TDS Telecom's operating income increased 22% to $27.0 million reflecting a $5.8 million increase in ILEC operations offset somewhat by $856,000 of additional operating losses from CLEC operations. TDS Telecom's operating margin increased to 20.9% in 1999 from 19.3% in 1998. Aerial's operating loss declined 28% to 2 $49.8 million in the first quarter of 1999.
Three Months Ended March 31, ---------------------------- 1999 1998 Change ---- ---- ------ (Dollars in thousands) Operating Income (Loss) from Ongoing Operations U.S. Cellular $ 52,114 $ 33,155 $ 18,959 TDS Telecom 26,954 22,032 4,922 Aerial (49,834) (69,313) 19,479 -------- -------- -------- 29,234 (14,126) 43,360 American Paging Operating (Loss) -- (11,406) 11,406 -------- -------- -------- Operating Income (Loss) $ 29,234 $(25,532) $ 54,766 ======== ======== ========
TDS contributed substantially all of the assets and certain limited liabilities of American Paging, Inc. ("American Paging") to a previously unrelated limited liability corporation for a 30% interest in that corporation effective March 31, 1998. American Paging's revenues were netted against its expenses with the resulting operating loss reported as American Paging Operating (Loss). American Paging's revenues totaled $17.8 million and operating expenses totaled $29.2 million for the three months ended March 31, 1998. Beginning April 1, 1998, TDS followed the equity method of accounting for this investment and reported these results as a component of Investment Income. Investment and Other Income (Expense) totaled $22.2 million in 1999 and $222.2 million in 1998. Gain on Sale of Cellular Interests and Other Investments totaled $11.6 million in the first quarter of 1999 and $221.4 million in the first quarter of 1998 as the Company has sold or traded certain non-strategic minority cellular interests and other investments. Investment Income, net, the Company's share of income from investments in which the Company has a minority interest and follows the equity method of accounting, primarily cellular investments, decreased 48% ($6.1 million) in the first quarter of 1999. The decrease was primarily due to the decline in 1999 in results from markets managed by others in which the Company owned investment interests in both periods and the sale of certain minority cellular interests in the first quarter of 1998. Investment income is net of amortization relating to these minority interests. 3 Minority Share of Loss (Income) includes the minority public shareholders' share of U.S. Cellular's and Aerial's net income or loss, and the minority shareholders' or partners' share of U.S. Cellular's, Aerial's and TDS Telecom's subsidiaries' and any other subsidiaries' net income or loss. The decrease in minority share of income is primarily due to the decrease in U.S. Cellular's minority public shareholders' portion of income because of the decrease in gains from the sale of cellular investments. The minority shareholder in a subsidiary of Aerial was not allocated a portion of its loss in 1998 as the minority shareholder investment occurred in September 1998.
Three Months Ended March 31, ---------------------------- 1999 1998 Change ---- ---- ------ (Dollars in thousands) Minority Share of Loss (Income) U.S. Cellular Minority Public Shareholders' $ (5,297) $(24,535) $ 19,238 Minority Shareholders' or Partners' (1,438) (1,182) (256) -------- -------- -------- (6,735) (25,717) 18,982 Aerial Minority Public Shareholders' 4,182 15,241 (11,059) Minority Shareholders' 5,920 -- 5,920 -------- -------- -------- 10,102 15,241 (5,139) Telephone Subsidiaries and Other (226) (263) 37 -------- -------- -------- $ 3,141 $(10,739) $ 13,880 ======== ======== ========
Interest Expense decreased $1.0 million to $30.6 million in the first quarter of 1999. Improvements in the Company's cash management program has resulted in additional internal cash balances being available to reduce short-term debt, thereby reducing interest income and interest expense. Minority Interest in Income of Subsidiary Trust (Trust Preferred Securities Distributions) increased $1.3 million to $6.2 million in the first quarter of 1999. The increase reflects a full quarter of dividends on the $150 million of additional securities issued in February 1998. Income Tax Expense decreased $81.7 million in 1999 to $4.3 million primarily due to the effect of significant gains on the sale of cellular and other investments which increased pretax income in 1998. Net income available to common totaled $10.1 million, or $.16 diluted earnings per share, in the first quarter of 1999, compared to $73.7 million, or $1.20 diluted earnings per share, in the first quarter of 1998. Net income was significantly affected by gains from the sale of cellular and other investments. The increase in net income from operations is primarily due to the improvements in operations at all three business units. A summary of net income 4 available to common and diluted earnings per share from operations and gains is shown below.
Three Months Ended March 31, ------------------------------------ 1999 1998 ----------------- ----------------- (Dollars in thousands, except per share amounts) Net Income Available to Common Operations $ 3,029 $ (38,754) Gains 7,021 112,484 ----------------- ----------------- $ 10,050 $ 73,730 ================= ================= Diluted Earnings Per Share Operations .05 (.64) Gains .11 1.84 ----------------- ----------------- $ .16 $ 1.20 ================= =================
U.S. CELLULAR OPERATIONS TDS provides cellular telephone service through United States Cellular Corporation ("U.S. Cellular"), an 80.9%-owned subsidiary. U.S. Cellular owns, manages and invests in cellular markets throughout the United States. Rapid growth in the customer base is the primary reason for the growth in U.S. Cellular's results of operations. The number of customers served increased by 453,000, or 25%, since March 31, 1998, to 2,270,000.
Three Months Ended March 31, ------------------ 1999 1998 ---- ---- (Dollars in thousands) Operating Revenues Local service $213,511 $170,085 Inbound roaming 70,964 46,206 Long-distance and other 30,719 20,053 -------- -------- Service Revenue 315,194 236,344 Equipment sales 10,791 8,813 -------- -------- 325,985 245,157 -------- -------- Operating Expenses System operations 58,691 36,943 Marketing and selling 58,305 50,001 Cost of equipment sold 25,441 20,748 General and administrative 79,519 59,043 Depreciation 41,616 35,920 Amortization 10,299 9,347 -------- -------- 273,871 212,002 -------- -------- Operating Income $ 52,114 $ 33,155 ======== ========
U.S. Cellular revenues increased 33% ($80.8 million) in 1999. Total average monthly service 5 revenue per customer increased 6% ($2.52) to $47.18 in the first quarter of 1999 from $44.66 in 1998. The increase in average monthly service revenue per customer resulted from increases in minutes of use on U.S. Cellular's systems from both local retail customers and inbound roamers, offset somewhat by a decline in average revenue per minute of use. Average monthly service revenue per customer is expected to decline for the full year of 1999 compared to 1998, despite the increase in the first quarter comparison, as local retail and inbound roaming revenue per minute of use decline due to competitive pressures, further negotiated reductions in roaming rates and continued penetration of the consumer market. Local retail revenue increased 26% ($43.4 million) in the first quarter of 1999 due primarily to the 25% customer growth. Average local minutes of use per retail customer increased 6% to 101 in 1999 from 95 in 1998, while average local retail revenue per minute declined by 6% to $.32 in 1999 from $.34 in 1998. U.S. Cellular's use of pricing and other incentive programs in order to stimulate overall usage, and competitive pressures resulted in a lower average revenue per minute of use. Average monthly local retail revenue per customer declined 1% ($.18) to $31.96 in 1999 from $32.14 in 1998. Inbound roaming revenue (charges to customers of other systems who use U.S. Cellular's cellular systems when roaming) increased 54% ($24.8 million) in the first quarter of 1999. Roaming minutes of use increased by 72% in 1999. The increase in minutes of use was significantly affected by certain "one rate" programs introduced by other wireless companies in the second half of 1998. Wireless customers who sign up for these programs are given price incentives to roam in other markets, including U.S. Cellular's markets, thus driving an increase in U.S. Cellular's inbound roaming minutes. The increase in minutes of use is expected to be slower in the second half of 1999 as the effect of "one rate" programs becomes present in both periods of comparison. Average inbound roaming revenue per minute declined by 14% to $.59 in 1999 from $.69 in 1998 reflecting the downward trend in negotiated rates. Average monthly inbound roaming revenue per customer increased 22% ($1.89) to $10.62 in 1999 compared to $8.73 in 1998. The increase in average monthly inbound roaming revenue per customer is attributable to a larger increase in inbound roaming revenue than in the customer base. Long-distance and other revenue increased 53% ($10.7 million) in the first quarter of 1999 as the volume of long-distance calls billed by U.S. Cellular increased, primarily from inbound roamers using U.S. Cellular's systems to make long-distance calls. Average monthly long-distance and other revenue per customer increased 21% ($.81) to $4.60 in 1999 compared to $3.79 in 1998. U.S. Cellular expenses increased 29% ($61.9 million) during 1999. Costs to provide service (system operations expenses) as a percent of service revenue were 18.6% in 1999 and 15.6% in 1998. System operations expenses include customer usage expenses and maintenance, utility and cell site expenses. Customer usage expenses increased 84% ($19.0 million) and consumed 13.2% of service revenues in 1999 and 9.6% in 1998. The increase in customer usage expense was primarily due to the 164% increase in net outbound roaming usage expense. Net outbound roaming usage expense is the result of U.S. Cellular offering its customers an increasingly larger service footprint in which their calls are billed at local rates. In certain cases these service footprints include other operators' service areas. U.S. Cellular pays roaming rates to the other carriers for calls its customers make in these areas, while charging these customers a local rate which is usually lower than the roaming rate. Also contributing to the increase in customer usage expenses was a 19% rise in costs related to the increase in minutes of use. Maintenance, utility and cell site expenses increased 20% ($2.8 million) and consumed 5.4% of service revenues in 1999 and 6.1% in 1998. 6 The number of cell sites operated increased to 2,106 in 1999 from 1,786 in 1998. Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. These expenses, less equipment sales revenue, represent the cost to acquire a new customer. Cost per gross customer addition increased slightly to $319 in 1999 from $313 in 1998 while gross customer activations increased to 229,000 in 1999 from 198,000 in 1998. The cost per gross customer addition increased primarily due to additional brand advertising expenses and the increase in losses on equipment sales. The increase in equipment sales losses was primarily driven by the sale of more digital phone units, which on average generate greater equipment losses than the sale of analog phone units. General and administrative expenses as a percent of service revenue were 25.2% in 1999 and 25.0% in 1998. The overall increase in administrative expenses reflects the growing customer base in existing markets and an expansion of local office and corporate staff necessitated by such growth. U.S. Cellular also incurred additional costs in the first quarter of 1999 related to its six communications centers, which were created to centralize certain customer service functions, compared to two communications centers in the first quarter of 1998; the conversion of a new billing system; and providing digital phone units to customers who migrated from analog to digital rate plans. Depreciation and amortization expense as a percent of service revenue was 16.5% in 1999 and 19.2% in 1998. Depreciation expense increased 16% ($5.7 million) in 1999 primarily due to the 16% increase in average fixed assets since March 31, 1998. Operating income increased 57% ($19.0 million) to $52.1 million in the first quarter of 1999. The improvement was primarily driven by the substantial growth in customers and revenue. Operating margin, as a percent of service revenue, improved to 16.5% in 1999 compared to 14.0% in 1998. Although service revenues increased 33% and average monthly revenue per customer increased 6% in the first quarter of 1999, management does not expect these trends to continue through 1999 for the reasons stated previously. Management continues to believe seasonal trends exist 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, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide PCS services have initiated service in certain of U.S. Cellular's markets over the past three years. U.S. Cellular expects PCS operators to continue deployment of PCS in portions of all of its market clusters throughout 1999. U.S. Cellular has increased its advertising to promote its 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 how this additional competition is affecting U.S. Cellular's results. 7 TDS TELECOM OPERATIONS TDS operates its landline telephone business through TDS Telecommunications Corporation ("TDS Telecom"), a wholly-owned subsidiary. TDS Telecom's 105 incumbent local exchange ("ILEC") companies served 554,900 access lines at March 31, 1999, a 5% increase over the 528,900 access lines at March 31, 1998. TDS Telecom's competitive local exchange ("CLEC") companies served 43,500 access lines at March 31, 1999. CLEC activities began in the first quarter of 1998, serving 5,500 customers at March 31, 1998.
Three Months Ended March 31, ------------------ 1999 1998 ---- ---- (Dollars in thousands) Operating Revenues ILEC Revenues Local service $ 36,389 $ 32,551 Network access and long-distance 66,297 60,846 Miscellaneous 15,601 15,583 --------- --------- Total ILEC Revenues 118,287 108,980 CLEC Revenues 11,103 5,665 Intercompany Revenues (425) (479) --------- --------- Total Operating Revenues 128,965 114,166 --------- --------- Operating Expenses ILEC Expenses Network operations 22,958 21,173 Depreciation and Amortization 29,272 26,342 Customer operations 18,554 18,311 Corporate operations 18,046 19,475 --------- --------- Total ILEC Expenses 88,830 85,301 CLEC Expenses 13,606 7,312 Intercompany Expenses (425) (479) --------- --------- Total Operating Expenses 102,011 92,134 --------- --------- Operating Income $ 26,954 $ 22,032 ========= =========
TDS Telecom revenues increased 13% ($14.8 million) in 1999 reflecting primarily customer growth. Revenues from ILEC operations increased 9% ($9.3 million) in the first quarter of 1999. Average monthly revenue per access line increased 3% ($1.97) to $71.53 in the first quarter of 1999 from $69.56 in the first quarter of 1998. Local service revenue increased 12% ($3.8 million) during 1999. Access line growth of 5% increased revenues by $1.6 million while the sale of custom-calling and advanced features increased revenues by $1.4 million. Average monthly local service revenue per customer was $22.01 in 1999 and $20.78 in 1998. Network access and long-distance revenue increased 9% ($5.5 million) during 1999. Revenue generated from access minute growth due to increased network usage increased $3.8 million in 1999. Recovery of increased costs of providing long-distance services resulted in increased revenue of $1.6 million. Average monthly network access and long-distance revenue per customer was $40.09 in 1999 and $38.83 in 1998. 8 Miscellaneous revenue remained flat as a $940,000 increase in Internet service revenue was offset by an $880,000 decrease in sales of customer premise equipment, including digital broadcast satellites. Average monthly miscellaneous revenue per customer was $9.43 in 1999 and $9.95 in 1998. Revenues from CLEC operations increased 96% ($5.4 million) in the first quarter of 1999 as access lines served increased to 43,500 at March 31, 1999 from 5,500 at March 31, 1998. Operating expenses increased 11% ($9.9 million) during 1999 due to growth in ILEC operations and the development of CLEC operations. Expenses from ILEC operations increased by 4% ($3.5 million) in the first quarter of 1999. The costs to provide service to customers increased 8% ($1.8 million), primarily for increased wages and benefits expenses, and consumed 19.4% of ILEC revenues in 1999 and 1998. Costs to serve customers increased 1% ($243,000) and consumed 15.7% of ILEC revenues in 1999 and 16.8% in 1998. Corporate expenses decreased 7% ($1.4 million) primarily due to improved efficiencies and cost controls, and consumed 15.3% of ILEC revenues in 1999 and 17.9% in 1998. Depreciation and amortization increased 11% ($2.9 million), primarily due to increased investment in facilities, and consumed 24.7% of ILEC revenues in 1999 and 24.2% in 1998. CLEC operating expenses increased 86% ($6.3 million) in the first quarter of 1999 as the CLEC subsidiaries continue to grow their customer base. Operating income increased 22% ($4.9 million) to $27.0 million in the first quarter of 1999 reflecting improved ILEC results offset somewhat by increased CLEC losses. Operating income from ILEC operations increased 24% ($5.8 million) to $29.5 million. Operating loss from CLEC operations increased 52% ($856,000) reflecting the expenses associated with the development and start-up of operations. 9 AERIAL OPERATIONS TDS provides Personal Communications Services ("PCS") telephone service through Aerial Communications, Inc. ("Aerial"), an 82.2%-owned subsidiary. Aerial customers served increased by 165,600, or 100%, since March 31, 1998, to 331,600.
Three Months Ended March 31, ------------------ 1999 1998 ---- ---- (Dollars in thousands) Operating Revenues Service revenues $ 44,098 $ 24,083 Equipment sales revenues 6,443 6,663 --------- --------- 50,541 30,746 --------- --------- Operating Expenses Systems operations 20,353 15,337 Marketing and selling 20,077 17,432 Customer service 9,851 10,899 Cost of equipment sold 12,402 22,820 General and administrative 15,921 13,875 Depreciation 19,882 17,807 Amortization 1,889 1,889 --------- --------- 100,375 100,059 --------- --------- Operating (Loss) $ (49,834) $ (69,313) ========= =========
Aerial revenues increased 64% ($19.8 million) in 1999. Service revenues increased 83% ($20.0 million) in the first quarter of 1999 due primarily to the 100% customer growth. The average monthly service revenue per customer decreased to $46 in the first quarter of 1999 from $57 in 1998. The decrease in average monthly service revenue per customer primarily reflects the addition of more moderate wireless users to the customer base. Aerial's expenses remained relatively flat in total between the first quarter of 1999 and 1998. The costs to provide service to the customer base (system operations expenses) consists of customer usage expenses and maintenance, utility and cell site expenses. System operations expense increased 33% ($5.0 million) in the first quarter of 1999 primarily due to a $4.3 million increase in systems maintenance expenses for the PCS network. Aerial began incurring charges for these services in the second half of 1998. Engineering and maintenance personnel costs also increased as new employees were added to maintain the system. The number of cell sites operated increased to 1,180 in 1999 from 1,118 in 1998. Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. These expenses, less equipment sales revenue, represent the cost to acquire a new customer. Costs per gross customer addition decreased to $399 in 1999 from $563 in 1998, reflecting primarily the decrease in cost of equipment sold. Gross customer activations increased to 65,200 in 1999 from 59,700 in 1998. Cost of equipment sold decreased 46% ($10.4 million) reflecting a significant decline in handset cost per unit, partially offset by an increase in handsets sold. 10 Customer service expenses decreased 10% ($1.0 million) in the first quarter of 1999 primarily due to a decrease in bad debt expense. General and administrative expenses increased 15% ($2.0 million) due primarily to the increased number of employees and related expenses. Depreciation expense increased 12% ($2.1 million) reflecting the increase in depreciable property and equipment. Operating loss declined 28% ($19.5 million) to $(49.8) million in the first quarter of 1999 from $(69.3) million in 1998. The improvement was primarily driven by the growth in customers and revenue. TDS anticipates that Aerial will generate significant losses at least through 1999 as it continues to build its customer base. 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, in recent years, TDS and its subsidiaries have obtained substantial funds from external sources to finance Aerial's operations and construction activities, to fund acquisitions and for general corporate purposes. Although U.S. Cellular's increasing internal cash flow and TDS Telecom's steady internal cash flow have reduced the overall need for external financing, Aerial's working capital, operating expenses and construction activities have nevertheless required substantial additional funds from external sources. Cash Flows From Operating Activities. TDS is generating substantial internal funds from the rapid growth in U.S. Cellular's customers and revenues and TDS Telecom's steady growth. However, Aerial's operations have required substantial funds, thereby reducing the effect of the increases in cash flows from U.S. Cellular and TDS Telecom. Cash flows from operating activities totaled $69.1 million in the first quarter of 1999 compared to $28.1 million in 1998. U.S. Cellular's operating cash flow (operating income plus depreciation and amortization) totaled $104.0 million in the first quarter of 1999 (up 33%) while TDS Telecom's operating cash flow totaled $57.5 million (up 18%). Aerial's operating cash outflow declined to $28.1 million for the first quarter of 1999 from $49.6 million in 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 $64.3 million in the first quarter of 1999 and $46.0 million in 1998.
Three Months Ended March 31, ---------------------------- 1999 1998 Change ---- ---- ------ (Dollars in thousands) Operating cash flow U.S. Cellular $ 104,029 $ 78,422 $ 25,607 TDS Telecom 57,511 48,808 8,703 Aerial (28,063) (49,617) 21,554 American Paging -- (3,511) 3,511 --------- --------- --------- 133,477 74,102 59,375 Other operating activities (64,330) (45,989) (18,341) --------- --------- --------- $ 69,147 $ 28,113 $ 41,034 ========= ========= =========
Cash Flows from Financing Activities. TDS has used short-term debt to finance Aerial's 11 construction and 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 the sale of long-term debt and equity securities, including sales of debt and equity securities by subsidiaries. Cash flows from financing activities totaled $36.5 million in the first quarter of 1999 compared to $54.2 million in 1998. Increases in short-term debt of $40.6 million provided most of the Company's external financing requirements during the first quarter of 1999. In 1998, TDS received $145.1 million on the sale of 8.04% Trust Originated Preferred Securities. The proceeds provided most of the Company's external financing during the first quarter of 1998 and were used to reduce notes payable balances. TDS also expended $5.7 million for the purchase of American Paging common shares pursuant to a tender offer in the first quarter of 1998. 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 $102.3 million in the first quarter of 1999 compared to $66.5 million in 1998. Capital expenditures required $115.6 million in 1999 and $125.3 million in 1998. Acquisitions, net of cash acquired, required $8.1 million in 1999 and $52.3 million in 1998. The sales of non-strategic cellular interests and other investments provided $14.3 million in 1999 and $96.4 million in 1998 reducing total cash flows required for investing activities in each period. 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 $115.6 million in 1999 consisting primarily of $84.7 million for cellular property and equipment, $21.6 million for telephone plant and equipment and $5.3 million for PCS property and equipment. Capital expenditures totaled $125.3 million in the first quarter of 1998 consisting primarily of $69.1 million for cellular property and equipment, $30.7 million for telephone plant and equipment and $29.7 million for PCS property and equipment. LIQUIDITY TDS anticipates that the aggregate resources required for 1999 will include approximately $300 million for U. S. Cellular capital additions and $120 million for TDS Telecom capital additions. TDS intends to spin-off Aerial in 1999. The aggregate resources required in 1999 for Aerial include approximately $105 million for capital additions and $235 million for working capital and operating expenses, including $85 million for interest expense. See "Corporate Restructuring" for additional information regarding the Aerial spin-off and financing needs. TDS and its subsidiaries had cash and temporary investments totaling $63.6 million and longer-term cash investments totaling $10.3 million at March 31, 1999. 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 $597 million of bank lines of credit for general corporate purposes at March 31, 1999. Unused amounts of such lines totaled $385 million. These line of credit agreements provide for borrowings at negotiated 12 rates up to the prime rate. 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 $408.5 million for the twelve months ended March 31, 1999, up 42% ($121.7 million) from 1998. U.S. Cellular had $500 million of bank lines of credit for general corporate purposes at March 31, 1999, 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 $214.5 million for the twelve months ended March 31, 1999, up 9% ($18.4 million) from 1998. At March 31, 1999, TDS Telecom telephone subsidiaries had $121.6 million in unadvanced loan funds from federal government programs to finance the telephone construction program. Management believes that 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 and if capital requirements, financial market conditions and other factors warrant. Corporate Restructuring In December 1998, TDS announced that it was pursuing a tax-free spin-off of its 82.2% interest in Aerial, as well as reviewing other alternatives. There are a number of conditions that must be met for a tax-free spin-off to occur, including the receipt of a favorable Internal Revenue Service ruling on the tax-free status of such a spin-off, final approval by the TDS Board of Directors, certain government and third party approvals and review by the Securities and Exchange Commission ("SEC") of appropriate SEC filings. Prior to any spin-off, it is expected that Aerial will seek additional financing so that Aerial would have the appropriate capitalization to operate as a stand-alone entity. In connection with such financing, it is anticipated that a substantial amount of Aerial's debt to TDS may be converted into equity. TDS intends to seek shareholder approval of a proposal to distribute Aerial Series A Common Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and to distribute Aerial Common Shares, on a pro-rata basis, to holders of TDS Common Shares. There can be no assurance that a spin-off will be consummated or that other alternatives will not be pursued. In September 1998, pursuant to a purchase agreement between TDS, Aerial, Aerial Operating Company, Inc. ("AOC"), and Sonera Ltd., a limited liability company organized under the laws of Finland ("Sonera"), Sonera purchased 2.4 million shares of common stock of AOC representing a 19.423% equity interest in AOC, subject to adjustment under certain circumstances, for an aggregate purchase price of $200 million. Sonera has the right, subject to adjustment under certain 13 circumstances, to exchange each share of AOC common stock which it owns for 6.72919 Common Shares of Aerial. Upon the exchange of all of the AOC shares, Sonera would own an 18.452% equity interest in Aerial, reflecting a purchase price equivalent to $12.33 per Common Share of Aerial (the "Equivalent Purchase Price"). Following the announcement by TDS in December 1998, that it intended to distribute to its shareholders all of the capital stock of Aerial that it owns, and that Aerial would seek additional financing from sources other than TDS in connection therewith, Sonera contacted TDS to express certain concerns about the announcement. Sonera has asserted that the TDS announcement reflects a change in circumstances that warrant the renegotiation of certain matters related to its investment in AOC, including an adjustment in the Equivalent Purchase Price, and has raised the possibility of litigation in connection therewith. TDS and Aerial intend to attempt to reach a mutually acceptable resolution of the concerns raised by Sonera. There can be no assurance that this matter will not lead to litigation, or that it will not have a material adverse effect on TDS or Aerial or on the plans relating to the refinancing and spin-off of Aerial. Aerial's capital additions budget totals approximately $105 million. In addition, Aerial will require $235 million for working capital and operating expenses, including $85 million for interest expense. Aerial plans to finance its construction expenditures and working capital requirements through external financing, vendor financing and the remaining amount available under the revolving credit agreement with TDS. As part of the potential tax-free spin-off of Aerial, TDS and Aerial are seeking short- and long-term financing so that Aerial would have the appropriate capitalization to operate as a stand-alone entity. In 1998,a vendor agreed to provide up to $150 million in financing to Aerial for the purchase of network infrastructure equipment and services. Aerial may borrow up to $75 million prior to June 30,1999 and an additional $75 million between June 30, 1999 and June 30, 2000. At March 31, 1999, Aerial had $94.7 million available under the agreement. In March 1999, TDS paid Aerial $114.5 million as a settlement for tax losses incurred by Aerial and utilized by the TDS consolidated tax group. Aerial used the funds to repay a portion of the existing indebtedness to TDS thereby increasing the amount available under the revolving credit agreement. At March 31, 1999, Aerial had $92.4 million available for borrowings under the revolving credit agreement with TDS which is expected to last through June 1999. TDS has not committed to any further financing of Aerial's operations. It is the intent of TDS and Aerial for Aerial to obtain the necessary level of financial support from sources other than TDS to enable Aerial to pay its debts as they become due. TDS and Aerial management believe Aerial has the ability to obtain that financial support. Sources of additional capital may include vendor financing and public and private equity and debt financings by Aerial or its subsidiaries. If sufficient future funding is not available on terms and prices acceptable to Aerial, Aerial would have to reduce its construction and operating activities or take other actions, which could have a material adverse impact on Aerial's financial condition and results of operations. MARKET RISK The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. The majority of the Company's debt is in the form of long-term fixed-rate notes, debentures and trust securities with original maturities ranging up to 40 years. Accordingly, fluctuations in interest rates can lead to fluctuations in the fair value of such instruments. TDS has not entered into financial derivatives to reduce its exposure to interest rate risks. There have been no material changes to 14 TDS's outstanding debt and trust securities instruments since December 31, 1998. TDS maintains a portfolio of available for sale marketable equity securities which resulted from acquisitions and the sale of non-strategic investments. The market value of these investments, principally AirTouch Communications, Inc. common shares, amounted to $509.9 million at March 31, 1999. A hypothetical 10% decrease in the share prices of these investments would result in a $51.0 million decline in the market value of the investments. YEAR 2000 ISSUE The Year 2000 Issue exists because many computer systems and applications abbreviate dates using only two digits rather than four digits, e.g., "98" rather than "1998". Unless corrected, this shortcut may cause problems when the century date "2000" occurs. On that date, some computer operating systems and applications and embedded technology may recognize the date as January 1, 1900 instead of January 1, 2000. If the Company fails to correct any critical Year 2000 processing problems prior to January 1, 2000, the affected systems may either cease to function or produce erroneous data, which could have material adverse operational and financial consequences. The Company's management has established a project team to address Year 2000 issues. The Company's plan to address the Year 2000 Issue consists of five general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv) Validation and (v) Implementation. The awareness phase consisted of establishing Year 2000 project teams at each business unit and developing an overall strategy. Management has established a Year 2000 Program Office at the TDS corporate level to coordinate activities of the Year 2000 project teams, to monitor the current status of individual projects, to report periodically to the TDS Audit Committee, and to promote the exchange of information between all business units to share knowledge and solution techniques. Management of each business unit has made the Year 2000 Issue a top priority. The Year 2000 effort covers the network and supporting infrastructure for the provision of cellular, local switched and data telecommunications and PCS services; the operational and financial information technology ("IT") systems and applications, such as computer systems that support key business functions such as billing, finance, customer service, procurement and supply; and a review of the Year 2000 compliance efforts of the Company's critical vendors. The assessment phase included the identification of core business areas and processes, analysis of systems and hardware supporting the core business areas and the prioritization of renovation or replacement of systems and hardware that are not Year 2000 compliant. Included in the assessment phase is an analysis of risk management factors such as contingency plans and legal matters. Except for the contingency plans as discussed below, the assessment phase was completed in the first quarter of 1999. The Year 2000 project teams have identified those mission critical hardware, systems and applications that are not Year 2000 compliant. These noncompliant critical hardware, systems and applications have undergone renovation or are currently in the renovation phase. The renovation phase consists of the remediation or replacement of mission critical systems, applications and hardware. The renovation of these mission critical hardware, systems and applications is on schedule and should be substantially completed in the third quarter of 1999. 15 The mission critical hardware, systems and applications that have been renovated are undergoing Year 2000 validation testing. The validation phase includes testing, verifying and validating the renovated or replaced platforms, applications, databases and utilities. The validation phase consists of independent verification testing of mission critical systems, applications and hardware as well as network and system component upgrades received from suppliers. In addition, selected Year 2000 upgrades are slated to undergo testing in a controlled environment that replicates the current environment and is equipped to simulate the turn of the century and leap year dates. The Company will rely on the Cellular Telephone Industry Association ("CTIA") and TELCO Forum, which have formed working groups to coordinate efforts of various carriers and manufacturers to facilitate inter- network Year 2000 testing. Validation of mission critical hardware, systems and applications is scheduled to be completed in the third quarter of 1999. The implementation phase involves migrating the converted, renovated and validated mission critical systems, applications and hardware into production. This phase is expected to be completed during the fourth quarter of 1999. Management cannot provide assurance that its plan to achieve Year 2000 compliance will be successful as it is subject to various risks and uncertainties. The Company's current schedule is subject to change depending on developments that may arise through unforeseen circumstances in the renovation, validation and implementation phases of the Company's compliance efforts. The Company, like most other telecommunications operators, is highly dependent on the telecommunications network vendors to provide compliant hardware, systems and applications and on other third parties, including vendors, other telecommunications service providers, government agencies and financial institutions, to deliver reliable services. The Company is dependent on the development of compliant hardware, systems and applications and upgrades by experts, both internal and external, and the availability of critical resources with the requisite skill sets. The Company's ability to meet its target dates is dependent upon the timely provision of necessary upgrades and modifications by its suppliers and internal resources. In addition, the Company cannot guarantee that third parties on whom it depends for essential services (such as electric utilities, financial institutions, interconnected telecommunications operators, etc.) will convert their critical systems and processes in a timely manner. Failure or delay by any of these parties could significantly disrupt the Company's business, including the provision of cellular, local switched and PCS services, billing and collection processes and other areas of the business, and cause a material adverse effect on the Company's results of operations, financial positions and cash flow. The Company has contacted critical vendors requesting information about their Year 2000 readiness. The responses are being reviewed and used in developing the Company's overall contingency plans. The Company's Year 2000 worst case scenario may involve interruption of telecommunications services and data processing services and/or interruption of customer billing, operating and other information systems. As part of its Year 2000 initiative, the Company is evaluating a variety of adverse scenarios and is in the process of developing contingency and business continuity plans tailored for adverse Year 2000-related occurrences. The contingency and business continuity plans are expected to assess the potential for business disruption in various scenarios, and to provide key operational back-up, recovery and restorational alternatives. The Company's contingency plan initiatives will include the following: reviewing, assessing and updating existing business recovery plans; identifying teams who will be on call during the millennium change to monitor the network, critical systems, operations centers and business processes to react 16 immediately to facilitate repairs; re-prioritization of mission critical work processes and associated resources; developing alternate processes to support critical customer functions in the event information systems or mechanized processes experience Year 2000 disruptions; establishing replacement/repair parallel paths to provide for repair and readiness of existing systems and components that are scheduled for replacement by the year 2000, in the event the replacement schedules are not met; developing alternate plans for critical suppliers of products/services that fail to meet Year 2000 compliance commitment schedules; and developing data retention and recovery procedures to be in place for customer and critical business data to provide pre-millennium backups with on-site as well as off-site data copies. The Company anticipates having these contingency plans in place early in the fourth quarter of 1999. The Company estimates that the total costs related to the Year 2000 project will be approximately $30 million. Through March 31, 1999, the total costs associated with the Year 2000 Issue were $11.4 million. In recent years, the Company has made capital expenditures, primarily related to upgrades of the cellular network to provide digital capabilities as well as certain financial systems, billing systems, and customer care systems which are by design thought to be Year 2000 compliant. These costs are not considered to be directly related to the Year 2000 project because they were incurred as part of the Company's overall operating strategies to add digital capabilities for competitive purposes, and to improve financial systems and customer service. However, these upgrades and financial systems will be tested for Year 2000 compliance. The timing of expenditures may vary and is not necessarily indicative of readiness efforts or progress to date. Though Year 2000 project costs will directly impact the reported level of future net income, the Company intends to manage its total cost structure, including deferral of non-critical projects, in an effort to mitigate the impact of Year 2000 project costs. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "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; unanticipated changes in growth in cellular and PCS customers, penetration rates, churn rates and the mix of products and services offered in our markets; and unanticipated problems with the Year 2000 Issue. Readers should evaluate any statements in light of these important factors. 17 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited
Three Months Ended March 31, ---------------------- 1999 1998 ---- ---- (Dollars in thousands, except per share amounts) OPERATING REVENUES U.S. Cellular $ 325,985 $ 245,157 TDS Telecom 128,965 114,166 Aerial 50,541 30,746 --------- --------- 505,491 390,069 --------- --------- OPERATING EXPENSES U.S. Cellular 273,871 212,002 TDS Telecom 102,011 92,134 Aerial 100,375 100,059 --------- --------- 476,257 404,195 --------- --------- Operating Income (Loss) from Ongoing Operations 29,234 (14,126) American Paging Operating (Loss) -- (11,406) --------- --------- OPERATING INCOME (LOSS) 29,234 (25,532) --------- --------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 1,825 3,437 Investment income, net of amortization 6,543 12,620 Gain on sale of cellular and other investments 11,551 221,442 Other income (expense), net (821) (4,595) Minority share of loss (income) 3,141 (10,739) --------- --------- 22,239 222,165 --------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 51,473 196,633 Interest expense 30,571 31,613 Minority interest in income of subsidiary trusts 6,203 4,896 --------- --------- INCOME BEFORE INCOME TAXES 14,699 160,124 Income tax expense 4,299 85,954 --------- --------- NET INCOME 10,400 74,170 Preferred Dividend Requirement (350) (440) --------- --------- NET INCOME AVAILABLE TO COMMON $ 10,050 $ 73,730 ========= ========= WEIGHTED AVERAGE COMMON SHARES (000s) 61,279 60,750 BASIC EARNINGS PER SHARE $ .16 $ 1.21 ========= ========= DILUTED EARNINGS PER SHARE $ .16 $ 1.20 ========= ========= DIVIDENDS PER SHARE $ .115 $ .11 ========= =========
The accompanying notes to financial statements are an integral part of these statements. 18 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited ---------
Three Months Ended March 31, ------------------- 1999 1998 ---- ---- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,400 $ 74,170 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 104,243 99,673 Deferred taxes 566 79,114 Investment income (9,767) (14,551) Minority share of income (3,141) 11,553 Gain on sale of cellular and other investments (11,551) (221,442) Noncash interest expense 8,841 8,424 Other noncash expense 6,319 4,166 Change in accounts receivable 11,787 (61) Change in accounts payable (36,900) (12,945) Change in accrued taxes 1,416 1,276 Change in accrued interest (13,113) (8,853) Change in other assets and liabilities 47 7,589 --------- --------- 69,147 28,113 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 1,756 1,848 Repayments of long-term debt (3,846) (5,496) Change in notes payable 40,637 (75,670) Trust preferred securities -- 145,050 Dividends paid (7,183) (7,141) Purchase of subsidiary common stock -- (5,738) Other financing activities 5,124 1,365 --------- --------- 36,488 54,218 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (115,565) (125,314) Investments in and advances to investment entities and license costs 1,633 (5,430) Distributions from investments 6,100 4,554 Proceeds from investment sales 14,295 96,432 Other investing activities (80) (3,135) Acquisitions, net of cash acquired (8,131) (52,275) Change in temporary investments and marketable securities (534) 18,630 --------- -------- (102,282) (66,538) --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,353 15,793 CASH AND CASH EQUIVALENTS - Beginning of period 50,083 51,008 --------- -------- End of period $ 53,436 $ 66,801 ========= =========
The accompanying notes to financial statements are an integral part of these statements. 19 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------
(Unaudited) December 31, March 31, 1999 1998 -------------- ------------ (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 53,436 $ 50,083 Temporary investments 10,148 10,341 Accounts receivable from customers and others 273,062 284,610 Materials and supplies, at average cost, and other current assets 60,777 60,405 ---------- ---------- 397,423 405,439 ---------- ---------- INVESTMENTS Intangible Assets Cellular license acquisition costs, net 1,198,340 1,200,653 Broadband PCS license acquisition costs, net 309,915 311,915 Franchise costs and other costs, net 180,371 181,517 Investments in unconsolidated entities 303,805 307,258 Marketable equity securities 509,912 378,812 Other investments 34,386 33,870 ---------- ---------- 2,536,729 2,414,025 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET U.S. Cellular 1,178,651 1,138,585 TDS Telecom 869,271 881,507 Aerial 612,368 621,281 Other 30,023 31,216 ---------- ---------- 2,690,313 2,672,589 ---------- ---------- OTHER ASSETS AND DEFERRED CHARGES 34,379 35,492 ---------- ---------- TOTAL ASSETS $5,658,844 $5,527,545 ========== ==========
The accompanying notes to financial statements are an integral part of these statements. 20 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
(Unaudited) December 31, March 31, 1999 1998 -------------- ------------ (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt $ 15,948 $ 15,946 Notes payable 211,526 170,889 Accounts payable 239,830 288,417 Advance billings and customer deposits 37,076 37,473 Accrued interest 11,177 24,290 Accrued taxes 31,866 30,449 Accrued compensation 26,072 29,584 Other current liabilities 29,696 26,331 ----------- ----------- 603,191 623,379 ----------- ----------- DEFERRED LIABILITIES AND CREDITS 401,260 346,989 ----------- ----------- LONG-TERM DEBT, excluding current portion 1,569,486 1,553,096 ----------- ----------- MINORITY INTEREST in subsidiaries 448,471 440,188 ----------- ----------- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES of Subsidiary Trusts Holding Solely Company Subordinated Debentures (a) 300,000 300,000 ----------- ----------- PREFERRED SHARES 24,029 25,985 ----------- ----------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $.01 per share 550 550 Series A Common Shares, par value $.01 per share 69 69 Capital in excess of par value 1,883,171 1,882,710 Treasury Shares, at cost (619,155 and 761,220 shares, respectively) (24,444) (29,439) Accumulated other comprehensive income 141,435 75,609 Retained earnings 311,626 308,409 ----------- ----------- 2,312,407 2,237,908 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,658,844 $ 5,527,545 =========== ===========
(a) 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. 21 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation 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, 1999 and December 31, 1998, and the results of operations and cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 and 1998, are not necessarily indicative of the results to be expected for the full year. 2. Corporate Restructuring In December 1998, TDS announced that it was pursuing a tax-free spin-off of its 82.2% interest in Aerial Communications, Inc. ("Aerial"), as well as reviewing other alternatives. There are a number of conditions that must be met for a tax-free spin-off to occur, including the receipt of a favorable Internal Revenue Service ruling on the tax-free status of such a spin-off, final approval by the TDS Board of Directors, certain government and third party approvals and review by the Securities and Exchange Commission ("SEC") of appropriate SEC filings. Prior to any spin-off, it is expected that Aerial will seek additional financing so that Aerial would have the appropriate capitalization to operate as a stand-alone entity. In connection with such financing, it is anticipated that a substantial amount of Aerial's debt to TDS may be converted into equity. TDS intends to seek shareholder approval of a proposal to distribute Aerial Series A Common Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and to distribute Aerial Common Shares, on a pro-rata basis, to holders of TDS Common Shares. There can be no assurance that a spin-off will be consummated or that other alternatives will not be pursued. In September 1998, pursuant to a purchase agreement between TDS, Aerial, Aerial Operating Company, Inc. ("AOC"), and Sonera Ltd., a limited liability company organized under the laws of Finland ("Sonera"), Sonera purchased 2.4 million shares of common stock of AOC representing a 19.423% equity interest in AOC, subject to adjustment under certain circumstances, for an aggregate purchase price of $200 million. Sonera has the right, subject to adjustment under certain circumstances, to exchange each share of AOC common stock which it owns for 6.72919 Common Shares of Aerial. Upon the exchange of all of the AOC shares, Sonera would own an 18.452% equity interest in Aerial, reflecting a purchase price equivalent to $12.33 per Common Share of Aerial (the "Equivalent Purchase Price"). Following the announcement by TDS in December 1998, that it intended to distribute to its 22 shareholders all of the capital stock of Aerial that it owns, and that Aerial would seek additional financing from sources other than TDS in connection therewith, Sonera contacted TDS to express certain concerns about the announcement. Sonera has asserted that the TDS announcement reflects a change in circumstances that warrant the renegotiation of certain matters related to its investment in AOC, including an adjustment in the Equivalent Purchase Price, and has raised the possibility of litigation in connection therewith. TDS and Aerial intend to attempt to reach a mutually acceptable resolution of the concerns raised by Sonera. There can be no assurance that this matter will not lead to litigation, or that it will not have a material adverse effect on TDS or Aerial or on the plans relating to the refinancing and spin-off of Aerial. 3. Marketable Equity Securities Marketable equity securities include the Company's investments in equity securities, primarily AirTouch Communications, Inc. ("AirTouch") common shares. These securities are classified as available-for-sale and stated at fair market value. Information regarding the Company's marketable equity securities is summarized below.
March 31, December 31, 1999 1998 ------------ ------------ (Dollars in thousands) Available-for-sale Equity Securities Aggregate Fair Value $509,912 $378,812 Original Cost 231,717 230,344 -------- -------- Gross Unrealized Holding Gains 278,195 148,468 Tax Effect 111,753 59,661 -------- -------- Unrealized Holding Gains, net of tax 166,441 88,807 Minority Share of Unrealized Holding Gains 25,007 13,198 -------- -------- Net Unrealized Holding Gains $141,435 $ 75,609 -------- --------
4. Gains from Sale of Cellular and Other Investments Gains from the sale of cellular interest and other investments primarily reflect gains recorded on the sale of a minority cellular interest and certain other investments for cash in 1999 and the sale of minority interests in twelve markets to AirTouch for AirTouch common shares and cash in 1998. 23 5. Other 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.
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- (Dollars in thousands) Accumulated Other Comprehensive Income Balance, beginning of period $ 75,609 $ 683 Other Comprehensive Income - Unrealized gains on securities 129,727 28,245 Income tax effect 52,092 10,301 -------- -------- 77,635 17,944 Minority share of unrealized gains 11,809 2,407 Net unrealized gains included in Comprehensive Income 65,826 15,537 -------- -------- Balance, end of period $141,435 $ 16,220 ======== ======== Comprehensive Income Net Income $ 10,400 $ 74,170 Net unrealized gains on securities 65,826 15,537 -------- -------- $ 76,226 $ 89,707 ======== ========
24 6. Earnings Per Share 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:
March 31, March 31, 1999 1998 -------- -------- (Dollars and shares in thousands) Net Income $ 10,400 $74,170 Less: Preferred Dividends (350) (440) -------- -------- Net Income Available to Common used in Earnings per Share-Basic 10,050 73,730 Reduction in preferred dividends if Preferred Shares converted into Common Shares -- 402 Minority income adjustment (18) (51) -------- -------- Net Income Available to Common used in Earnings per Share-Diluted $ 10,032 $ 74,081 -------- -------- Weighted Average Number of Common Shares used in Earnings per Share-Basic 61,279 60,750 Effect of Dilutive Securities: Common Shares outstanding if Preferred Shares converted -- 927 Stock options and stock appreciation rights 193 136 Common Shares issuable 13 14 -------- -------- Weighted Average Number of Common Shares used in Earnings per Share-Diluted 61,485 61,827 ======== ========
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. 25 7. 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 with other investments and are stated at amortized cost. TDS acquired certain cellular licenses in 1999 and 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.
Three Months Ended March 31, --------------------- 1999 1998 -------- -------- (Dollars in thousands, except per share amounts) Property, plant and equipment $ -- $ 7,825 Cellular licenses 5,464 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 2,667 7,820 Common Shares issued -- (10,028) -------- -------- Decrease in cash due to acquisitions $ 8,131 $ 52,275 ======== ========
The following table summarizes interest and income taxes paid, and other noncash transactions.
Three Months Ended March 31, ------------------ 1999 1998 ---- ---- (Dollars in thousands) Interest Paid $34,667 $32,097 Income Taxes Paid 6,555 8,347 Common Shares issued by TDS for conversion of TDS Preferred Stock $ 1,874 $ 3,063
26 8. Business Segment Information Financial data for the Company's business segments for each of the three month periods ended or at March 31, 1999 and 1998 are as follows:
Three Months Ended or at March 31, 1999 U.S. Cellular TDS Telecom Aerial All Other Total - -------------------- ------------- ----------- -------- --------- --------- (Dollars in thousands) Operating revenues $ 325,985 $ 128,965 $ 50,541 $ -- $ 505,491 Operating cash flow 104,029 57,511 (28,063) -- 133,477 Depreciation and amortization expense 51,915 30,557 21,771 -- 104,243 Operating income (loss) 52,114 26,954 (49,834) -- 29,234 Total Assets 3,182,652 1,623,075 954,443 3,323,758 9,083,928 Capital expenditures $ 84,688 $ 21,556 $ 5,253 $ 4,068 $ 115,565 Three Months Ended or at March 31, 1998 U.S. Cellular TDS Telecom Aerial All Other Total - -------------------- ------------- ----------- -------- --------- ---------- (Dollars in thousands) Operating revenues $ 245,157 $ 114,166 $ 30,746 $ 17,783 $ 407,852 Operating cash flow 78,422 48,808 (49,617) (3,511) 74,102 Depreciation and amortization expense 45,267 26,776 19,696 7,895 99,634 Operating income (loss) 33,155 22,032 (69,313) (11,406) (25,532) Total Assets 2,741,361 1,480,573 962,886 3,884,444 9,069,264 Capital expenditures $ 69,093 $ 30,739 $ 29,685 $ (4,203) $ 125,314
Three Months Ended or at March 31, ------------------- 1999 1998 ---- ---- (Dollars in thousands) Reconciliation of Segment Revenues to Consolidated Revenues: Total Revenues for reportable segments $ 505,491 $ 407,852 American Paging Revenues included in "American Paging Operating (Loss)" -- (17,783) ----------- ----------- Consolidated Revenues $ 505,491 $ 390,069 =========== =========== Reconciliation of Segment Total Assets to Consolidated Total Assets: Total Assets for reportable segments $ 9,083,928 $ 9,069,264 Intercompany eliminations (1) (3,425,084) (3,868,156) ----------- ----------- Consolidated Total Assets $ 5,658,844 $ 5,201,108 =========== ===========
(1) Intercompany eliminations consist primarily of the elimination of TDS's book value in its subsidiaries and the elimination of intercompany receivables. 27 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 6 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, 1999: None 28 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. ------------------------------- (Registrant) Date May 14, 1998 /s/ Sandra L. Helton ---------------------------- -------------------------------- Sandra L. Helton, Executive Vice President-Finance (Chief Financial Officer) Date May 14, 1998 /s/ Gregory J. Wilkinson ------------------------- -------------------------------- Gregory J. Wilkinson, Vice President and Controller (Principal Accounting Officer) 29 EX-12 2 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES For the Three Months March 31, 1999 (Dollars In Thousands)
EARNINGS: Income from Continuing Operations before income taxes $ 14,699 Add (Deduct): Minority Share of Losses (5,938) Earnings on Equity Method 6,542 Distributions from Minority Subsidiaries 6,100 Amortization of Capitalized Interest 395 Minority interest in majority-owned subsidiaries that have fixed charges 1,342 -------- 23,140 Add fixed charges: Consolidated interest expense 36,774 Interest Portion (1/3) of Consolidated Rent Expense 5,099 -------- $ 65,013 FIXED CHARGES: ======== Consolidated interest expense $ 36,774 Interest Portion (1/3) of Consolidated Rent Expense 5,099 -------- $ 41,873 ======== RATIO OF EARNINGS TO FIXED CHARGES 1.55 ======== Tax-Effected Redeemable Preferred Dividends $ 78 Fixed Charges 41,873 -------- Fixed Charges and Redeemable Preferred Dividends $ 41,951 ======== RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 1.55 ======== Tax-Effected Preferred Dividends $ 1,483 Fixed Charges 41,873 -------- Fixed Charges and Preferred Dividends $ 43,356 ======== RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 1.50 ========
EX-27 3 FDS
5 This schedule contains summary financial information extracted from the consolidated financial statements of Telephone and Data Systems, Inc. as of March 31, 1999, and for the three months then ended, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1999 MAR-31-1999 53,436 509,912 200,144 12,442 34,686 397,423 3,992,367 1,302,054 5,658,844 603,191 1,569,486 0 24,029 619 2,311,788 5,658,844 0 505,491 0 476,257 (22,239) 0 36,774 14,699 4,299 10,400 0 0 0 10,400 0.16 0.16
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