-----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, TL771IppHgwcMDK8ujoGckC7wBpA8yrMwMYyLjvl4Y+3MnPbwJHAVw1s34dhaggt CoiOi+lPnCmtx9Ggx+Rzvg== 0000096966-98-000023.txt : 19980513 0000096966-98-000023.hdr.sgml : 19980513 ACCESSION NUMBER: 0000096966-98-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980512 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC CENTRAL INDEX KEY: 0000096966 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 362669023 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08251 FILM NUMBER: 98616910 BUSINESS ADDRESS: STREET 1: 8401 GREENWAY BLVD STREET 2: PO BOX 628010 CITY: MIDDLETON STATE: WI ZIP: 535628010 BUSINESS PHONE: 3126301900 MAIL ADDRESS: STREET 1: 30 NORTH LASALLE STREET SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60602 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC STOCK OPTION PLANS DATE OF NAME CHANGE: 19741118 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC DATE OF NAME CHANGE: 19740509 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, 1998 ------------------------------------------------- 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 - -------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Iowa 36-2669023 ----------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30 North LaSalle Street, Chicago, Illinois 60602 ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-1900 Not Applicable ------------------------------------------------------ (Former address of principal executive offices) (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 1998 ----------------------------- ------------------------------- Common Shares, $1 par value 54,036,216 Shares Series A Common Shares, $1 par value 6,939,280 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 2-12 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 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 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 - --------------------- Three Months Ended 3/31/98 Compared to Three Months Ended 3/31/97 - ----------------------------------------------------------------- Telephone and Data Systems, Inc. reported net income available to common of $73.7 million, or 2 $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.
Three Months Ended March 31, ------------------------------- 1998 1997 ---- ---- (Dollars in thousands, except per share amounts) 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 -- ------------- ------------- $ 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 -- ------------- ------------- $ 1.20 $ .15 ============= =============
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 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 4 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 5 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.
Three Months Ended March 31, ------------------------------------------- 1998 1997 Change ----------- ----------- ----------- (Dollars in thousands) 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) =========== =========== ===========
6 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.
Three Months Ended March 31, --------------------------------------- 1998 1997 Change ----------- ---------- ------------ (Dollars in thousands) 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) =========== ========== ===========
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 7 ($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 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.
Three Months Ended March 31, ----------------------------------------- 1998 1997 Change ---- ---- ------ (Dollars in thousands) 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) ========== =========== ==========
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 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 $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 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 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited ---------
Three Months Ended March 31, ------------------------------- 1998 1997 ---- ---- (Dollars in thousands, except per share amounts) 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 =============== ============= The accompanying notes to financial statements are an integral part of these statements.
13 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited ---------
Three Months Ended March 31, -------------------------- 1998 1997 ---- ---- (Dollars in thousands) 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 =========== ========== The accompanying notes to financial statements are an integral part of these statements.
14 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------
(Unaudited) March 31, 1998 December 31, 1997 -------------- ----------------- (Dollars in thousands) 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 ============= ============= The accompanying notes to financial statements are an integral part of these statements.
15 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
(Unaudited) March 31, 1998 December 31, 1997 -------------- ----------------- (Dollars in thousands) 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 ============= =============== (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.
16 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 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 4. Marketable Equity Securities The following table lists the Company's marketable equity securities at March 31, 1998.
Cumulative Net Fair Market Original Unrealized Tax Unrealized Value Cost Gain Effect Gain --------- --------- --------- --------- ---------- (Dollars in thousands) 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 ========= ========= ========= ========= =========
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 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.
Three Months Ended March 31, ---------------------------- 1998 1997 ------------ ------------ (Dollars in thousands) 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 ============ ============
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 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, 1998 1997 ---------------------- (Dollars and shares in thousands) 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 ========== =========
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:
Three Months Ended March 31, 1998 1997 --------- ---------- (Dollars in thousands, except per share amounts) 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
21 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.
Three Months Ended March 31, 1998 ------------------------------- (Dollars in thousands, except per share amounts) 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 ======================
The following table summarizes interest and income taxes paid, and other noncash transactions.
Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- (Dollar in thousands) 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
22 12. Business Segment Information The following tables summarize business segment information for the three months ended or at March 31, 1998, and 1997. U.S. CELLULAR OPERATIONS
Three Months Ended or at March 31, ------------------------------ 1998 1997 ------------- -------------- (Dollars in thousands) 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
AERIAL OPERATIONS
Three Months Ended or at March 31, ------------------------------ 1998 1997 ------------- ------------- (Dollars in thousands) 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
23 TDS TELECOM OPERATIONS
Three Months Ended or at March 31, ---------------------------- 1998 1997 ---------- ------------ (Dollars in thousands) 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
OTHER OPERATIONS
Three Months Ended or at March 31, ----------------------------- 1998 1997 ------------ ------------- (Dollars in thousands) Additions to property, plant and equipment Other $ (4,203) $ 7,450 Identifiable assets Other $ 218,634 $ 238,514
24 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 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 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, 1998 (Dollars In Thousands) 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 ============
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, 1998, and for the three months then ended, and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1998 MAR-31-1998 66,801 268,221 197,413 19,173 33,863 386,581 3,474,978 1,023,732 5,201,108 779,107 1,292,311 175 27,924 61,673 1,996,491 5,201,108 0 392,118 0 407,961 (212,476) 0 36,509 160,124 85,954 74,170 0 0 0 74,170 1.21 1.20
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