-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, D7mSSrO47jcmfNFr+C4EoWDYYfXEk9JpCu1yLFyrrHvKQWeUXen14ZXX6Pv7BSb8 yz50NSngNKlkw8yaE7GcVg== 0000096966-94-000029.txt : 19940525 0000096966-94-000029.hdr.sgml : 19940525 ACCESSION NUMBER: 0000096966-94-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940512 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC CENTRAL INDEX KEY: 0000096966 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 362669023 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08251 FILM NUMBER: 94527678 BUSINESS ADDRESS: STREET 1: 30 N LASALLE ST STE 4000 CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3126301900 MAIL ADDRESS: STREET 1: 301 S. WESTFIELD RD STREET 2: PO BOX 5158 CITY: MADISON STATE: WI ZIP: 53705-0158 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, 1994 ----------------------------- 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 incorporation or organization) Identification No.) 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, 1994 ---------------- ---------------------------------- Common Shares, $1 par value 46,276,845 Shares Series A Common Shares, $1 par value 6,883,715 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 2-15 Consolidated Statements of Income - Three Months Ended March 31, 1994 and 1993 16 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1994 and 1993 17 Consolidated Balance Sheets - March 31, 1994 and December 31, 1993 18-19 Notes to Consolidated Financial Statements 20-22 Part II. Other Information 23 Signatures 24 PART I. FINANCIAL INFORMATION ------------------------------ TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -------------------------------------------------------------- AND FINANCIAL CONDITION ----------------------- RESULTS OF OPERATIONS --------------------- CONSOLIDATED Telephone and Data Systems, Inc.'s ("TDS" or the "Company") consolidated results of operations for the first quarter of 1994 reflect i) rapid growth in cellular and paging customer units which resulted in substantial increases in revenues, ii) steady growth in telephone access lines and revenues, iii) improvements in cellular and paging economies of scale and cost-containment measures in all three business units which resulted in improved cash flow, operating results, and cash and operating margins, iv) increases in interest and income tax expense and v) an increase in weighted average shares outstanding due to the Company's continuing acquisition program. Operating revenues grew 31.9% to $158.8 million in the first quarter of 1994 over 1993, operating cash flow increased 34.3% to $56.2 million and operating income rose 45.1% to $22.3 million. Net income before the cumulative effect of an accounting change rose 50.3% to $10.2 million in the first quarter of 1994 over 1993. Earnings per share before the cumulative effect of an accounting change, reflecting the significantly improved operating results offset somewhat by an 18.7% increase in weighted average common shares, grew 28.6% to $.18 in 1994 from $.14 in 1993. Net income and earnings per share in 1994 were reduced by $723,000 and $.01, respectively, due to TDS's adoption of a new accounting standard for postemployment benefits. TDS Telecommunications Corporation ("TDS Telecom") has acquired two telephone companies since March 31, 1993. These acquisitions added 2,500 access lines while internal growth added 16,500 lines. United States Cellular Corporation (AMEX symbol "USM"), TDS's 81.3%-owned subsidiary, has added 20 markets to consolidated operations since March 31, 1993, through acquisitions and the initiation of cellular operations. USM currently provides cellular service through systems serving 120 majority-owned and managed markets. American Paging, Inc. (AMEX symbol "APP"), TDS's 82.5%-owned subsidiary, has acquired one paging system since March 31, 1993, which added approximately 10,700 pagers. APP provides service to its customers through 38 sales and service operating centers. Operating revenues grew 31.9% ($38.4 million) in 1994 primarily as a result of the growth in customers served. Cellular telephone revenues increased as a result of the 69.2% customer growth in majority-owned markets which resulted in increased local retail and access revenue, and increased roaming revenue, offset somewhat by a 4.0% decline in average monthly service revenue per unit. Radio paging revenues increased primarily as a result of the 40.3% growth in the number of pagers in service offset somewhat by a 12.4% decline in average monthly service revenue per unit. Telephone revenues increased primarily due to acquisitions, recovery of increased costs of providing long-distance services, internal access line growth and a 6.1% increase in average monthly revenue per access line. -2- Operating expenses rose 30.0% ($31.5 million) in 1994 as a result of the continued rapid growth in USM's cellular telephone operations and the steady growth in TDS Telecom's and APP's operations. Operating expenses increased in all three business units, but at a slower rate than revenues due to increasing economies of scale in the cellular and paging units and cost-containment measures in all three businesses. Operating income increased 45.1% to $22.3 million in the first quarter of 1994 from $15.4 million in 1993. The increase in telephone operating income was complemented by a decrease in the cellular telephone operating loss and the first quarter paging operating income (compared to operating loss in 1993). Three Months Ended March 31, --------------------------------------- 1994 1993 Change ----------- ---------- ---------- (Dollars in thousands) CONSOLIDATED OPERATING INCOME Telephone Operations $ 22,738 $ 19,502 $ 3,236 Cellular Telephone Operations (1,004) (3,380) 2,376 Radio Paging Operations 570 (746) 1,316 --------- --------- -------- $ 22,304 $ 15,376 $ 6,928 --------- --------- -------- Operating Margins: Telephone 32.0% 31.5% Cellular Telephone* (1.6)% (8.6)% Radio Paging* 3.1% (5.1)% * Computed on Service Revenues Investment and other income was unchanged in total at $5.2 million in 1994 and 1993. Cellular investment income, net increased $1.1 million to $3.6 million, reflecting improvement in USM's equity method markets. Minority share of income decreased $2.0 million in the first quarter of 1994 over 1993, as shown in the following table. Minority share of (income) loss includes (a) the minority shareholders' share of USM's net loss, (b) the minority partners' share of income or loss of the cellular markets majority-owned by USM and (c) the minority shareholders' share of income of a telephone company majority- owned by TDS. The minority shareholders' share of USM's net loss decreased $1.2 million in the first quarter of 1994 over 1993 due to the improvement in USM's net loss. MINORITY SHARE OF (INCOME) LOSS Three Months Ended March 31, --------------------------------------- 1994 1993 Change ----------- ---------- ---------- (Dollars in thousands) United States Cellular Minority Shareholders' Share $ 342 $ 1,522 $(1,180) Minority Partners' Share (1,118) (767) (351) --------- --------- -------- (776) 755 (1,531) TDS Telecom (421) -- (421) --------- --------- -------- $ (1,197) $ 755 $(1,952) ========= ========= ======== -3- Interest expense increased 10.3% ($863,000) in 1994. The increase was primarily due to an increase in long-term interest expense. Since March 31, 1993, TDS has issued $39.5 million under its Medium-Term Note Program, which was used to retire higher-cost long- and short-term notes. The Company's average balance of short-term notes payable decreased to $18.1 million in 1994 from $43.2 million in 1993, resulting in a decrease in short-term interest expense in the first quarter of 1994 compared with the first quarter of 1993. Income tax expense increased 50.0% ($2.7 million) in 1994 compared with 1993 as pretax income increased. The effective income tax rate was 44% in the first quarter of 1994 and 1993. State income taxes increased 54.0% ($674,000) in 1994, due primarily to the increase in pretax income. Net income before the cumulative effect of a change in accounting principle improved to $10.2 million in 1994 from $6.8 million in 1993. Earnings per common share before the cumulative effect of a change in accounting principle were $.18 in 1994 and $.14 in 1993. The weighted average number of common shares outstanding increased 18.7% in 1994. The increase is primarily due to the issuance of 5.8 million Common Shares since March 31, 1993 in connection with acquisitions. Cumulative effect of accounting changes: Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires employers to recognize the obligation to provide postemployment benefits to former or inactive employees after employment but before retirement. The cumulative effect of the new principle on years prior to 1994 reduced net income and earnings per share by $723,000 and $.01, respectively. Effective January 1, 1993, the Company adopted SFAS 109, which requires an asset and liability approach for financial reporting for income taxes. The cumulative effect of the new principle on years prior to 1993 had no effect on net income or earnings per share. -4- TELEPHONE OPERATIONS
Three Months Ended March 31, ----------------------------------------------------- Change Change Due To Excluding 1994 1993 Change Acquisitions Acquisitions -------- ------- -------- ---------- ------------ (Dollars in thousands, except per access line amounts) Operating Revenues Local Service $19,395 $ 16,972 $ 2,423 $ 645 $ 1,778 Network Access and Long-Distance 41,803 36,571 5,232 2,181 3,051 Miscellaneous 9,862 8,414 1,448 544 904 ------- ------- ------- -------- ---------- 71,060 61,957 9,103 3,370 5,733 ------- ------- ------- -------- ---------- Operating Expenses Plant Operations 11,069 9,236 1,833 635 1,198 Depreciation 14,553 12,874 1,679 559 1,120 Amortization 890 833 57 115 (58) Customer Operations 10,319 8,906 1,413 407 1,006 Corporate and Other 11,491 10,606 885 639 246 ------- ------- ------- -------- ---------- 48,322 42,455 5,867 2,355 3,512 ------- ------- ------- -------- ---------- Operating Income $22,738 $ 19,502 $ 3,236 $ 1,015 $ 2,221 ======= ======= ======= ======== ========== Telephone Revenues as a Percent of Total Revenues 44.7% 51.5% Additions to Property, Plant and Equipment* $13,585 $ 10,379 Identifiable Assets $825,239 $787,980 Companies 93 92 Access Lines 360,100 341,100 Growth in access lines from prior quarter-end: Acquisitions -- 16,300 Internal growth 3,900 3,100 Average monthly revenue per access line $ 66 $ 62 * Does not include cash expenditures (in thousands) of $7,143 and $5,462, respectively, which relate to additions in prior periods.
Operating revenues from telephone operations increased 14.7% ($9.1 million) in the first quarter of 1994 compared to 1993. The increase in revenues was primarily due to internal access line growth, recovery of increased costs of providing long-distance services and the effects of acquisitions. The effects of acquisitions increased telephone revenues 5.4% ($3.4 million) in 1994. TDS has acquired two telephone companies serving 2,500 access lines since March 31, 1993. Telephone results of operations include the results of these acquired companies since the respective dates of acquisition. Local service revenues increased 14.3% ($2.4 million) in 1994 with acquisitions increasing such revenues 3.8% ($645,000). Internal access line growth and sales of custom-calling and other features increased revenues 5.5% ($926,000). Certain extended area service ("EAS") -5- revenues previously reported as network access revenues increased local service revenues 2.9% ($495,000). Network access and long-distance revenues increased 14.3% ($5.2 million) in 1994 with acquisitions increasing such revenues 6.0% ($2.2 million). These revenues increased 4.5% ($1.6 million) due to recovery of increased costs of providing access to long-distance carriers. Increased usage of the network generated 3.7% ($1.3 million) of additional network access and long-distance revenue. These revenues decreased 1.4% ($495,000) in 1994 as certain EAS revenues are now reported as local service revenues. Miscellaneous revenues increased 17.2% ($1.4 million) in 1994, with acquisitions increasing such revenues 6.5% ($544,000). Increased message volumes increased miscellaneous revenues 3.6% ($307,000), higher sales and leases of customer premise equipment increased these revenues 3.5% ($296,000), and call plan programming services provided to other carriers increased these revenues by 2.6% ($217,000). Operating expenses increased 13.8% ($5.9 million) in 1994. The effects of acquisitions increased expenses 5.5% ($2.4 million). Plant operations expenses increased 19.8% ($1.8 million) with acquisitions increasing these expenses 6.8% ($635,000). The remainder of the increase was primarily due to salary and work force changes along with the effects of general inflation. Depreciation expense increased 13.0% ($1.7 million) with acquisitions increasing such expenses 4.3% ($559,000). The remaining increase was due primarily to increases in plant facilities. Customer operations expenses increased 15.9% ($1.4 million) with acquisitions increasing such expenses 4.6% ($407,000). The remaining increase was primarily due to increases in customer billing and programming costs and increased marketing activities. Corporate and other expenses increased 8.3% ($885,000) with acquisitions increasing such expenses 6.0% ($639,000). The remaining increase was due primarily to staffing increases and legal and other costs related to new business development and long-range planning activities, and general inflation and salary increases. Operating income from telephone operations increased 16.6% ($3.2 million) in 1994, with acquisitions increasing such income 5.2% ($1.0 million). The telephone operating margin was 32.0% in 1994 compared to 31.5% in 1993. The increase in operating income reflects additional 1994 revenues from recovery of increased costs of providing long-distance services and from growth in access lines and minutes of use. These increases in revenues were offset somewhat by increased costs for plant operations, customer billing, and new business and long-range planning and by increased depreciation. TDS Telecom's increased operating margin for the first quarter of 1994 may not be sustainable for the remainder of the year. Increased construction expenditures and seasonality effects are expected to reduce the operating margin to levels near 30%. -6- CELLULAR TELEPHONE OPERATIONS Three Months Ended March 31, --------------------------------------- 1994 1993 Change ----------- ---------- ---------- (Dollars in thousands, except per unit amounts) Operating Revenues Service $ 63,361 $ 39,132 $24,229 Equipment Sales 2,872 2,336 536 --------- --------- -------- 66,233 41,468 24,765 --------- --------- -------- Operating Expenses System Operations 9,730 6,850 2,880 Marketing and Selling 14,054 9,311 4,743 Cost of Equipment Sold 8,009 3,871 4,138 General and Administrative 20,726 15,125 5,601 Depreciation 8,622 5,549 3,073 Amortization 6,096 4,142 1,954 --------- --------- -------- 67,237 44,848 22,389 --------- --------- -------- Operating (Loss) $ (1,004) $ (3,380) $ 2,376 ========= ========= ======== Cellular Telephone Revenues as a Percent of Total Revenues 41.7% 34.4% Additions to Property, Plant and Equipment* $ 19,398 $ 12,850 Identifiable Assets $1,385,742 $1,043,617 Majority-Owned, Managed and Consolidated Markets: Population equivalents (000s) 18,521 16,217 Total population (000s) 19,927 17,338 Customers 294,000 173,800 Market penetration 1.48% 1.00% Markets in operation 120 101 Cell sites in service 566 362 Average monthly service revenue per unit $ 76 $ 79** Churn rate per month 2.3% 2.1% Marketing cost per net customer addition $ 711 $ 798 * Does not include cash expenditures (in thousands) of $12,710 and $5,369, respectively, which relate to additions in prior periods. ** Average monthly revenue per unit amount for 1993 has been restated to conform to current year presentation. USM owns, operates and invests in cellular markets. USM owns or has the right to acquire interests, both majority and minority, in 205 cellular telephone markets at March 31, 1994, representing 23,642,000 population equivalents. USM manages the operations in 139 markets at March 31, 1994, and expects to manage the operations of four other markets. The remaining interests in 62 markets are managed by others. USM's consolidated results of operations include 100% of the revenues and expenses of the systems serving its majority- owned and managed markets. The results of operations of 120 markets are included in 1994 consolidated results compared to 101 markets in 1993. Operating revenues increased 59.7% ($24.8 million) in 1994. The revenue increase is primarily the result of 69.2% customer growth in the systems serving its majority-owned and managed markets, growth in roamer revenues and acquisitions. Acquisitions and start-ups increased revenues 18.3% ($7.6 million). USM changed its financial reporting presentation for outbound, or pass-through, roamer revenue during the first quarter of 1994. Pass-through roamer revenue is now treated as an offset to the expense charged by other cellular carriers to the Company's markets for this roaming service, and the net amount is included in system operations -7- expense. Service revenues and system operations expense for 1993 have been reclassified for the effect of this change in presentation, which will allow more comparability of USM's revenues and margins to other companies in the cellular industry. While the number of customers and amount of revenues earned continued to grow, average revenue per customer and monthly local minutes of use per customer declined. Average monthly service revenues per customer declined to $76 in 1994 from $79 in 1993. Monthly local minutes of use averaged 89 in the first three months of 1994 compared to 100 in the same period in 1993. The decline in average local minutes of use follows an industry-wide trend and is believed to be related to the tendency of the early subscribers in a market to be the heaviest users. It also reflects USM's and the cellular industry's continued penetration of the consumer market, which tends to include more lower-usage customers. Management anticipates that average local minutes of use and average monthly service revenue per customer will continue to decline as USM adds more customers. Service revenues from local customers' usage of USM's systems increased 62.6% ($14.9 million) in 1994. Growth in the number of customers in USM's consolidated markets was the primary reason for the increase in local revenue, offset somewhat by the decrease in average monthly local minutes of use. The decrease in average minutes of use resulted in a decrease in average monthly retail revenue per customer, to $46 in 1994 from $48 in 1993. Inbound roamer revenues, earned when customers of other systems use USM's cellular systems when roaming, increased 57.4% ($7.2 million). The increase is attributable to an increase in the number of customers from other systems using USM's systems as well as an increased number of USM-managed systems and cell sites within those systems. Monthly roamer revenue per customer averaged $24 in 1994 and $25 in 1993. Long-distance revenues increased 95.4% ($2.1 million) as the volume of long-distance calls billed by USM increased. Equipment sales revenue reflects the sale of 28,700 and 11,700 cellular telephone units in 1994 and 1993, respectively, plus installation and accessories revenue. The average revenue per telephone unit sold was $100 in 1994 compared to $200 in 1993. The average revenue decline partially reflects both USM's decision to reduce sales prices on cellular telephones to stimulate customer growth as well as reduced manufacturers' prices. Also, during the first quarter of 1994, the Company used promotions which were based on increased equipment discounting. The success of these promotions led to both an increase in units sold and a decrease in average sales revenue per unit. Operating expenses increased 49.9% ($22.4 million) in 1994. The increase in expenses was primarily the result of increased customer activations, acquisitions and increased depreciation and amortization expense related to increases in fixed assets and license costs. Acquisitions and start-ups increased operating expenses 22.8% ($10.2 million) in 1994. System operations expenses increased 42.0% ($2.9 million) in 1994 as a result of increases in customer usage expenses and other costs associated with operating USM's cellular systems. Customer usage expenses represent charges from other telecommunications service providers for local interconnection to the landline network, toll charges and roamer expenses from USM's customers' use of systems other than their local systems, offset somewhat by increased pass- through roamer revenue. Customer usage expenses increased 12.7% ($463,000) in 1994. Maintenance, utility and cell site expenses grew 75.6% ($2.4 million) in 1994, reflecting growth in the number of cells to 566 in 1994 from 362 in 1993 and in the number of switches in service, and the effects of acquisitions and new systems started after March 31, 1993. -8- Marketing and selling expenses increased 50.9% ($4.7 million) in 1994, due primarily to the increased number of gross customer activations in 1994 and the effects of acquisitions. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices, agent commissions, promotional expenses, local advertising and public relations expenses. Management expects that marketing and selling costs will continue to increase as additional customers are added to USM's systems. Cost of equipment sold reflects the increased unit sales related to the increase in gross customer activations and the first quarter 1994 promotional sales discussed above, offset somewhat by falling manufacturers' prices. The average cost of a telephone unit sold was $279 in 1994 compared to $331 in 1993. General and administrative expenses increased 37.1% ($5.6 million) in 1994. These expenses include the costs of operating USM's local business offices and its corporate expenses. The increase results from the growth in the number of consolidated markets due to acquisitions as well as the growth in the customer base in existing systems. USM is using an ongoing clustering strategy to combine local operations wherever warranted in order to gain operational efficiencies and reduce its administrative expenses. Depreciation expense increased 55.4% ($3.1 million) in 1994, reflecting a 54.4% increase in average fixed assets since March 31, 1993. Amortization expense, primarily amortization of license costs, increased 47.2% ($2.0 million) in 1994. License costs for consolidated operational markets increased 40.6% ($259 million) since March 31, 1993. Operating loss was $1.0 million in 1994 compared to $3.4 million in 1993. Operating margin on service revenues, while still negative, improved to (1.6%) in 1994 from (8.6%) in 1993. The decrease in operating loss was primarily due to improved results in the more established systems and increased revenues from growth in the customer base, offset somewhat by costs associated with the growth of USM's operations and increased losses on equipment sales. At least 11 additional markets are expected to be added to consolidated operations by the end of 1994. The addition of these markets is expected to increase expenses as USM adds to its technical and administrative staffs to build and serve the systems. As a result, USM may generate operating losses over the next several quarters. Cellular investment income includes USM's and TDS's share of the net incomes or losses of cellular markets in which they have a minority interest and for which they follow the equity method of accounting, net of amortization of license costs related to these minority interests. CELLULAR INVESTMENT INCOME Net of License Cost Amortization Three Months Ended March 31, ------------------------------------- 1994 1993 Change --------- --------- -------- (Dollars in thousands) Cellular Systems Managed by USM $ (158) $ (413) $ 255 Cellular Systems Managed by Others 3,741 2,865 876 --------- --------- -------- $ 3,583 $ 2,452 $ 1,131 ========= ========= ======== -9- Net loss from cellular telephone operations was $1.5 million in 1994 compared to $7.6 million in 1993. Such net loss excludes the USM minority shareholders' share of such losses. Net loss from cellular telephone operations does not include income tax benefits from inclusion in the TDS consolidated federal tax return. Under a tax allocation agreement between TDS and USM, TDS does not reimburse USM currently for income tax benefits and credits. Instead, such benefits and credits are carried forward until they can be used by USM. TDS owned an aggregate of 62,487,904 shares of common stock of USM at March 31, 1994, representing over 81% of the combined total of USM's outstanding Common and Series A Common Shares and over 96% of their combined voting power. Assuming USM's Common Shares are issued in all instances in which USM has the choice to issue its Common Shares or other consideration and assuming the USM common stock to be issued to TDS and third parties for completed and pending acquisitions and Preferred Stock conversions had been completed at March 31, 1994, TDS would have owned approximately 79.6% of the total outstanding common stock of USM and controlled over 95% of the combined voting power of both classes of its common stock. In the event TDS's ownership of USM falls below 80% of the total value of all of the outstanding shares of USM's stock, TDS and USM would be deconsolidated for federal income tax purposes. TDS and USM have the ability to defer or prevent deconsolidation, if deferring or preventing deconsolidation would be advantageous, by delivering TDS Common Shares and/or cash, in lieu of USM's Common Shares in connection with certain acquisitions. RADIO PAGING OPERATIONS Three Months Ended March 31, -------------------------------------- 1994 1993 Change ----------- ---------- ---------- (Dollars in thousands, except per unit amounts) Service Operations Revenues $ 18,139 $ 14,616 $ 3,523 --------- --------- -------- Costs and Expenses Cost of Services 4,207 3,637 570 Selling and Advertising 3,020 2,644 376 General and Administrative 6,776 5,969 807 Depreciation 3,107 2,556 551 Amortization 602 510 92 --------- --------- -------- 17,712 15,316 2,396 --------- --------- -------- Service Operating Income (Loss) 427 (700) 1,127 --------- --------- -------- Equipment Sales Revenue 3,370 2,359 1,011 Cost of Equipment Sold 3,227 2,405 822 --------- --------- -------- Equipment Sales Income (Loss) 143 (46) 189 --------- --------- -------- Operating Income (Loss) $ 570 $ (746) $ 1,316 ========= ========= ======== Radio Paging Revenues as a Percent of Total Revenues 13.6% 14.1% Additions to Property and Equipment* $ 7,004 $ 5,486 Identifiable Assets $ 74,907 $ 60,935 Pagers in service 492,300 350,900 Average monthly service revenue per unit $ 12.69 $ 14.48 Transmitters in service 758 533 Disconnect rate per month 2.8% 2.8% Marketing cost per net customer unit addition $ 92 $ 94 * Does not include cash expenditures (in thousands) of $1,474 in 1994 which relate to additions in 1993. Includes noncash expenditures (in thousands) of $1,492 in 1993. -10- Service revenues increased 24.1% ($3.5 million) in the first quarter of 1994 from 1993, primarily as a result of the 40.3% growth in the number of pagers in service. A net additional 141,400 pagers have been placed in service since March 31, 1993. However, a continuing decline in average revenue per pager has slowed service revenue growth. Average monthly service revenue per pager declined 12.4% to $12.69 in the first three months of 1994 from $14.48 in the same period of 1993. The decline in APP's average service revenue per pager is consistent with the industry trend. However, APP's average service revenue per pager remains above the industry average. Declining average monthly service revenue per pager is related to competitive factors and a shift toward lower distribution channels such as resellers and customers purchasing pagers through retail operations. Service expenses increased 15.6% ($2.4 million) in 1994 from 1993, primarily as a result of the costs of system expansion and serving new customers. However, average monthly operating cost per unit improved 19.3% to $7.68 in 1994 from $9.52 in 1993 as a result of achieving economies of scale and operating efficiencies. Cost of services increased 15.7% ($570,000) in 1994 reflecting the additional costs of providing service to the increased customer base and the costs of upgrading and expanding the systems to improve system reliability and coverage. APP's transmitters in service increased to 758 at March 31, 1994 from 533 at March 31, 1993. Selling and advertising expense increased 14.2% ($376,000) in 1994 over 1993 on a 25.9% increase in pager sales. Selling and advertising expense increased at a slower rate than the rate of growth in pagers in service due to improved productivity of sales personnel and increased use of lower- cost distribution channels such as resellers and retail outlets. General and administrative expense increased 13.5% ($807,000) due primarily to increases in employee-related costs ($302,000), additional bad debt expense ($264,000) and additional billing costs due to an enhancement of APP's customer billing system ($124,000). Depreciation charges increased 21.6% ($551,000) in 1994 reflecting the increased investment in pagers and related equipment. Equipment sales revenue increased 42.9% ($1.0 million) due to APP's increased emphasis on selling pagers to customers, particularly through retail stores and resellers. Cost of equipment sold increased 34.3% ($822,000) also due to the increased focus on pager sales. Operating income (loss) was $570,000 in 1994 compared to ($746,000) in 1993. The improvement in operating results reflects i) rapid growth in revenues due to the growth in the customer base, offset somewhat by a continuing decline in average monthly service revenue per unit and ii) increased operating expenses due to the growth in customer units, tempered by APP's efforts to reduce costs through process improvements and economies of scale. APP's use of lower- revenue distribution channels, while reducing the rate of revenue growth, is associated with lower customer acquisition costs. Net income (loss) from radio paging operations totalled $12,000 in 1994 and $(892,000) in 1993. -11- PARENT AND SERVICE COMPANY OPERATIONS Other income, net includes the gross income of TDS's computer, engineering and printing service companies and costs of corporate operations. Three Months Ended March 31, ----------------------- 1994 1993 --------- --------- (Dollars in thousands) Additions to Property and Equipment* $ 1,729 $ 3,057 Identifiable Assets $ 113,586 $ 56,021 * Does not include cash expenditures (in thousands) of $74 and $241, respectively, related to additions in prior periods. FINANCIAL RESOURCES AND LIQUIDITY --------------------------------- Cash flows from operating activities totalled $41.0 million in the first quarter of 1994 compared to $24.5 million in 1993. Consolidated operating cash flow (operating income plus depreciation and amortization) totalled $56.2 million in 1994 compared to $41.8 million in 1993. The 34.3% increase in operating cash flow reflects improved operating cash flow in all three of TDS's primary business units. Three Months Ended March 31, ------------------------------------- 1994 1993 Change ----------- ---------- ---------- (Dollars in thousands) OPERATING CASH FLOW Telephone Operations $ 38,181 $ 33,209 $ 4,972 Cellular Telephone Operations 13,714 6,311 7,403 Radio Paging Operations 4,279 2,320 1,959 --------- --------- -------- $ 56,174 $ 41,840 $14,334 ========= ========= ======== Cash flows from other operating activities (investment and other income, interest and income tax expense, and changes in working capital and other assets and liabilities) required $15.2 million in the first quarter of 1994 compared to $17.4 million in the first quarter of 1993. Cash flows from financing activities totalled $56.9 million in the first quarter of 1994 compared to $56.8 million in 1993. Sales of common stock by TDS and APP and long- and short-term borrowings provided most of the Company's external financing requirements during the first quarter of 1994. Long-term debt borrowings, primarily under TDS's Medium-Term Note Program, provided most of the Company's external financing requirements during the first quarter of 1993. TDS has used short-term debt to finance its cellular telephone and radio paging operations, for acquisitions and for general corporate purposes. Proceeds from the sale of long-term debt and equity securities from time to time have retired such short-term debt. Cash flows from investing activities required cash of $62.7 million in the first quarter of 1994 compared to $81.4 million in 1993. Such cash flows primarily consist of additions to property, plant and equipment requiring the use of cash, and cash flows for acquisitions and for investments in cellular telephone partnerships. Cash expenditures for property, plant and equipment totalled $63.1 million in the first quarter of 1994 compared to $41.4 million in the first quarter of 1993. Cash used for acquisitions totalled $4.3 million and $35.1 million in the first quarter of 1994 and 1993, respectively. -12- Additions to telephone plant and equipment totalled $13.6 million for the first quarter of 1994. Management expects that plant and equipment additions will total about $110 million in 1994, exclusive of acquisitions. This construction budget includes $45 million for new digital switches and $47 million for outside plant upgrades such as the installation of fiber optic cables. The Company plans to finance its telephone construction programs primarily using internally generated funds supplemented by long-term financing obtained under federal government programs. Additions to cellular telephone plant and equipment totalled $19.4 million for the first quarter of 1994. Management expects such cellular telephone expenditures during 1994 to total about $140 million for enhancements of existing majority-owned systems and for the construction of switching offices and cell sites. These additions will be financed by a combination of the Company's short-term bank financing, vendor financing and sales of USM equity and/or debt securities. Additions to radio paging property and equipment totalled $7.0 million for the first quarter of 1994. Management expects that such property and equipment additions will total about $25 million in 1994, primarily for the purchase of pagers. The Company's short-term bank financing along with radio paging operations' internally generated cash will finance these property additions. Other fixed asset additions totalled $1.7 million for the first quarter of 1994. Management expects that these additions will total about $10 million in 1994 and will be financed primarily using short-term bank notes along with internally generated cash. Cash flows used for acquisitions, net of cash acquired, totalled $4.3 million in the first quarter of 1994 compared to $35.1 million in 1993. During the first quarter of 1994, TDS purchased controlling interests in six cellular markets and several minority cellular interests representing a total of 822,000 population equivalents. Some of the entities acquired during 1994 were subject to acquisition agreements prior to 1994. The aggregate consideration for the acquisitions completed in 1994 was $98.7 million, consisting of $4.8 million in cash, 1.8 million TDS Common Shares ($90.5 million), cancellation of a note receivable ($1.4 million) and the obligation to deliver 42,000 TDS Common Shares ($2.0 million) in the future. TDS's active acquisition program may require substantial external financing during the remainder of 1994. TDS and its subsidiaries had agreements pending at March 31, 1994, to acquire controlling interests in three cellular markets and minority interests in two markets representing approximately 487,000 population equivalents and two telephone companies for an aggregate consideration of approximately $88.1 million. If all of these pending acquisitions are completed as planned, TDS and/or USM will issue approximately 1.8 million TDS Common Shares ($85.6 million) and 50,000 USM Common Shares ($984,000) and will pay approximately $1.5 million in cash. Any cellular interests acquired by TDS are expected to be assigned to USM, and at the time this occurs USM will reimburse TDS for TDS's consideration delivered and costs incurred in such acquisitions in the form of USM Common Shares, notes payable and cash. Additionally, USM has commitments to issue 1.0 million of its Common Shares to third parties in 1994 through 1996 in connection with acquisitions closed in prior years. In addition to the agreements discussed above, USM has an agreement to acquire a controlling interest in a cellular market representing 150,000 population equivalents. The -13- consideration for this acquisition will be determined based on an appraisal in the future of the fair market value of the interest to be acquired. TDS and USM plan to continue to acquire additional cellular interests in markets that strengthen USM's position, and are currently negotiating agreements for the acquisition of additional cellular interests. TDS and APP are also currently negotiating agreements for the acquisition of additional telephone and paging companies, respectively. TDS is a party to a legal proceeding before the Federal Communications Commission ("FCC") involving its cellular license in a Wisconsin Rural Service Area. Pending the resolution of the issues in the Wisconsin proceeding, further FCC grants to TDS and its subsidiaries will be conditioned on the outcome of that proceeding. TDS's and USM's ability to sell or exchange properties with third parties while such proceeding is pending may be affected. See Note 14 of Notes to Consolidated Financial Statements, Legal Proceedings (La Star Application), in the Company's 1993 Annual Report to Shareholders for a discussion of the proceeding involving the Wisconsin Rural Service Area and the La Star proceeding. As disclosed in a Form 8-K dated March 30, 1994, the FCC's decision in the La Star proceeding was vacated and remanded to the FCC for further proceedings by a federal court of appeals. The Company is evaluating what impact the court's decision in the La Star matter may have on the Wisconsin proceeding. Liquidity. Management believes that TDS has adequate internal and external resources to finance its business development, construction and acquisition programs. TDS and its subsidiaries had cash and temporary investments totalling $108 million and longer-term investments totalling $59.5 million at March 31, 1994. 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 had $120 million of bank lines of credit for general corporate purposes at March 31, 1994, all of which were committed. Unused amounts of such lines totalled $97.7 million, all of which were committed. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. TDS and USM also have access to debt and equity capital markets, including shelf registration statements to issue common stock and preferred stock for acquisitions. TDS's shelf registration statement for Common Shares for acquisitions had 4.7 million unissued shares at March 31, 1994, including 726,000 shares reserved under definitive agreements. TDS has a universal shelf registration statement which may be used from time to time to issue debt securities and/or Common Shares for cash. At March 31, 1994, $277.6 million remained unused on the universal shelf. Of this unused amount, $150 million has been allocated to TDS's Series C Medium-Term Note Program. The remaining $127.6 million may be used for either debt or equity security issuances. In February 1994, APP issued 3.5 million Common Shares in an initial public offering at a price of $14.00 per share. The $45.6 million proceeds (after underwriting discount) were used to reduce TDS's short-term debt and for general Corporate purposes. Management believes that TDS's internal cash flow and funds available from cash and cash investments provide substantial financial flexibility. TDS also has substantial lines of credit and longer-term financing commitments to meet its short- and longer-term financing needs. Moreover, TDS, USM and APP have access to public and private capital markets and anticipate issuing debt -14- and equity securities when capital requirements (including acquisitions), financial market conditions and other factors warrant. -15- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ---------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME -------------------------------- Unaudited --------- Three Months Ended March 31, ------------------------ 1994 1993 ---------- -------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Telephone $ 71,060 $ 61,957 Cellular telephone 66,233 41,468 Radio paging 21,509 16,975 ---------- ---------- 158,802 120,400 ---------- ---------- OPERATING EXPENSES Telephone 48,322 42,455 Cellular telephone 67,237 44,848 Radio paging 20,939 17,721 ---------- ---------- 136,498 105,024 ---------- ---------- OPERATING INCOME 22,304 15,376 ---------- ---------- INVESTMENT AND OTHER INCOME Interest and dividend income 2,048 1,778 Minority share of (income) loss (1,197) 755 Cellular investment income, net of license cost amortization 3,583 2,452 Other income, net 769 184 ---------- ---------- 5,203 5,169 ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 27,507 20,545 Interest expense 9,249 8,386 ---------- ---------- INCOME BEFORE INCOME TAXES 18,258 12,159 Income tax expense 8,034 5,356 ---------- ---------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 10,224 6,803 Cumulative effect of accounting change (Note 2) (723) -- ---------- ---------- NET INCOME 9,501 6,803 Preferred Dividend Requirement (564) (596) ---------- ---------- NET INCOME AVAILABLE TO COMMON $ 8,937 $ 6,207 ========== ========== WEIGHTED AVERAGE COMMON SHARES (000s) 52,555 44,261 EARNINGS PER COMMON SHARE: Before cumulative effect of accounting change $ .18 $ .14 Cumulative effect of accounting change (Note 2) (.01) -- ---------- ---------- Net Income $ .17 $ .14 ========== ========== DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .09 $ .085 ========== ========== The accompanying notes to financial statements are an integral part of these statements. -16- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES -------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------- Unaudited ------------ Three Months Ended March 31, ------------------------ 1994 1993 ---------- -------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,501 $ 6,803 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting changes 723 -- Depreciation and amortization 36,606 28,785 Deferred taxes 10,218 1,289 Investment income (5,021) (3,761) Minority share of income (losses) 1,197 (755) Other noncash expense 1,106 1,229 Change in accounts receivable (5,265) (3,261) Change in accounts payable (774) (3,786) Change in accrued taxes (4,775) 2,911 Change in other assets and liabilities (2,539) (4,987) ---------- --------- 40,977 24,467 ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 6,397 69,910 Repayments of long-term debt (10,274) (13,015) Change in notes payable 16,041 3,007 Common stock issued 5,532 340 Minority partner capital (distributions) contributions (658) 732 Redemption of preferred stock (268) (104) Dividends paid (5,095) (4,184) Sale of stock by a subsidiary 45,241 80 ---------- --------- 56,916 56,766 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (63,117) (41,352) Investments in and advances to cellular minority partnerships (3,979) (5,711) Distributions from partnerships 5,098 4,562 Other investments 2,043 (3,398) Acquisitions, excluding cash acquired (4,280) (35,135) Change in temporary investments 1,523 (336) ---------- --------- (62,712) (81,370) ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,181 (137) CASH AND CASH EQUIVALENTS - Beginning of period 55,666 40,810 ---------- --------- End of period $ 90,847 $40,673 ========== ========= The accompanying notes to financial statements are an integral part of these statements. -17- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES -------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) March 31, 1994 December 31, 1993 -------------- ----------------- (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 90,847 $ 55,666 Temporary investments 16,642 17,719 Accounts receivable from customers and others 86,215 80,796 Materials and supplies, at average cost, and other current assets 27,104 25,375 ------------ ------------- 220,808 179,556 ------------ ------------- INVESTMENTS Cellular limited partnership interests 100,468 101,210 Cellular license acquisition costs, net 140,777 92,277 Marketable equity securities 19,135 19,368 Other 109,040 115,532 ------------ ------------- 369,420 328,387 ------------ ------------- PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 636,271 638,848 Cellular telephone plant and license costs, net 1,069,920 1,014,103 Radio paging, net 54,870 52,945 Other, net 32,445 32,402 ------------ ------------- 1,793,506 1,738,298 ------------ ------------- OTHER ASSETS AND DEFERRED CHARGES 16,852 12,941 ------------ ------------- $ 2,400,586 $ 2,259,182 ============ ============= The accompanying notes to financial statements are an integral part of these statements. -18- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY -------------------------------------- (Unaudited) March 31, 1994 December 31, 1993 -------------- ----------------- (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt and preferred shares $ 34,752 $ 24,859 Notes payable 22,350 6,309 Accounts payable 60,704 82,878 Advance billings and customer deposits 18,318 17,273 Accrued interest 4,303 8,968 Accrued taxes 3,240 7,995 Other current liabilities 16,730 15,249 ------------ ------------- 160,397 163,531 ------------ ------------- DEFERRED LIABILITIES AND CREDITS 93,074 90,979 ------------ ------------- LONG-TERM DEBT, excluding current portion 510,868 514,442 ------------ ------------- REDEEMABLE PREFERRED SHARES, excluding current portion 15,058 25,632 ------------ ------------- MINORITY INTEREST in subsidiaries 243,934 223,480 ------------ ------------- NONREDEEMABLE PREFERRED SHARES 16,652 16,833 ------------ ------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 45,761 43,504 Series A Common Shares, par value $1 per share 6,884 6,881 Common Shares issuable (41,908 and 304,328 shares, respectively) 1,995 15,189 Capital in excess of par value 1,212,207 1,069,022 Retained earnings 93,756 89,689 ------------ ------------- 1,360,603 1,224,285 ------------ ------------- $ 2,400,586 $ 2,259,182 ============= ============= The accompanying notes to financial statements are an integral part of these statements. -19- 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, 1994 and December 31, 1993, and the results of operations and cash flows for the three months ended March 31, 1994 and 1993. The results of operations for the three months ended March 31, 1994 and 1993, are not necessarily indicative of the results to be expected for the full year. Certain 1993 cellular operating revenues and expenses have been reclassified to conform to current year presentation. 2. The Company implemented SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in one of three categories: a) held-to-maturity securities, reported at amortized cost; b) trading securities, reported at fair value; and c) available-for-sale securities, reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Information regarding the Company's securities is summarized below.
Aggregate Gross Unrealized Gross Unrealized Amortized Fair Value Holding Gains Holding Losses Cost Basis -------------------------------------------------------- (dollars in thousands) Available-for-sale Equity securities $19,135 $ 441 $ 2,578 $ 21,272 Held-to-maturity-- U.S. Treasury and other U.S. government corporations and agencies Current 8,079 48 --- 8,031 Non-current $57,639 $ --- $ 1,319 $ 58,958
-20- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's debt securities classified as held-to- maturity have contractual maturities as follows: Aggregate Amortized Fair Value Cost Basis -------- ---------- Within one year $ 8,079 $ 8,031 Over one year through five years 52,893 53,942 Over five years through 10 years $ 4,746 $ 5,016 The Company's net unrealized holding loss on available- for-sale securities, $1.5 million in the first quarter of 1994, has been included as a reduction of Common Stockholders' Equity. No sales of these securities have occurred during the quarter. No sales of or transfers from securities classified as held-to-maturity have occurred during the quarter. 3. Earnings per Common Share were computed by dividing Net Income Available to Common by the weighted average number of common and common equivalent shares outstanding during the period. Dilutive common stock equivalents at March 31, 1994, consist of dilutive Common Share options. 4. Assuming that acquisitions accounted for as purchases during the period January 1, 1993, to March 31, 1994, had taken place on January 1, 1993, pro forma results of operations from continuing operations would have been, for the three months ended March 31, 1994: operating revenues $159.0 million, net income $9.4 million and primary earnings per common share $.17 and would have been, for the three months ended March 31, 1993: operating revenues $130.1 million, net income $3.7 million and primary earnings per common share $.06. -21- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Supplemental Cash Flow Information Cash and cash equivalents includes cash and those short- term, highly liquid investments with original maturities of three months or less. Those investments with original maturities of greater than three months to twelve months are classified as temporary investments. TDS acquired certain cellular licenses and operating companies in 1994 and 1993. TDS also acquired two telephone companies during the first quarter of 1993. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed, and Common Shares and Preferred Shares issued. Three Months Ended March 31, ---------------------- 1994 1993 --------- ------- (Dollars in thousands) Property, plant and equipment $ 3,782 $51,530 Cellular licenses 98,061 164,953 Increase (decrease) in equity method investment in cellular interests (4,154) 5,107 Long-term debt -- (21,907) Deferred credits (18) (3,339) Other assets and liabilities, excluding cash and cash equivalents (1,337) 4,521 Minority interest 711 (12,174) Common Shares issued and issuable (92,765) (147,560) Preferred Shares issued -- (3,000) USM Stock issued and issuable -- (2,996) ---------- --------- Decrease in cash due to acquisitions $ 4,280 $35,135 ========== ========= The following table summarizes interest and income taxes paid, and other non-cash transactions. Three Months Ended March 31, ---------------------- 1994 1993 --------- ------- (Dollars in thousands) Interest paid $ 13,874 $ 10,448 Income taxes paid 4,144 1,526 Common Shares issued by TDS for conversion of TDS and Subsidiary Preferred Stock $ 181 $ 364 -22- PART II. OTHER INFORMATION ------------------------------ Item 1. Legal Proceedings --------------------------- Townes Telecommunications, Inc., et. al. v. TDS et. al. On May 6, 1994, TDS and USM announced that a Hendersen, Texas jury rejected all claims made against TDS and USM in connection with this litigation. A copy of the new release is attached as an exhibit hereto and incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. ------------------------------------------ (a) Exhibit 11 - Computation of earnings per common share. (b) Exhibit 12 - Statement regarding computation of ratios. (c) Exhibit 99.1 - Unaudited Consolidated Statements of Income for the Twelve Months Ended March 31, 1994 and 1993. Exhibit 99.2 - Pro Forma Financial Information. Exhibit 99.3 - News release regarding the successful outcome of the legal proceeding - Townes Telecommunications, Inc. et. al. v. TDS et. al. (d) Reports on Form 8-K filed during the quarter ended March 31, 1994: TDS filed a Report on Form 8-K dated January 19, 1994, which describes certain pending acquisitions. The Report filed the financial statements of two companies which were pending acquisitions. The Report filed unaudited consolidated pro forma financial statements reflecting the effects of the pending acquisitions. TDS filed a Report on Form 8-K dated February 7, 1994, which included a press release announcing that a hearing had been ordered by the Federal Communications Commission ("FCC") to determine whether USM had misrepresented facts to, lacked candor in its dealings with or attempted to mislead the FCC in a proceeding involving the application of LaStar Cellular Telephone Company for a certain initial cellular license. The hearing will also determine whether TDS possesses the requisite character qualifications to retain its cellular license in another market. TDS filed a Report on Form 8-K dated March 30, 1994, which included a press release announcing that the U.S. Court of Appeals for the District of Columbia Circuit vacated an FCC decision holding that USM had been in control of LaStar Cellular Telephone Company. The Court remanded the matter to the FCC for further proceedings. No other reports on Form 8-K were filed during the quarter ended March 31, 1994. -23- 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, 1994 /s/ MURRAY L. SWANSON ---------------- ---------------------------- Murray L. Swanson, Executive Vice President- Finance Date May 12, 1994 /s/ GREGORY J. WILKINSON ----------------- ----------------------------- Gregory J. Wilkinson, Vice President and Controller (Principal Accounting Officer) -24- EX-11 2 EXHIBIT 11 Exhibit 11 Telephone and Data Systems, Inc. Computation of Earnings Per Common Share (in thousands, except per share amounts) Three Months Ended March 31, 1994 1993 ---------------------------- ---------- -------- Primary Earnings Net Income before cumulative effect of accounting change $10,224 $ 6,803 Dividends on Preferred Shares (564) (596) -------- -------- Net income before cumulative effect of accounting change applicable to Common 9,660 6,207 Cumulative effect of accounting change (723) - -------- -------- Net Income Available to Common $ 8,937 $ 6,207 ======== ======== Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 52,290 43,976 Additional shares assuming issuance of: Options and Stock Appreciation Rights 202 284 Convertible Preferred Shares 28 1 Common Shares Issuable 35 - -------- -------- Primary Shares 52,555 44,261 ======== ======== Primary Earnings per Common Share Net Income before cumulative effect of accounting change $ .18 $ .14 Cumulative effect of accounting change (.01) - -------- -------- Net Income $ .17 $ .14 ======== ======== Fully Diluted Earnings* Net Income before cumulative effect of accounting change $10,224 $ 6,803 Dividends on Preferred Shares (564) (596) -------- -------- Net income before cumulative effect of accounting change applicable to Common 9,660 6,207 Cumulative effect of accounting change (723) - -------- -------- Net Income Available to Common $ 8,937 $ 6,207 ======== ======== Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 52,290 43,976 Additional shares assuming issuance of: Options and Stock Appreciation Rights 206 294 Convertible Preferred Shares 28 1 Common Shares Issuable 35 - -------- -------- Fully Diluted Shares 52,559 44,271 ======== ======== Fully Diluted Earnings per Common Share Net Income before cumulative effect of accounting change $ .18 $ .14 Cumulative effect of accounting change (.01) - -------- --------- Net Income $ .17 $ .14 ======== ========= * This calculation is submitted in accordance with Securities Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-12 3 EXHIBIT 12 Exhibit 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES For the Three Months March 31, 1994 (Dollars In Thousands) 3/31/94 ------------------ EARNINGS: Income from Continuing Operations before income taxes $18,258 Add (Deduct): Minority Share of Losses (368) Earnings on Equity Method (5,021) Distributions from Minority Subsidiaries 5,098 Amortization of Non-Telephone Capitalized Interest 6 Minority interest in majority-owned subsidiaries that have fixed charges 482 ------------ 18,455 Add fixed charges: Consolidated interest expense 9,213 Interest Portion (1/3) of Consolidated Rent Expense 1,228 Amortization of debt expense and discount on indebtedness 37 ------------ $28,933 ============ FIXED CHARGES: Consolidated interest expense $ 9,213 Interest Portion (1/3) of Consolidated Rent Expense 1,228 Amortization of debt expense and discount on indebtedness 37 ------------ $10,478 ============ RATIO OF EARNINGS TO FIXED CHARGES 2.76 ============ Tax-Effected Redeemable Preferred Dividends $ 584 Fixed Charges 10,478 ------------ Fixed Charges and Redeemable Preferred Dividends $11,062 ============ RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 2.62 ============ Tax-Effected Preferred Dividends $ 1,006 Fixed Charges 10,478 ------------ Fixed Charges and Preferred Dividends $11,484 ============ RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 2.52 ============ EX-99 4 EXHIBIT 99.1 Exhibit 99.1 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited --------- Twelve Months Ended March 31, -------------------- 1994 1993 ---------- --------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Telephone $ 277,225 $ 241,990 Cellular telephone 239,075 154,869 Radio paging 79,897 59,772 ---------- --------- 596,197 456,631 ---------- --------- OPERATING EXPENSES Telephone 194,879 168,884 Cellular telephone 245,355 168,274 Radio paging 79,302 64,337 ---------- --------- 519,536 401,495 ---------- --------- OPERATING INCOME 76,661 55,136 ---------- --------- INVESTMENT AND OTHER INCOME Interest and dividend income 8,352 7,935 Minority share of income (2,427) (567) Cellular investment income, net of license cost amortization 16,835 10,045 Gain on sale of cellular interests 4,970 16,521 Other income, net 430 1,214 ---------- --------- 28,160 35,148 ---------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 104,821 90,284 Interest expense 38,329 32,924 ---------- --------- INCOME BEFORE INCOME TAXES 66,492 57,360 Income tax expense 29,175 25,196 ---------- --------- NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 37,317 32,164 Extraordinary item - (769) Cumulative effect of accounting change (723) - ---------- --------- NET INCOME 36,594 31,395 Preferred Dividend Requirement (2,353) (2,280) ---------- --------- NET INCOME AVAILABLE TO COMMON $ 34,241 $ 29,115 ========== ========= WEIGHTED AVERAGE COMMON SHARES (000s) 49,332 41,097 EARNINGS PER COMMON SHARE: Before extraordinary item and cumulative effect of accounting change $ .71 $ .73 Extraordinary item - (.02) Cumulative effect of accounting change (.02) - ----------- ---------- Net Income $ .69 $ .71 =========== ========== DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .345 $ .325 =========== ========== EX-99 5 EXHIBIT 99.2 Exhibit 99.2 TELEPHONE AND DATA SYSTEMS, INC. PRO FORMA FINANCIAL INFORMATION Telephone and Data Systems, Inc. ("TDS"), together with its majority-owned subsidiaries, TDS Telecommunications Corporation, United States Cellular Corporation (AMEX symbol "USM") and American Paging, Inc. (AMEX symbol "APP"), are referred to in this report as the "Company." From January 1 through March 31, 1994, the Company acquired controlling interests in six cellular markets and several minority cellular interests representing a total of approximately 822,000 population equivalents. The total consideration paid for these acquisitions was approximately $98.7 million, consisting of 1.8 million TDS Common Shares, the obligation to deliver 42,000 TDS Common Shares in the future, the cancellation of a note receivable of $1.4 million and $4.8 million in cash. As of March 31, 1994, the Company had pending agreements to acquire two telephone companies and controlling interests in three cellular markets and minority interests in two markets representing a total of approximately 487,000 population equivalents. The total consideration to be paid for the acquisitions described in this paragraph, valued at the time such agreements were entered into, is approximately $88.1 million. If these acquisitions are completed as planned, the Company and/or USM will issue approximately 1.8 million TDS Common Shares, 50,000 USM Common Shares and will pay approximately $1.5 million in cash. Pursuant to Rule 3-05 and Rule 11-01 of Regulation S-X, the completed and pending acquisitions of businesses described in the foregoing paragraphs are not individually significant. The following pro forma financial information is included pursuant to Article 11 of Regulation S-X: Telephone and Data Systems, Inc. Unaudited Condensed Pro Forma Consolidated Financial Statements: Unaudited Condensed Pro Forma Consolidated Balance Sheet as of March 31, 1994 Unaudited Condensed Pro Forma Consolidated Statement of Income for the Three Months Ended March 31, 1994 Unaudited Condensed Pro Forma Consolidated Statement of Income for the Year Ended December 31, 1993 Notes to Unaudited Condensed Pro Forma Consolidated Financial Statements TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Balance Sheet March 31, 1994 Unaudited --------- (In Thousands) ASSETS
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated (a) Acquisitions (Decrease) Consolidated ------------------------------------------------------ CURRENT ASSETS $ 220,808 $ 14,172 $ - $ 234,980 --------------------------------------------------------- INVESTMENTS Cellular limited partnership interests 100,468 - (658) (1) 99,810 Cellular license acquisition costs, net 140,777 - - 140,777 Marketable equity securities 19,135 - - 19,135 Other 109,040 3,515 - 112,555 --------------------------------------------------------- 369,420 3,515 (658) 372,277 --------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 636,271 32,371 34,512 (1) 703,154 Cellular telephone plant and license costs, net 1,069,920 2,678 37,781 (1) 1,110,379 Radio paging, net 54,870 - - 54,870 Other, net 32,445 - - 32,445 --------------------------------------------------------- 1,793,506 35,049 72,293 1,900,848 --------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES 16,852 2,868 - 19,720 --------------------------------------------------------- $2,400,586 $ 55,604 $71,635 $2,527,825 ========================================================= The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Balance Sheet March 31, 1994 Unaudited --------- (In Thousands) STOCKHOLDERS' EQUITY AND LIABILITIES
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated (a) Acquisitions (Decrease) Consolidated ----------------------------------------------------- CURRENT LIABILITIES $ 160,397 $ 12,042 $ 822(1) $ 173,261 ---------------------------------------------------------- DEFERRED LIABILITIES AND CREDITS 93,074 6,000 - 99,074 ---------------------------------------------------------- LONG-TERM DEBT, excluding current portion 510,868 21,793 - 532,661 --------------------------------------------------------- REDEEMABLE PREFERRED STOCK, excluding current portion 15,058 - - 15,058 --------------------------------------------------------- MINORITY INTEREST in subsidiaries 243,934 - 984(1) 244,918 --------------------------------------------------------- NONREDEEMABLE PREFERRED STOCK 16,652 - - 16,652 --------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 45,761 114 1,680(1) 47,555 Series A Common Shares, par value $1 per share 6,884 - - 6,884 Common Shares Issuable 1,995 - - 1,995 Capital in excess of par value 1,212,207 - 83,804 (1) 1,296,011 Retained earnings 93,756 15,655 (15,655) (1) 93,756 --------------------------------------------------------- 1,360,603 15,769 69,829 1,446,201 --------------------------------------------------------- $2,400,586 $ 55,604 $71,635 $2,527,825 ========================================================= The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Statement of Income For the Three Months Ended March 31, 1994 Unaudited --------- (In Thousands, except per share amounts)
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated Acquisitions(b) (Decrease) Consolidated ------------ -------------- --------- ------------ OPERATING REVENUES Telephone $ 71,060 $ 9,333 $ - $ 80,393 Cellular telephone 66,233 610 - 66,843 Radio paging 21,509 - 21,509 ----------- --------- ------- ------------ Total operating revenues 158,802 9,943 - 168,745 ----------- --------- ------- ------------ OPERATING EXPENSES Telephone 48,322 8,091 217 (3) 56,630 Cellular telephone 67,237 686 400 (3) 68,323 Radio paging 20,939 - 20,939 ----------- --------- ------- ------------ Total operating expenses 136,498 8,777 617 145,892 ----------- --------- ------- ------------ OPERATING INCOME 22,304 1,166 (617) 22,853 ----------- --------- ------- ------------ INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 2,048 - (9) (5) 2,039 Minority share of income (1,197) - (12) (2) (1,094) 115 (6) Cellular investment income, net of license cost amortization 3,583 - - 3,583 Other, net 769 159 - 928 ----------- --------- ------- ------------ 5,203 159 94 5,456 ----------- --------- ------- ------------ INCOME BEFORE INTEREST AND INCOME TAXES 27,507 1,325 (523) 28,309 Interest expense 9,249 484 (9) (5) 9,792 68 (7) ----------- --------- ------- ------------ INCOME BEFORE INCOME TAXES 18,258 841 (582) 18,517 Income tax expense 8,034 421 (324) (8) 8,131 ----------- --------- ------- ------------ NET INCOME(c) 10,224 420 (258) 10,386 Preferred Dividend Requirement (564) - - (564) ----------- --------- ------- ------------ NET INCOME AVAILABLE TO COMMON(c) $ 9,660 $ 420 $ (258) $ 9,822 =========== ========= ======= ============ WEIGHTED AVERAGE COMMON SHARES (000s) 52,555 3,380 55,935 =========== ======= ============ EARNINGS PER COMMON SHARE(c) $ .18 .18 =========== =========== The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Statement of Income For the Year Ended December 31, 1993 Unaudited --------- (In Thousands, except per share amounts)
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated(d) Acquisitions (Decrease) Consolidated --------------- ------------ --------- ------------ OPERATING REVENUES Telephone $ 268,122 $ 36,961 $ - $ 305,083 Cellular telephone 214,310 7,302 - 221,612 Radio paging 75,363 - - 75,363 ----------- --------- ------- ------------ Total operating revenues 557,795 44,263 - 602,058 ----------- --------- ------- ------------ OPERATING EXPENSES Telephone 189,012 32,251 869 (3) 222,132 Cellular telephone 222,966 7,882 1,827 (3) 232,675 Radio paging 76,084 - - 76,084 ----------- --------- ------- ------------ Total operating expenses 488,062 40,133 2,696 530,891 ----------- --------- ------- ------------ OPERATING INCOME 69,733 4,130 (2,696) 71,167 ----------- --------- ------- ------------ INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 8,082 31 (31) (5) 8,082 Minority share of income (475) - (45) (2) (66) 454 (6) Cellular investment income, net of license cost amortization 15,704 - 85 (4) 15,789 Gain on sale of cellular interests 4,970 - - 4,970 Other, net (155) 4,872 - 4,717 ----------- --------- ------- ------------ 28,126 4,903 463 33,492 ----------- --------- ------- ------------ INCOME BEFORE INTEREST AND INCOME TAXES 97,859 9,033 (2,233) 104,659 Interest expense 37,466 2,037 (31) (5) 39,857 385 (7) ----------- --------- ------- ------------ INCOME BEFORE INCOME TAXES 60,393 6,996 (2,587) 64,802 Income tax expense 26,497 1,664 (2,501) (8) 25,660 ----------- --------- ------- ------------ NET INCOME (c) 33,896 5,332 (86) 39,142 Preferred Dividend Requirement (2,386) - - (2,386) ----------- --------- ------- ------------ NET INCOME AVAILABLE TO COMMON (c) $ 31,510 $ 5,332 $ (86) $ 36,756 =========== ========= ======= ============ WEIGHTED AVERAGE COMMON SHARES (000s) 47,266 3,662 50,928 =========== ======= ============ EARNINGS PER COMMON SHARE (c) $ .67 $ .72 =========== ============ The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
TELEPHONE AND DATA SYSTEMS, INC. NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (a) Includes the balance sheets of the entities discussed in the second paragraph of this exhibit. (b) Includes the income statements of the entities discussed in the second paragraph of this exhibit prior to the date of acquisition by the Company, as well as each of the income statements of the entities for which acquisition by the Company is pending as of the date of this Form 10-Q. (c) Net income, net income available to common and earnings per share are presented prior to extraordinary items and the cumulative effect of accounting changes. (d) Cellular operating revenues and expenses for 1993 have been reclassified to conform to 1994 presentation. (e) The pro forma adjustments are described in the following paragraphs: 1) Reflects TDS's acquisition of the telephone and cellular telephone interests described in the third paragraph of this exhibit. Also reflects the elimination of the equity of these interests in purchase transactions and the allocation of the purchase price in excess of book value (in thousands). Purchase price (aggregate) $ 88,062 Less: acquired companies' equity at March 31, 1994 (15,769) --------- Purchase price to be allocated $ 72,293 ========= Purchase price in excess of book value-- Cellular operations $ 37,781 Telephone operations 34,512 --------- $ 72,293 ========= The pro forma allocations of the purchase prices to the acquired entities' assets as set forth above are based upon preliminary estimates of the values of those assets. 2) Reflects the minority shareholders' portion of acquired companies' net income. 3) Reflects the amortization of assumed costs in excess of book value. Excess cost amounts are primarily assumed to be amortized over 40 years. 4) Reflects the elimination of the equity-method losses of acquired entities which are consolidated in the Pro Forma Consolidated Statements of Income. 5) Reflects the elimination of intercompany interest income and interest expense between the Company and an acquired entity. The acquired entity was previously accounted for by the equity method of accounting (see Note 4). 6) Reflects the minority shareholders' portion of USM's net income due to the addition of the cellular entities and the related pro forma adjustments in (2)-(4) above. 7) Reflects the estimated interest expense incurred as a result of increases in Notes Payable in connection with the acquisitions included in the Condensed Pro Forma Consolidated Statements of Income. 8) Reflects the estimated income tax effects of the pro forma adjustments in (2)-(4) and (7) above. EX-99 6 EXHIBIT 99.3 Exhibit 99.3 TDS AND UNITED STATES CELLULAR SUCCESSFUL IN TEXAS LITIGATION Chicago, Illinois, May 6, 1994 Telephone and Data Systems, Inc. (AMEX: TDS), and its United States Cellular Corporation subsidiary (AMEX: USM), announced that a Henderson, Texas, jury rejected claims totaling more than $200 million made against the Company and USM. The suit was filed by Townes Telecommunications, Inc., of Lewisville, Arkansas, and certain of its affiliates in a Texas State Court in September, 1991. TDS Chairman LeRoy T. Carlson, who testified at the trial, said that "the TDS family of companies, their shareholders and employees appreciate the jury's recognition of TDS's honesty and integrity". Townes had alleged that the Company and USM breached an alleged oral agreement with Townes, breached an alleged fiduciary relationship between TDS and Townes, perpetrated a fraud against Townes and had failed to comply with a first right of refusal provision of a related shareholders' agreement. The jury rejected all claims. TDS is a Chicago-based telecommunications company with established local telephone, cellular telephone and radio paging operations. TDS strives to build value for its shareholders by providing excellent communications services in attractive, closely related segments of the telecommunications industry. USM, headquartered in Chicago, manages and invests in cellular systems throughout the United States. For additional information, please call Murray L. Swanson TDS Executive Vice President-Finance at (312) 630-1900. -----END PRIVACY-ENHANCED MESSAGE-----