-----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, O7uH12R4C7Dah2NKD6Ecll4WkBhS5vqEHu93ukEaAfKRT9GBBmtWqyGvagQFLFhM JA41PF9/rURsWNgL70jtbw== 0000096966-94-000036.txt : 19940817 0000096966-94-000036.hdr.sgml : 19940817 ACCESSION NUMBER: 0000096966-94-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 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: 94543697 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 TDS 2ND QTR 1994 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 June 30, 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 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 July 29, 1994 ------------------------------ ---------------------------------- Common Shares, $1 par value 46,342,814 Shares Series A Common Shares, $1 par value 6,885,573 Shares ----------------------------------------------------------------------------- THIS CONFORMING PAPER FORMAT IS BEING SUBMITTED PURSUANT TO RULE 901(d) OF REGULATION S-T. TELEPHONE AND DATA SYSTEMS, INC. -------------------------------------- 2ND 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 2-19 Consolidated Statements of Income - Three Months and Six Months Ended June 30, 1994 and 1993 20 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1994 and 1993 21 Consolidated Balance Sheets - June 30, 1994 and December 31, 1993 22-23 Notes to Consolidated Financial Statements 24-26 Part II. Other Information 27-28 Signatures 29 PART I. FINANCIAL INFORMATION ----------------------------------- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES --------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -------------------------------------------------------------- AND FINANCIAL CONDITION ------------------------ RESULTS OF OPERATIONS --------------------- Six Months Ended 6/30/94 Compared to Six Months Ended 6/30/93 CONSOLIDATED Telephone and Data Systems, Inc.'s ("TDS" or the "Company") consolidated results of operations for the first half 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 and sales of Common Shares. Operating revenues grew 29.0% to $332.4 million in the first half of 1994 over 1993, operating cash flow increased 32.7% to $120.3 million and operating income rose 41.9% to $51.3 million. Net income before the cumulative effect of an accounting change rose 55.6% to $24.5 million in the first half of 1994 over 1993. Earnings per share before the cumulative effect of an accounting change, reflecting the significantly improved operating results offset somewhat by a 16.3% increase in weighted average common shares, grew 37.5% to $.44 in 1994 from $.32 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 June 30, 1993. These acquisitions added 2,500 access lines while internal growth added 17,200 lines. TDS Telecom provides service to customers in 29 states. United States Cellular Corporation (AMEX symbol "USM"), TDS's 81.4%-owned subsidiary, has added 16 markets to consolidated operations since June 30, 1993, through acquisitions and the initiation of cellular operations. USM currently provides cellular service through systems serving 123 majority-owned and managed markets. American Paging, Inc. (AMEX symbol "APP"), TDS's 82.5%-owned subsidiary, has added approximately 136,300 pagers since June 30, 1993. APP provides service to its customers through 38 sales and service operating centers. Operating revenues grew 29.0% ($74.7 million) in 1994 primarily as a result of the growth in customers served. Cellular telephone revenues increased as a result of the 75.0% customer growth in majority-owned markets, which resulted in increased local retail and access revenue, and increased roaming revenues, offset somewhat by a 5.7% decline in average monthly service revenue per unit. Radio paging revenues increased primarily as a result of the 34.2% growth in the number of pagers in service offset somewhat by a 12.1% decline in average monthly service revenue per unit. Telephone revenues increased primarily due to acquisitions, recovery of increased costs of providing long-distance services and internal access line growth. -2- Operating expenses rose 26.9% ($59.5 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 41.9% to $51.3 million in the first half of 1994 from $36.2 million in 1993. The increase in operating income reflects improved operating results in all three business units, as shown in the following table. Six Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) CONSOLIDATED OPERATING INCOME Telephone Operations $ 45,572 $ 40,742 $ 4,830 Cellular Telephone Operations 4,519 (2,820) 7,339 Radio Paging Operations 1,218 (1,771) 2,989 --------- -------- ---------- $ 51,309 $ 36,151 $ 15,158 ========= ======== ========== Operating Margins: Telephone 32.2% 31.3% Cellular Telephone* 3.2% (3.2)% Radio Paging* 3.3% (5.9)% * Computed on Service Revenues Investment and other income increased 10.9% ($1.1 million) in 1994. Cellular investment income, net increased $4.8 million to $10.9 million, reflecting improvement in USM's equity-method markets managed by others. Minority share of income increased $3.6 million in the first half of 1994 over 1993, as shown in the following table. Other income, net for 1994 includes a charge of $614,000 for USM's sale of obsolete equipment. Other income, net reflects a $1.1 million pretax charge in 1993 as American Paging elected to cease national retailer distribution of pagers through its wholly owned subsidiary, American Paging Network ("APN"). In addition, 1993's other income, net includes income of $580,000 related to USM's sale of the customer base in its reseller operation and income of $675,000 related to USM's settlement of a lawsuit. Minority share of income includes (a) the minority shareholders' share of USM's net income or 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. USM reported net income in 1994 and a net loss in 1993, resulting in a $3.0 million increase in minority share of income. -3- MINORITY SHARE OF INCOME Six Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) United States Cellular Minority Shareholders' Share $ (743) $ 2,237 $ (2,980) Minority Partners' Share (2,314) (1,987) (327) --------- -------- ---------- (3,057) 250 (3,307) TDS Telecom (828) (528) (300) --------- -------- ---------- $ (3,885) $ (278) $ (3,607) ========= ======== ========== Interest expense increased 3.4% ($610,000) in 1994. The increase was primarily due to an increase in long-term interest expense. Since June 30, 1993, TDS has issued $14.5 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 $23.4 million in 1994 from $39.0 million in 1993, resulting in a decrease in short-term interest expense in the first half of 1994 compared with the first half of 1993. Income tax expense increased 55.4% ($6.9 million) in 1994 compared with 1993 as pretax income increased. The effective income tax rate was 44.0% in the first half of 1994 and 1993. State income taxes increased 9.1% ($251,000) in 1994, due primarily to the increase in pretax income. Net income before the cumulative effect of a change in accounting principle improved to $24.5 million in 1994 from $15.8 million in 1993. Earnings per common share before the cumulative effect of a change in accounting principle were $.44 in 1994 and $.32 in 1993. The weighted average number of common shares outstanding increased 16.3% since June 30, 1993. The increase is primarily due to the issuance of 3.7 million Common Shares in connection with acquisitions and 1.4 million Common Shares for cash since June 30, 1993. 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. -4- TELEPHONE OPERATIONS Six Months Ended June 30, ------------------------------------------------- Change Change Due To Excluding 1994 1993 Change Acquisitions Acquisitions -------- -------- ------ -------- --------- (Dollars in thousands, except per access line amounts) Operating Revenues Local Service $ 39,498 $ 34,948 $4,550 $ 733 $ 3,817 Network Access and Long-Distance 82,300 77,993 4,307 2,477 1,830 Miscellaneous 19,550 17,265 2,285 591 1,694 -------- ------- ------ -------- -------- 141,348 130,206 11,142 3,801 7,341 -------- ------- ------ -------- -------- Operating Expenses Plant Operations 21,700 19,556 2,144 719 1,425 Depreciation 29,296 26,324 2,972 621 2,351 Amortization 1,799 1,712 87 159 (72) Customer Operations 20,284 19,032 1,252 530 722 Corporate and Other 22,697 22,840 (143) 740 (883) -------- ------- ------ -------- -------- 95,776 89,464 6,312 2,769 3,543 -------- ------- ------ -------- -------- Operating Income $ 45,572 $ 40,742 $4,830 $ 1,032 $ 3,798 ======== ======= ====== ========= ========= Telephone Revenues as a Percent of Total Revenues 42.5% 50.5% Additions to Property, Plant and Equipment* $ 33,797 $ 28,238 Identifiable Assets $835,421 $788,556 Companies 93 92 Access Lines 364,300 344,600 Growth in access lines in past 12 months: Acquisitions 2,500 19,300 Internal growth 17,200 12,700 Average monthly revenue per access line $ 65 $ 65 * Does not include cash expenditures (in thousands) of $6,273 and $5,685, respectively, which relate to additions in prior periods. Operating revenues from telephone operations increased 8.6% ($11.1 million) in the first half 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. Acquisitions increased telephone revenues 2.9% ($3.8 million) in 1994. TDS has acquired two telephone companies serving 2,500 access lines since June 30, 1993. Telephone results of operations include the results of these acquired companies since the respective dates of acquisition. Local service revenues increased 13.0% ($4.6 million) in 1994 with acquisitions increasing such revenues 2.1% ($733,000). Internal access line growth and sales of custom-calling and other features increased revenues 6.3% ($2.2 million). Certain extended area service ("EAS") and extended community calling ("ECC") revenues previously reported as network access revenues and changes in settlement plans increased local service revenues 3.7% ($1.3 million). -5- Network access and long-distance revenues increased 5.5% ($4.3 million) in 1994 with acquisitions increasing such revenues 3.2% ($2.5 million). Increased usage of the network generated 3.5% ($2.7 million) of additional network access and long-distance revenue. These revenues increased 3.1% ($2.4 million) due to recovery of increased costs of providing access to long-distance carriers. Out-of-period adjustments to revenues earned based on expense and investment in the network reduced these revenues 1.7% ($1.3 million) in 1994. These revenues also decreased 2.4% ($1.9 million) in 1994 due to changes in settlement plans and because certain EAS and ECC revenues are now reported as local service revenues. Miscellaneous revenues increased 13.2% ($2.3 million) in 1994 with acquisitions increasing such revenues 3.4% ($591,000). Higher sales and leases of customer premise equipment increased miscellaneous revenues 4.4% ($765,000), changes in settlement plans increased these revenues 3.3% ($577,000), and call plan programming services provided to other carriers increased these revenues 1.5% ($252,000). Operating expenses increased 7.1% ($6.3 million) in 1994. Acquisitions increased operating expenses 3.1% ($2.8 million), while a health and life insurance premium refund reduced operating expenses 1.2% ($1.0 million). Plant operations expenses increased 11.0% ($2.1 million) with acquisitions increasing these expenses 3.7% ($719,000). The remainder of the increase was primarily due to salary and work force changes along with the effects of general inflation. Depreciation expense increased 11.3% ($3.0 million) with acquisitions increasing such expenses 2.4% ($621,000). The remaining increase was due primarily to increases in plant facilities. Customer operations expenses increased 6.6% ($1.3 million) with acquisitions increasing such expenses 2.8% ($530,000). The remaining increase was primarily due to increases in salary and workforce changes, customer billing and programming costs and increased marketing activities. Corporate and other expenses decreased .6% ($143,000). Increases due to acquisitions, 3.2% ($740,000), were more than offset by decreases due to out-of-period adjustments. Operating income from telephone operations increased 11.9% ($4.8 million) in 1994, with acquisitions increasing such income 2.5% ($1.0 million). The telephone operating margin was 32.2% in 1994 compared to 31.3% 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 and customer billing and by increased depreciation. TDS Telecom's increased operating margin for the first half 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 Six Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- ---------- ----------- (Dollars in thousands, except per unit amounts) Operating Revenues Service* $ 140,426 $ 87,050 $ 53,376 Equipment Sales 6,464 4,970 1,494 --------- -------- ---------- 146,890 92,020 54,870 --------- -------- ---------- Operating Expenses System Operations* 21,804 15,536 6,268 Marketing and Selling 30,031 17,634 12,397 Cost of Equipment Sold 17,021 8,381 8,640 General and Administrative 43,206 33,010 10,196 Depreciation 18,142 11,518 6,624 Amortization 12,167 8,761 3,406 --------- -------- ---------- 142,371 94,840 47,531 --------- -------- ---------- Operating Income (Loss) $ 4,519 $ (2,820) $7,339 ======== ======== ======== Cellular Telephone Revenues as a Percent of Total Revenues 44.2% 35.7% Additions to Property, Plant and Equipment** $ 59,777 $ 30,500 Identifiable Assets $1,460,030 $ 1,128,163 Majority-Owned, Managed and Consolidated Markets: Population equivalents (000s) 18,861 17,004 Total population (000s) 20,344 17,553 Customers 331,000 189,100 Market penetration 1.63% 1.08% Markets in operation 123 107 Cell sites in service 610 393 Average monthly service revenue per unit* $ 79 $ 84 Churn rate per month 2.2% 2.0% Marketing cost per net customer addition $ 665 $ 692 * Amounts for 1993 have been reclassified to conform to current year presentation. ** Does not include cash expenditures (in thousands) of $9,674 and $5,026, respectively, which relate to additions in prior periods. USM owns, operates and invests in cellular markets. USM owns or has the right to acquire interests, both majority and minority, in 208 cellular telephone markets at June 30, 1994, representing 24,330,000 population equivalents. USM managed the operations in 141 markets at June 30, 1994, and expects to manage the operations of five other markets in the future. 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 123 markets are included in 1994 consolidated results compared to 107 markets in 1993. Operating revenues increased 59.6% ($54.9 million) in 1994. The revenue increase is primarily the result of 75.0% customer growth in the systems serving its majority-owned and managed markets, growth in roamer revenues and acquisitions. Acquisitions and start-ups increased revenues 11.5% ($10.6 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 expense. Service revenues and system operations expense for 1993 have been reclassified for -7- the effect of this change in presentation, which allows for 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 $79 in 1994 from $84 in 1993. Monthly local minutes of use averaged 96 in the first half of 1994 compared to 104 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 revenue per customer will continue to decline as USM adds more customers. Service revenues from local customers' usage of USM's systems increased 63.5% ($32.9 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 $48 in 1994 from $50 in 1993. Inbound roamer revenues, earned when customers of other systems use USM's cellular systems, increased 54.6% ($15.8 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 $25 in 1994 and $28 in 1993. Long-distance revenues increased 90.5% ($4.6 million) as the volume of long-distance calls billed by USM increased. Equipment sales revenue reflects the sale of 63,200 and 24,300 cellular telephone units in 1994 and 1993, respectively, plus installation and accessories revenue. The average revenue per telephone unit sold was $102 in 1994 compared to $204 in 1993. The average revenue decline partially reflects USM's decision to reduce sales prices on cellular telephones to stimulate customer growth as well as reduced manufacturers' prices. Also, during the first half of 1994, USM 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 equipment sales revenue per unit. Operating expenses increased 50.1% ($47.5 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 15.6% ($14.8 million) in 1994. System operations expenses increased 40.3% ($6.3 million) in 1994 as a result of increases in customer usage expenses and other costs associated with operating USM's increased number of cellular systems and the growing number of cell sites within those 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 grew 17.3% ($1.5 million) in 1994. Maintenance, utility and cell site expenses grew 67.5% ($4.8 million) in 1994, reflecting growth in the number of cells to 610 in 1994 from 393 in 1993 and in the number of switches in service, and the effects of acquisitions and start-ups. -8- Marketing and selling expenses increased 70.3% ($12.4 million) in 1994, due primarily to the increased number of gross customer activations in 1994 and the effects of acquisitions and start-ups. 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 half of 1994 promotional sales discussed above, offset somewhat by falling manufacturers' prices per unit. The average cost of a telephone unit sold was $269 in 1994 compared to $345 in 1993. General and administrative expenses increased 30.9% ($10.2 million) in 1994. These expenses include the costs of operating USM's local business offices and its corporate expenses. The increase results from the increase in the number of consolidated markets due to acquisitions as well as the growth in the customer base in existing systems. General and administrative expenses increased approximately $1.6 million in 1994 due to legal expenses incurred to successfully defend the Company against claims totalling more than $200 million. A health and life insurance premium refund decreased general and administrative expenses by $730,000 in 1994. USM is using an ongoing clustering strategy to combine local operations wherever feasible in order to gain operational efficiencies and reduce its administrative expenses. Depreciation expense increased 57.5% ($6.6 million) in 1994, reflecting a 55.4% increase in average fixed assets since June 30, 1993. Amortization expense, primarily amortization of license costs, increased 38.9% ($3.4 million) in 1994. This additional amortization reflects the 41.5% ($291 million) increase in license costs for consolidated operational markets since June 30, 1993. Operating income was $4.5 million in 1994 compared to an operating loss of $2.8 million in 1993. Operating margin on service revenues improved to 3.2% in 1994 from (3.2%) in 1993. The improvement in operating results was primarily due to improved results in the more established markets 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 12 additional markets are expected to be added to consolidated operations during the remainder 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. Additionally, management believes there exists a seasonality in both service revenues and operating expenses, especially marketing expenses. As a result, decreased operating income, or operating loss, could be generated 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 cost related to those minority interests. CELLULAR INVESTMENT INCOME Net of License Cost Amortization Six Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) Cellular Systems Managed by USM $ 380 $ (293) $ 673 Cellular Systems Managed by Others 10,504 6,425 4,079 --------- -------- ---------- $ 10,884 $ 6,132 $ 4,752 ========= ======== ========== -9- Net income from cellular telephone operations was $3.6 million in 1994 compared to a net loss of $11.2 million in 1993. Such net income or loss excludes the USM minority shareholders' share of such income or loss. Net income or loss from cellular telephone operations does not include income taxes 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 63,373,565 shares of common stock of USM at June 30, 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 Common Shares are issued in all instances in which USM has the choice to issue its Common Shares or other consideration and assuming all issuances of USM's common stock to be issued to TDS and third parties for completed and pending acquisitions and Preferred Stock conversions had been completed at June 30, 1994, TDS would have owned approximately 80% 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. -10- RADIO PAGING OPERATIONS Six Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands, except per unit amounts) Service Operations Revenues* $ 36,963 $ 30,103 $ 6,860 --------- -------- ---------- Costs and Expenses Cost of Services* 8,669 7,730 939 Selling and Advertising 6,098 5,346 752 General and Administrative* 13,484 12,270 1,214 Depreciation 6,363 5,291 1,072 Amortization* 1,203 913 290 --------- -------- ---------- 35,817 31,550 4,267 --------- -------- ---------- Service Operating Income (Loss) 1,146 (1,447) 2,593 --------- -------- ---------- Equipment Sales Revenue 7,186 5,376 1,810 Cost of Equipment Sold 7,114 5,700 1,414 --------- -------- ---------- Equipment Sales Income (Loss) 72 (324) 396 --------- -------- ---------- Operating Income (Loss) $ 1,218 $ (1,771) $ 2,989 ========= ======== ========== Radio Paging Revenues as a Percent of Total Revenues 13.3% 13.8% Additions to Property and Equipment** $ 12,594 $ 11,484 Identifiable Assets $ 77,133 $ 65,408 Pagers in Service 535,100 398,800 Average monthly service revenue per unit $ 12.43 $ 14.14 Transmitters in service 856 546 Disconnect rate per month 2.8% 2.9% Marketing cost per net customer unit addition $ 83 $ 81 * Amounts for 1993 have been reclassified to conform to year-end 1993 presentation. ** Does not include cash expenditures (in thousands) of $3,156 in 1994 which relate to additions in 1993. Includes noncash expenditures (in thousands) of $407 in 1993. Service revenues increased 22.8% ($6.9 million) in the first half of 1994 from 1993, primarily as a result of the 34.2% growth in the number of pagers in service. A net additional 136,300 pagers have been placed in service since June 30, 1993. However, a continuing decline in average revenue per pager has slowed service revenue growth. Average monthly service revenue per pager declined 12.1% to $12.43 in the first half of 1994 from $14.14 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 revenue distribution channels such as resellers and customers purchasing pagers through retail operations. Service expenses increased 13.5% ($4.3 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 20.7% to $7.45 in 1994 from $9.39 in 1993 as a result of achieving increasing economies of scale and operating efficiencies. Cost of services increased 12.1% ($939,000) 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 856 at June 30, 1994 from 546 at June 30, 1993. Selling and advertising expense increased 14.1% ($752,000) in 1994 over 1993. Selling and advertising expense increased at a slower rate than the rate of growth in -11- 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 9.9% ($1.2 million) due primarily to additional bad debt expense ($484,000), additional billing costs due to an enhancement of APP's customer billing system ($210,000) and increases in employee- related costs ($117,000). These increases in service expenses were offset somewhat by a refund of health and life insurance premiums totalling $540,000. Depreciation and amortization charges increased 22.0% ($1.4 million) in 1994, reflecting increased investment in pagers and related equipment and additional amortization expense due to a June 1993 acquisition. Based on a study of useful lives, APP will shorten the estimated useful lives of pagers and transmitters beginning July 1, 1994. The change in estimated useful lives is expected to increase depreciation expense by approximately $1.5 million for the remainder of 1994 and $3.8 million for 1995. Equipment sales revenue increased 33.7% ($1.8 million) due to APP's increased emphasis on selling pagers to customers, particularly through retail stores and resellers. Cost of equipment sold increased 24.8% ($1.4 million) also due to the increased focus on pager sales. Operating income was $1.2 million in 1994 compared to a net loss of $1.8 million 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, 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 and iii) a $540,000 health and life insurance premium refund. Net income from radio paging operations totalled $222,000 in 1994 compared to a net loss of $2.6 million in 1993. 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. Additionally, 1993's amount includes the $1.1 million charge to cease operations at APN, as discussed previously. Six Months Ended June 30, ------------------------- 1994 1993 ---------- ----------- (Dollars in thousands) Additions to Property and Equipment* $ 3,471 $ 4,784 Identifiable Assets $ 83,915 $ 63,249 * Does not include cash expenditures (in thousands) of $512 and $179, respectively, related to additions in prior periods. Three Months Ended 6/30/94 Compared to Three Months Ended 6/30/93 CONSOLIDATED Operating revenues grew 26.4% ($36.3 million) in 1994 primarily as a result of the growth in customers served. Operating expenses rose 24.1% ($28.0 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 income increased 39.6% to $29.0 million in the -12- second quarter of 1994 from $20.8 million in 1993. The increase in operating income reflects improvement in all three business segments. Three Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) CONSOLIDATED OPERATING INCOME Telephone Operations $ 22,834 $ 21,240 $ 1,594 Cellular Telephone Operations 5,523 560 4,963 Radio Paging Operations 648 (1,025) 1,673 --------- -------- ---------- $ 29,005 $ 20,775 $ 8,230 ========= ======== ========== Operating Margins: Telephone 32.5% 31.1% Cellular Telephone* 7.2% 1.2% Radio Paging* 3.4% (6.6)% * Computed on Service Revenues Investment and other income increased 21.5% ($1.1 million) in the second quarter of 1994 over the second quarter of 1993. Cellular investment income increased 98.4% ($3.6 million), reflecting improvement in USM's equity-method markets managed by others. Minority share of income increased $1.7 million as shown in the following table. Other income, net for 1994 includes a charge of $614,000 for USM's sale of obsolete equipment, while 1993 includes a $1.1 million pretax charge to cease operations at APN, income of $580,000 related to USM's sale of the customer base in its reseller operation, and income of $675,000 related to USM's settlement of a lawsuit. Minority share of income includes (a) the minority shareholders' share of USM's net income or 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. MINORITY SHARE OF INCOME Three Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) United States Cellular Minority Shareholders' Share $ (1,085) $ 715 $ (1,800) Minority Partners' Share (1,196) (1,220) 24 --------- -------- ---------- (2,281) (505) (1,776) TDS Telecom (407) (528) 121 --------- -------- ---------- $ (2,688) $ (1,033) $ (1,655) ========= ======== ========== -13- Interest expense decreased 2.6% ($253,000) in 1994, primarily due to a decrease in interest expense on higher cost long-term debt retired with the proceeds from the sale of $14.5 million of TDS's Medium-Term Notes. Income tax expense increased 59.4% ($4.2 million) in 1994 compared with 1993 as pretax income increased. The effective income tax rate was 44% in the second quarter of 1994 and 1993. Net income increased to $14.3 million in the second quarter of 1994 from $9.0 million in 1993. Earnings per common share were $.26 in 1994 and $.18 in 1993. The weighted average number of common shares outstanding increased 14.5% in 1994. TELEPHONE OPERATIONS Three Months Ended June 30, ----------------------------------------------------- Change Change Due To Excluding 1994 1993 Change Acquisitions Acquisitions ------- ------- ------ ---------- ----------- (Dollars in thousands) Operating Revenues Local Service $20,103 $ 17,976 $ 2,127 $ 87 $ 2,040 Network Access and Long-Distance 40,497 41,422 (925) 296 (1,221) Miscellaneous 9,688 8,851 837 48 789 -------- -------- ------- --------- ---------- 70,288 68,249 2,039 431 1,608 -------- -------- ------- --------- ---------- Operating Expenses Plant Operations 10,631 10,320 311 84 227 Depreciation 14,743 13,450 1,293 62 1,231 Amortization 909 879 30 44 (14) Customer Operations 9,965 10,126 (161) 123 (284) Corporate and Other 11,206 12,234 (1,028) 101 (1,129) -------- -------- ------- ---------- ---------- 47,454 47,009 445 414 31 -------- -------- ------- ---------- ---------- Operating Income $22,834 $ 21,240 $ 1,594 $ 17 $ 1,577 ======== ======== ======= ========== ========== Operating revenues from telephone operations increased 3.0% ($2.0 million) in the second quarter of 1994 compared to 1993. The increase in revenues was primarily due to internal access line growth, recovery of increased costs of providing network access and sales of custom-calling and other features. Local service revenues increased 11.8% ($2.1 million) in 1994, network access and long-distance revenues decreased 2.2% ($925,000), and miscellaneous revenues increased 9.5% ($837,000) for reasons generally the same as for the first six months. Operating expenses increased .9% ($445,000) in 1994, for reasons generally the same as for the first six months. -14- CELLULAR TELEPHONE OPERATIONS Three Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) Operating Revenues Service* $ 77,065 $ 47,918 $ 29,147 Equipment Sales 3,592 2,634 958 --------- -------- ---------- 80,657 50,552 30,105 --------- -------- ---------- Operating Expenses System Operations* 12,074 8,686 3,388 Marketing and Selling 15,977 8,323 7,654 Cost of Equipment Sold 9,012 4,510 4,502 General and Administrative 22,480 17,885 4,595 Depreciation 9,520 5,969 3,551 Amortization 6,071 4,619 1,452 --------- -------- ---------- 75,134 49,992 25,142 --------- -------- ---------- Operating Income $ 5,523 $ 560 $ 4,963 ========= ======== ========== * Amounts for 1993 amounts have been reclassified to conform to current year presentation. Service revenues increased 60.8% ($29.1 million) in the second quarter of 1994. The revenue increase is primarily the result of 75.0% customer growth in the systems serving USM's majority-owned and managed markets, growth in roamer revenues and the effects of acquisitions and start-ups. Average monthly service revenue per customer declined to $82 in 1994 from $88 in 1993. Monthly local minutes of use averaged 103 in the second quarter of 1994 compared to 110 in 1993. Revenues from local customers' usage of USM's systems increased 64.2% ($18.0 million) in 1994 primarily due to the increased number of customers served. Inbound roamer revenues increased 52.5% ($8.6 million) in 1994. The increase in inbound roamer revenues is primarily due to the increased number of other carriers' customers using USM's systems and the growth in the number of cell sites within those systems. Long-distance revenues increased 86.7% ($2.5 million) as the volume of long-distance calls billed by USM increased. Equipment sales revenue reflects the sale of 34,500 and 12,600 cellular telephone units in 1994 and 1993, respectively. The average revenue per telephone unit sold was $104 in 1994 compared to $208 in 1993. Operating expenses increased 50.3% ($25.1 million) in the second quarter of 1994 for reasons generally the same as for the first six months. Operating income was $5.5 million in 1994 compared to $560,000 in 1993. Operating margin on service revenues improved to 7.2% in 1994 from 1.2% in 1993. The improvement in operating income was primarily due to increased revenues and cost efficiencies, partially offset by the costs associated with the growth of USM's operations and the addition of new markets. 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 cost related to those minority interests. -15- CELLULAR INVESTMENT INCOME Net of License Cost Amortization Three Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) Cellular Systems Managed by USM $ 538 $ 120 $ 418 Cellular Systems Managed by Others 6,763 3,560 3,203 --------- -------- ---------- $ 7,301 $ 3,680 $ 3,621 ========= ======== ========== Net income from cellular telephone operations was $5.1 million in 1994 compared to a net loss of $3.6 million in 1993. Such net income or loss excludes the USM minority shareholders' share of such income or loss. Net income or loss from cellular telephone operations does not include income taxes 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. RADIO PAGING OPERATIONS Three Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) Service Operations Revenues* $ 18,824 $ 15,487 $ 3,337 --------- --------- ---------- Costs and Expenses Cost of Services* 4,462 4,093 369 Selling and Advertising 3,078 2,702 376 General and Administrative* 6,708 6,301 407 Depreciation 3,256 2,735 521 Amortization* 601 403 198 --------- --------- ---------- 18,105 16,234 1,871 --------- --------- ---------- Service Operating Income (Loss) 719 (747) 1,466 --------- --------- ---------- Equipment Sales Revenue 3,816 3,017 799 Cost of Equipment Sold 3,887 3,295 592 --------- --------- ---------- Equipment Sales Loss (71) (278) 207 --------- --------- ---------- Operating Income (Loss) $ 648 $ (1,025) $ 1,673 ========= ========= ========== * Amounts for 1993 have been reclassified to conform to year-end 1993 presentation. Service revenues increased 21.5% ($3.3 million) in the second quarter of 1994 from 1993, primarily as a result of the 34.2% growth in the number of pagers in service. Service expenses increased 11.5% ($1.9 million) in 1994 from 1993, primarily as a result of the costs of system expansion and serving new customers. Operating income was $648,000 in 1994 compared to an operating loss of $1.0 million in 1993. Net income from radio paging operations totalled $210,000 in 1994 compared to a net loss of $1.7 million in 1993. -16- FINANCIAL RESOURCES AND LIQUIDITY ---------------------------------- Cash flows from operating activities totalled $104.6 million in the first half of 1994 compared to $63.9 million in 1993. Consolidated operating cash flow totalled $120.3 million in 1994 compared to $90.7 million in 1993. The 32.7% increase in operating cash flow reflects improved operating cash flow in all three of TDS's primary business units. Six Months Ended June 30, ----------------------------------- 1994 1993 Change ---------- --------- ------------ (Dollars in thousands) OPERATING CASH FLOW Telephone Operations $ 76,667 $ 68,778 $ 7,889 Cellular Telephone Operations 34,828 17,459 17,369 Radio Paging Operations 8,784 4,433 4,351 --------- -------- ---------- $ 120,279 $ 90,670 $ 29,609 ========= ======== ========== 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 $15.7 million in the first half of 1994 compared to $26.8 million in 1993. Cash flows from financing activities totalled $60.3 million in the first half of 1994 compared to $74.2 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 half 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 half 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 $174.4 million in the first half of 1994 compared to $149.3 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 investments in cellular telephone partnerships. Cash expenditures for property, plant and equipment totalled $129.3 million in the first half of 1994 compared to $85.5 million in 1993. Cash used for acquisitions totalled $25.5 million and $45.7 million in the first six months of 1994 and 1993, respectively. Additions to telephone plant and equipment totalled $33.8 million for the first half of 1994. Management expects that plant and equipment additions will total about $95 million in 1994, exclusive of acquisitions. This construction budget includes $40 million for digital switches, $44 million for outside plant upgrades such as the installation of fiber optic cables and $11 million for other construction. 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 $59.8 million for the first half 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. -17- Additions to radio paging property and equipment totalled $12.6 million for the first half 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 $3.5 million for the first half 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 $25.5 million in the first half of 1994 compared to $45.7 million in 1993. During the first half of 1994, TDS purchased controlling interests in eight cellular markets and several minority cellular interests representing a total of 1.1 million population equivalents. Some of the entities acquired during 1994 were subject to acquisition agreements prior to 1993. The aggregate consideration for the acquisitions completed in 1994 was $123.7 million, consisting of $26.1 million in cash, 1.9 million TDS Common Shares ($92.9 million), 49,000 USM Common Shares ($1.3 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 entered into agreements at June 30, 1994, to acquire controlling interests in four cellular markets and one minority interest representing approximately 919,000 population equivalents, three telephone companies and one paging company for an aggregate consideration of approximately $145.1 million. If all of these pending acquisitions are completed as planned, TDS will issue approximately 3.1 million Common Shares ($122.7 million), 125,000 Preferred Shares ($12.5 million) and will pay approximately $9.9 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 in 1994 through 1996 in connection with acquisitions closed in 1993 and prior years. 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 a 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 the Company's Current Report on 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. -18- 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 $65.6 million and longer-term investments totalling $72.0 million at June 30, 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 $110 million of bank lines of credit for general corporate purposes at June 30, 1994, all of which were committed. Unused amounts of such lines totalled $71.5 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 covering issuance of common stock for acquisitions, and in the case of TDS, covering the issuance of Common Shares for cash. TDS's shelf registration statement for Common Shares for acquisitions had 4.6 million unissued shares at June 30, 1994, including 1.8 million 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 June 30, 1994, $277.6 million remained unused on the universal shelf. Of this unused amount, up to $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 and equity securities when capital requirements (including acquisitions), financial market conditions and other factors warrant. -19- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited ---------
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ---------------------- 1994 1993 1994 1993 ---------- -------- --------- -------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Telephone $ 70,288 $ 68,249 $ 141,348 $ 130,206 Cellular telephone 80,657 50,552 146,890 92,020 Radio paging 22,640 18,504 44,149 35,479 --------- ---------- ---------- ---------- 173,585 137,305 332,387 257,705 --------- ---------- ---------- ---------- OPERATING EXPENSES Telephone 47,454 47,009 95,776 89,464 Cellular telephone 75,134 49,992 142,371 94,840 Radio paging 21,992 19,529 42,931 37,250 --------- ---------- ---------- ---------- 144,580 116,530 281,078 221,554 --------- ---------- ---------- ---------- OPERATING INCOME 29,005 20,775 51,309 36,151 --------- ---------- ---------- ---------- INVESTMENT AND OTHER INCOME Interest and dividend income 2,456 1,768 4,504 3,546 Minority share of income (2,688) (1,033) (3,885) (278) Cellular investment income, net of license cost amortization 7,301 3,680 10,884 6,132 Gain on sale of cellular interests --- 119 --- 119 Other income (expense), net (1,060) 412 (291) 596 --------- ---------- ---------- ---------- 6,009 4,946 11,212 10,115 --------- ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 35,014 25,721 62,521 46,266 Interest expense 9,444 9,697 18,693 18,083 --------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 25,570 16,024 43,828 28,183 Income tax expense 11,250 7,057 19,284 12,413 --------- ---------- ---------- ---------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 14,320 8,967 24,544 15,770 Cumulative effect of accounting changes --- --- (723) --- --------- ---------- ---------- ---------- NET INCOME 14,320 8,967 23,821 15,770 Preferred Dividend Requirement (510) (596) (1,137) (1,192) --------- ---------- ---------- ---------- NET INCOME AVAILABLE TO COMMON $ 13,810 $ 8,371 $ 22,684 $ 14,578 ========= ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES (000s) 53,217 46,469 52,758 45,365 EARNINGS PER COMMON SHARE: Before cumulative effect of accounting changes $ .26 $ .18 $ .44 $ .32 Cumulative effect of accounting changes --- --- (.01) --- --------- ---------- ---------- ---------- Net Income $ .26 $ .18 $ .43 $ .32 ========= ========== ========== ========== DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .09 $ .085 $ .18 $ .17 ========= ========== ========== ========== The accompanying notes to financial statements are an integral part of these statements.
-20- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES -------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited ----------- Six Months Ended June 30, ------------------------- 1994 1993 ---------- ----------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 23,821 $ 15,770 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting changes 723 --- Depreciation and amortization 74,211 59,457 Deferred taxes 9,484 3,866 Investment income (12,909) (8,475) Minority share of income 3,885 278 Gain on sale of cellular interests --- (119) Other noncash expense 3,022 3,523 Change in accounts receivable (16,403) (9,857) Change in accounts payable 12,000 (581) Change in accrued taxes 3,136 (715) Change in other assets and liabilities 3,620 719 ----------- ----------- 104,590 63,866 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 10,305 98,576 Repayments of long-term debt (20,996) (17,765) Change in notes payable 32,416 679 Common stock issued 5,983 1,430 Minority partner capital distributions (1,923) (226) Redemption of preferred stock (268) (104) Dividends paid (10,219) (8,605) Sale of stock by a subsidiary 45,032 242 ----------- ----------- 60,330 74,227 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (129,254) (85,489) Investments in and advances to cellular minority partnerships (12,906) (9,120) Distributions from partnerships 8,962 5,914 Other investments (14,187) (18,855) Acquisitions, excluding cash acquired (25,541) (45,677) Change in temporary investments (1,487) 3,958 ----------- ----------- (174,413) (149,269) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (9,493) (11,176) CASH AND CASH EQUIVALENTS - Beginning of period 55,666 40,810 ----------- ----------- End of period $ 46,173 $ 29,634 =========== =========== The accompanying notes to financial statements are an integral part of these statements. -21- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) June 30, 1994 December 31, 1993 --------------- ----------------- (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 46,173 $ 55,666 Temporary investments 19,434 17,719 Accounts receivable from customers and others 98,171 80,796 Materials and supplies, at average cost, and other current assets 27,659 25,375 ------------ ----------- 191,437 179,556 ------------ ----------- INVESTMENTS Cellular limited partnership interests 106,715 101,210 Cellular license acquisition costs, net 112,576 92,277 Marketable equity securities 21,108 19,368 Other 127,546 115,532 ------------ ----------- 367,945 328,387 ------------ ----------- PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 639,308 638,848 Cellular telephone plant and license costs, net 1,149,663 1,014,103 Radio paging, net 56,643 52,945 Other, net 31,365 32,402 ------------ ----------- 1,876,979 1,738,298 ------------ ----------- OTHER ASSETS AND DEFERRED CHARGES 20,138 12,941 ------------ ----------- $2,456,499 $2,259,182 ============ =========== The accompanying notes to financial statements are an integral part of these statements. -22- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ (Unaudited) June 30, 1994 December 31, 1993 --------------- ----------------- (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt and preferred stock $ 34,676 $ 24,859 Notes payable 38,754 6,309 Accounts payable 76,634 82,878 Advance billings and customer deposits 18,770 17,273 Accrued interest 8,485 8,968 Accrued taxes 11,471 7,995 Other current liabilities 18,368 15,249 ------------ ----------- 207,158 163,531 ------------ ----------- DEFERRED LIABILITIES AND CREDITS 92,313 90,979 ------------ ----------- LONG-TERM DEBT, excluding current portion 504,266 514,442 ------------ ----------- REDEEMABLE PREFERRED STOCK, excluding current portion 15,294 25,632 ------------ ----------- MINORITY INTEREST in subsidiaries 248,916 223,480 ------------ ----------- NONREDEEMABLE PREFERRED STOCK 16,636 16,833 ------------ ----------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 45,838 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 1,214,324 1,069,022 Retained earnings 102,875 89,689 ------------ ----------- 1,371,916 1,224,285 ------------ ----------- $2,456,499 $2,259,182 ============ =========== The accompanying notes to financial statements are an integral part of these statements. -23- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The June 30, 1994 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, and with respect to certain investments in debt and equity securities, Note 2 of Notes to Consolidated Financial Statements included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of June 30, 1994, and the results of operations and cash flows for the six months ended June 30, 1994 and 1993. The results of operations for the six months ended June 30, 1994 and 1993, are not necessarily indicative of the results to be expected for the full year. Certain 1993 cellular and paging operating revenues and expenses have been reclassified to conform to current year presentation. 2. 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 June 30, 1994, consist of dilutive Common Share options. 3. Assuming that acquisitions accounted for as purchases during the period January 1, 1993, to June 30, 1994, had taken place on January 1, 1993, pro forma results of operations from continuing operations would have been, for the six months ended June 30, 1994: operating revenues $333.4 million, net income before cumulative effect of accounting changes $24.0 million and primary earnings per common share before cumulative effect of accounting changes $.43; and would have been, for the six months ended June 30, 1993: operating revenues $273.3 million, net income before cumulative effect of accounting changes $9.6 million and primary earnings per common share before cumulative effect of accounting changes $.17. -24- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. 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 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 and one paging company during the first half of 1993. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed, and Common Shares and Preferred Shares issued. Six Months Ended June 30, ------------------------- 1994 1993 ---------- ----------- (Dollars in thousands) Property, plant and equipment $ 6,648 $ 62,011 Cellular licenses 120,412 227,159 Increase (decrease) in equity method investment in cellular interests (4,816) 115 Long-term debt --- (21,933) Deferred credits --- (3,858) Other assets and liabilities, excluding cash and cash equivalents (1,234) 2,737 Minority interest 701 (11,884) Common Shares issued and issuable (94,891) (199,710) Preferred Shares issued --- (3,000) USM Stock issued and issuable (1,279) (3,051) Subsidiary preferred stock issued --- (2,909) ---------- --------- Decrease in cash due to acquisitions $ 25,541 $ 45,677 ========== ========= The following table summarizes interest and income taxes paid, and other non-cash transactions. Six Months Ended June 30, ------------------------- 1994 1993 ---------- ----------- (Dollars in thousands) Interest paid $ 19,095 $ 15,645 Income taxes paid 10,397 8,192 Common Shares issued by TDS for conversion of TDS and Subsidiary Preferred Stock $ 197 $ 1,381 -25- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Subsequent Event The Company has entered into a standby letter of credit agreement effective July 20, 1994, with a financial institution. This standby letter of credit, which will not exceed $9.9 million, provides supplemental security in support of a bank loan to an entity minority-owned by the Company. The bank loan, which is secured primarily by a first mortgage on the tangible and intangible assets of a cellular operating system to be constructed by the minority-owned entity, was arranged to finance the construction of this cellular system, the acquisition of customers and the initial operation of the system. The cellular license for this system was originally awarded to a third party which constructed its own cellular system. The third party's license application was subsequently found to be flawed by the Federal Communications Commission ("FCC"), and the license was then awarded to the entity minority-owned by the Company. The third party is appealing the FCC's decision. If the appeal is successful, the license will be removed from the entity minority-owned by the Company. The third party will then resume providing cellular service and will not be obligated to purchase the minority-owned entity's cellular system. Such removal of the license from the minority-owned entity constitutes an event of default under its bank loan agreement, and the bank may call upon the Company's standby letter of credit to satisfy any amounts still due under this loan agreement. -26- PART II. OTHER INFORMATION ---------------------------- Item 4. Submission of Matters to a Vote of Security-Holders ------------------------------------------------------------ At the Annual Meeting of Shareholders of TDS, held on May 6, 1994, the following numbers of votes were cast for the matters indicated: 1.a. Election of one Class I Director of the Company by the holders of Common Shares and holders of shares of Preferred Shares issued before October 31, 1981: Broker Nominee For Withhold Non-Vote -------- --- -------- -------- Donald R. Brown 39,811,519 597,615 -0- 1.b. Election of two Class I Directors of the Company by the holders of Series A Common Shares and the holders of Preferred Shares issued after October 31, 1981: Broker Nominee For Withhold Non-Vote ------- --- -------- -------- Robert J. Collins 68,701,711 2,923 -0- Rudolph E. Hornacek 68,696,165 8,469 -0- 2. Proposal to Approve the 1993 Employee Stock Purchase Plan of the Company: Broker For Against Abstain Non-Vote --- ------- ------- -------- 108,329,717 512,461 271,590 -0- 3. Proposal to Ratify the Selection of Arthur Andersen & Co. as Independent Public Accountants for 1994: For Against Abstain Non-Vote --- ------- ------- -------- 108,909,678 41,772 162,319 -0- -27- PART II. OTHER INFORMATION ---------------------------- 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 June 30, 1994 and 1993. Exhibit 99.2 - Pro Forma Financial Information. (d) Reports on Form 8-K filed during the quarter ended June 30, 1994: TDS filed a Report on Form 8-K dated April 22, 1994 which included the Selling Agency Agreement between TDS and Salomon Brothers Inc and Merrill Lynch & Co. with respect to the issue and sale by TDS of up to $150,000,000 aggregate principal amount of its Medium-Term Notes, Series C, Due from Nine Months to Thirty Years from Date of Issue. No other reports on Form 8-K were filed during the quarter ended June 30, 1994. -28- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- (Registrant) Date August 12, 1994 /s/ MURRAY L. SWANSON ------------------ --------------------------------- Murray L. Swanson, Executive Vice President-Finance Date August 12, 1994 /s/ GREGORY J. WILKINSON ------------------- --------------------------------- Gregory J. Wilkinson, Vice President and Controller (Principal Accounting Officer) -29- 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 June 30, 1994 1993 ---------------------------------------------------------------------------- Primary Earnings Net Income $ 14,320 $ 8,967 Dividends on Preferred Shares (510) (596) --------- -------- Net Income Available to Common $ 13,810 $ 8,371 ========= ======== Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 52,690 46,197 Additional shares assuming issuance of: Options and Stock Appreciation Rights 176 272 Convertible Preferred Shares 309 --- Common Shares Issuable 42 --- --------- -------- Primary Shares 53,217 46,469 ========= ======== Primary Earnings per Common Share $ .26 $ .18 ========= ======== Fully Diluted Earnings* Net Income $ 14,320 $ 8,967 Dividends on Preferred Shares (446) (596) --------- -------- Net Income Available to Common $ 13,874 $ 8,371 ========= ======== Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 52,690 46,197 Additional shares assuming issuance of: Options and Stock Appreciation Rights 180 287 Convertible Preferred Shares 579 --- Common Shares Issuable 42 --- --------- -------- Fully Diluted Shares 53,491 46,484 ========= ======== Fully Diluted Earnings per Common Share $ .26 $ .18 ========= ======== * 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%. Exhibit 11 Telephone and Data Systems, Inc. Computation of Earnings Per Common Share (in thousands, except per share amounts) Six Months Ended June 30, 1994 1993 --------------------------------------------------------------------------- Primary Earnings Net Income before cumulative effect of accounting changes $ 24,544 $ 15,770 Dividends on Preferred Shares (1,137) (1,192) --------- -------- Net income before cumulative effect of accounting changes applicable to Common 23,407 14,578 Cumulative effect of accounting changes (723) --- --------- -------- Net Income Available to Common $ 22,684 $ 14,578 ========= ======== Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 52,490 45,087 Additional shares assuming issuance of: Options and Stock Appreciation Rights 189 278 Convertible Preferred Shares 40 --- Common Shares Issuable 39 --- --------- -------- Primary Shares 52,758 45,365 ========= ======== Primary Earnings per Common Share Net Income before cumulative effect of accounting changes $ .44 $ .32 Cumulative effect of accounting changes (.01) --- --------- -------- Net Income $ .43 $ .32 ========= ======== Fully Diluted Earnings* Net Income before cumulative effect of accounting changes $ 24,544 $ 15,770 Dividends on Preferred Shares (1,094) (1,192) --------- -------- Net income before cumulative effect of accounting changes applicable to Common 23,450 14,578 Cumulative effect of accounting changes (723) --- --------- -------- Net Income Available to Common $ 22,727 $ 14,578 ========= ======== Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 52,490 45,087 Additional shares assuming issuance of: Options and Stock Appreciation Rights 184 298 Convertible Preferred Shares 140 --- Common Shares Issuable 39 --- --------- -------- Fully Diluted Shares 52,853 45,385 ========= ======== Fully Diluted Earnings per Common Share Net Income before cumulative effect of accounting changes $ .44 $ .32 Cumulative effect of accounting changes (.01) --- --------- -------- Net Income $ .43 $ .32 ========= ======== * 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. RATIO OF EARNINGS TO FIXED CHARGES For the Six Months Ended June 30, 1994 (Dollars In Thousands) EARNINGS: Income from Continuing Operations before income taxes $ 43,828 Add (Deduct): Minority Share of Cellular Losses (76) Earnings on Equity Method (12,909) Distributions from Minority Subsidiaries 8,962 Amortization of Non-Telephone Capitalized Interest 14 Minority interest in majority-owned subsidiaries that have fixed charges 1,733 --------- 41,552 Add fixed charges: Consolidated interest expense 18,621 Interest Portion (1/3) of Consolidated Rent Expense 2,457 Amortization of debt expense and discount on indebtedness 72 ---------- $ 62,702 ========== FIXED CHARGES: Consolidated interest expense $ 18,621 Interest Portion (1/3) of Consolidated Rent Expense 2,457 Amortization of debt expense and discount on indebtedness 72 ---------- $ 21,150 ========== RATIO OF EARNINGS TO FIXED CHARGES 2.96 ========== Tax-Effected Redeemable Preferred Dividends $ 1,156 Fixed Charges 21,150 ---------- Fixed Charges and Redeemable Preferred Dividends $ 22,306 ========== RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 2.81 ========== Tax-Effected Preferred Dividends $ 2,039 Fixed Charges 21,150 ---------- Fixed Charges and Preferred Dividends $ 23,189 ========== RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 2.70 ========== EX-99 4 EXHBIT 99-1 Exhibit 99.1 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------ CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited ---------
Twelve Months Ended June 30, ---------------------------- 1994 1993 ------------ ------------ (Dollars in thousands, except per share amounts) OPERATING REVENUES Telephone $ 279,264 $ 252,855 Cellular telephone 269,180 170,925 Radio paging 84,033 65,207 ------------ ----------- Total operating revenues 632,477 488,987 ------------ ----------- OPERATING EXPENSES Telephone 195,324 175,524 Cellular telephone 270,497 183,039 Radio paging 81,765 69,552 ------------ ----------- Total operating expenses 547,586 428,115 ------------ ----------- OPERATING INCOME 84,891 60,872 ------------ ----------- INVESTMENT AND OTHER INCOME Interest and dividend income 9,040 7,390 Minority share of income (4,082) (1,408) Cellular investment income, net of license cost amortization 20,456 11,157 Gain on sale of cellular properties and investments 4,851 16,640 Other income, net (1,042) 1,117 ------------ ----------- 29,223 34,896 ------------ ----------- INCOME BEFORE INTEREST AND INCOME TAXES 114,114 95,768 Interest expense 38,076 34,650 ------------ ----------- INCOME BEFORE INCOME TAXES 76,038 61,118 Income tax expense 33,368 26,979 ------------ ----------- NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 42,670 34,139 Extraordinary item --- (769) Cumulative effect of accounting changes (723) --- ------------ ----------- NET INCOME 41,947 33,370 Preferred Dividend Requirement (2,307) (2,316) ------------ ----------- NET INCOME AVAILABLE TO COMMON $ 39,640 $ 31,054 ============ =========== WEIGHTED AVERAGE COMMON SHARES (000s) 50,988 42,844 EARNINGS PER COMMON SHARE: Before extraordinary item and cumulative effect of accounting changes $ .79 $ .74 Extraordinary item --- (.02) Cumulative effect of accounting changes (.01) --- ------------ ----------- Net Income $ .78 $ .72 ============ =========== DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .35 $ .33 ============ ===========
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 June 30, 1994, the Company acquired controlling interests in eight cellular markets and several minority cellular interests representing a total of approximately 1.1 million population equivalents. The total consideration paid for these acquisitions was approximately $123.7 million, consisting of $26.1 million in cash, 1.9 million TDS Common Shares, 49,000 USM Common Shares, the obligation to deliver 42,000 TDS Common Shares in the future and the cancellation of a note receivable of $1.4 million. As of June 30, 1994, the Company had pending agreements to acquire three telephone companies, one paging company and controlling interests in four cellular markets and one minority interest in one market representing a total of approximately 919,000 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 $145.1 million. If these acquisitions are completed as planned, the Company will issue approximately 3.1 million TDS Common Shares, 125,000 TDS Preferred Shares and will pay approximately $9.9 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 June 30, 1994 Unaudited Condensed Pro Forma Consolidated Statement of Income for the Six Months Ended June 30, 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 June 30, 1994 Unaudited --------- (In Thousands) ASSETS
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated (a)Acquisitions (Decrease) Consolidated ------------------------------------------------------- CURRENT ASSETS $ 191,437 $ 18,283 $ (9)(1) $ 209,711 ---------- --------- --------- --------- INVESTMENTS Cellular limited partnership interests 106,715 566 (2,208)(1) 105,073 Cellular license acquisition costs, net 112,576 1,767 --- 114,343 Marketable equity securities 21,108 --- --- 21,108 Other 127,546 3,554 --- 131,100 ---------- --------- --------- --------- 367,945 5,887 (2,208) 371,624 ---------- --------- --------- --------- PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 639,308 40,372 42,555 (1) 722,235 Cellular telephone plant and license costs, net 1,149,663 7,459 73,318 (1) 1,230,440 Radio paging, net 56,643 543 11,119 (1) 68,305 Other, net 31,365 --- --- 31,365 ---------- --------- --------- --------- 1,876,979 48,374 126,992 2,052,345 ---------- --------- --------- --------- OTHER ASSETS AND DEFERRED CHARGES 20,138 3,746 --- 23,884 ---------- --------- --------- --------- $ 2,456,499 $ 76,290 $ 124,775 $2,657,564 ========== ========= ========= ========= 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 June 30, 1994 Unaudited ---------- (In Thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated(a) Acquisitions (Decrease) Consolidated ------------------------------------------------------- CURRENT LIABILITIES $ 207,158 $ 17,085 $ 7,525 (1) $ 231,768 ---------- --------- --------- --------- DEFERRED LIABILITIES AND CREDITS 92,313 5,700 --- 98,013 ---------- --------- --------- --------- LONG-TERM DEBT, excluding current portion 504,266 35,448 --- 539,714 ---------- --------- --------- --------- REDEEMABLE PREFERRED STOCK, excluding current portion 15,294 --- 12,508 (1) 27,802 ---------- --------- --------- --------- MINORITY INTEREST in subsidiaries 248,916 56 --- (1) 248,972 ---------- --------- --------- --------- NONREDEEMABLE PREFERRED STOCK 16,636 --- --- 16,636 ---------- --------- --------- --------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 45,838 140 2,993 (1) 48,971 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 1,214,324 5 119,605 (1) 1,333,934 Retained earnings 102,875 17,856 (17,856)(1) 102,875 ---------- --------- --------- --------- 1,371,916 18,001 104,742 1,494,659 ---------- --------- --------- --------- $ 2,456,499 $ 76,290 $ 124,775 $2,657,564 ========== ========= ======== =========== 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 Six Months Ended June 30, 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 $ 141,348 $ 10,362 $ --- $ 151,710 Cellular telephone 146,890 4,365 --- 151,255 Radio paging 44,149 2,309 --- 46,458 ---------- --------- --------- --------- Total operating revenues 332,387 17,036 --- 349,423 ---------- --------- --------- --------- OPERATING EXPENSES Telephone 95,776 9,873 535 (3) 106,184 Cellular telephone 142,371 4,342 1,202 (3) 147,915 Radio paging 42,931 2,060 519 (3) 45,510 ---------- --------- --------- --------- Total operating expenses 281,078 16,275 2,256 299,609 ---------- --------- --------- --------- OPERATING INCOME 51,309 761 (2,256) 49,814 ---------- --------- --------- --------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 4,504 4 (103)(5) 4,405 Minority share of income (3,885) --- 70 (2) (3,289) 526 (6) Cellular investment income, net of license cost amortization 10,884 --- --- 10,884 Other, net (291) 195 --- (96) ---------- --------- --------- --------- 11,212 199 493 11,904 ---------- --------- --------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 62,521 960 (1,763) 61,718 Interest expense 18,693 1,157 (103)(5) 20,423 676 (7) ---------- --------- --------- --------- INCOME BEFORE INCOME TAXES 43,828 (197) (2,336) 41,295 Income tax expense 19,284 546 (1,370)(8) 18,460 ---------- --------- --------- --------- NET INCOME(c) 24,544 (743) (966) 22,835 Preferred Dividend Requirement (1,137) --- (344)(9) (1,481) ---------- --------- --------- --------- NET INCOME AVAILABLE TO COMMON(c) $ 23,407 $ (743) $ (1,310) $ 21,354 ========== ========= ======== =========== WEIGHTED AVERAGE COMMON SHARES (000s) 52,758 3,397 56,155 ========== ======== ========== EARNINGS PER COMMON SHARE(c) $ .44 .38 ========== ========== 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 $ 39,182 $ --- $ 307,304 Cellular telephone 214,310 16,837 --- 231,147 Radio paging 75,363 4,618 --- 79,981 ------------ --------- -------- ---------- Total operating revenues 557,795 60,637 --- 618,432 ------------ --------- -------- ---------- OPERATING EXPENSES Telephone 189,012 37,722 1,071 (3) 227,805 Cellular telephone 222,966 14,936 3,087 (3) 240,989 Radio paging 76,084 4,120 1,037 (3) 81,241 ------------ --------- -------- ---------- Total operating expenses 488,062 56,778 5,195 550,035 ------------ --------- -------- ---------- OPERATING INCOME 69,733 3,859 (5,195) 68,397 ------------ --------- -------- ---------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 8,082 231 (188)(5) 8,125 Minority share of income (475) --- 45 (2) 644 1,074 (6) Cellular investment income, net of license cost amortization 15,704 --- 12 (4) 15,716 Gain on sale of cellular interests 4,970 --- --- 4,970 Other, net (155) 4,861 --- 4,706 ------------ --------- -------- ---------- 28,126 5,092 943 34,161 ------------ --------- -------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 97,859 8,951 (4,252) 102,558 Interest expense 37,466 3,440 (188)(5) 41,652 934 (7) ------------ --------- -------- ---------- INCOME BEFORE INCOME TAXES 60,393 5,511 (4,998) 60,906 Income tax expense 26,497 2,034 (4,061)(8) 24,470 ------------ --------- -------- ---------- NET INCOME (c) 33,896 3,477 (937) 36,436 Preferred Dividend Requirement (2,386) --- (688)(9) (3,074) ------------ --------- -------- ---------- NET INCOME AVAILABLE TO COMMON (c) $ 31,510 $ 3,477 $(1,625) $ 33,362 ============ ========= ======== =========== WEIGHTED AVERAGE COMMON SHARES (000s) 47,266 4,922 52,188 ============ ======== =========== EARNINGS PER COMMON SHARE (c) $ .67 $ .64 ============ =========== 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, cellular telephone, and radio paging 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) $145,105 Less: TDS's proportionate share of acquired companies' equity at June 30, 1994 (18,113) -------- Purchase price to be allocated $126,992 ======== Purchase price in excess of book value-- Cellular operations $ 73,318 Telephone operations 42,555 Paging operations 11,119 -------- $126,992 ======== 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 loss. 3) Reflects the amortization of assumed costs in excess of book value. Excess cost amounts are primarily assumed to be amortized over 5 to 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 acquired entities. The acquired entities were previously accounted for by the equity method of accounting (see Note 4). 6) Reflects the minority shareholders' portion of USM's net loss 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. 9) Reflects the preferred dividend requirement on the TDS Preferred Shares to be issued. -----END PRIVACY-ENHANCED MESSAGE-----