-----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, aO8OHANUlUjnLyXs2FRVqSWdkkgg3B4fqkW7jNJoUHB/DveWyvi9Stle416Awj1W OrK87+D0H0yqeWCBAZDJ8w== 0000096966-94-000043.txt : 19941111 0000096966-94-000043.hdr.sgml : 19941111 ACCESSION NUMBER: 0000096966-94-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941110 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: 94558737 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 3Q94 10Q ----------------------------------------------------------------------------- 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 September 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 principle 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 October 31, 1994 -------------------------- ------------------------------- Common Shares, $1 par value 48,144,865 Shares Series A Common Shares, $1 par value 6,887,164 Shares ----------------------------------------------------------------------------- THIS CONFORMING PAPER FORMAT IS BEING SUBMITTED PURSUANT TO RULE 901(d) OF REGULATION S-T TELEPHONE AND DATA SYSTEMS, INC. -------------------------------- 3RD 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 Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 1994 and 1993 20 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1994 and 1993 21 Consolidated Balance Sheets - September 30, 1994 and December 31, 1993 22-23 Notes to Consolidated Financial Statements 24 Part II. Other Information 26 Signatures 27 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 --------------------- Nine Months Ended 9/30/94 Compared to Nine Months Ended 9/30/93 CONSOLIDATED Telephone and Data Systems, Inc.'s ("TDS" or the "Company") consolidated results of operations for the first nine months 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 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 29.1% to $525.5 million in the first nine months of 1994 over 1993, operating cash flow increased 34.6% to $192.8 million and operating income rose 46.0% to $83.6 million. Net income before the cumulative effect of an accounting change rose 52.5% to $42.2 million in the first nine months of 1994 over 1993. Earnings per share before the cumulative effect of an accounting change grew 33.9% to $.75 in 1994 from $.56 in 1993, reflecting the significantly improved operating results offset somewhat by a 14.6% increase in weighted average common shares. 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 four telephone companies since September 30, 1993. These acquisitions added 18,600 access lines while internal growth added 15,800 lines. TDS Telecom provides service to customers in 29 states. United States Cellular Corporation (AMEX symbol "USM"), TDS's 81.3%-owned subsidiary, has added 13 markets to consolidated operations since September 30, 1993, through acquisitions and the initiation of cellular operations. USM currently provides cellular service through systems serving 124 majority-owned and managed markets. American Paging, Inc. (AMEX symbol "APP"), TDS's 82.5%-owned subsidiary, has added approximately 145,500 pagers since September 30, 1993. APP provides service to its customers through 38 sales and service operating centers. Operating revenues grew 29.1% ($118.6 million) in 1994 primarily as a result of the growth in customers served. Cellular telephone revenues increased as a result of the 61.5% customer growth in majority-owned markets, which resulted in increased local retail and access revenue, and increased roaming revenues, offset somewhat by a 5.2% decline in average monthly service revenue per unit. Radio paging revenues increased primarily as a result of the 33.6% growth in the number of pagers in service offset somewhat by a 12.7% 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 26.4% ($92.3 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 at a slower rate than consolidated revenues due to increasing economies of scale in the cellular business and cost- containment measures in all three businesses. Operating income increased 46.0% to $83.6 million in the first nine months of 1994 from $57.3 million in 1993. The increase in operating income reflects improved operating results in all three business units, as shown in the following table. Nine Months Ended September 30, --------------------------------- 1994 1993 Change (Dollars in thousands) ------- -------- -------- CONSOLIDATED OPERATING INCOME Telephone Operations $67,513 $61,643 $ 5,870 Cellular Telephone Operations 15,614 (2,592) 18,206 Radio Paging Operations 485 (1,778) 2,263 ------- ------- ------- $83,612 $57,273 $26,339 ======= ======= ======= Operating Margins: Telephone 30.5% 30.8% Cellular Telephone* 6.9% (1.8)% Radio Paging* .9% (3.8)% * Computed on Service Revenues Investment and other income increased 2.0% ($401,000) in 1994. Cellular investment income, net increased $9.1 million to $19.7 million, reflecting improvement in USM's equity- method markets managed by others. Minority share of income increased $6.4 million in the first nine months of 1994 over 1993, as shown in the following table. Gain on sale of cellular interests in 1993 includes $4.9 million related to the sale of two cellular minority interests. Other income, net reflects a $1.0 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"). 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 $5.1 million increase in minority share of income. -3- MINORITY SHARE OF INCOME Nine Months Ended September 30, --------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands) United States Cellular Minority Shareholders' Share $(2,743) $ 2,379 $(5,122) Minority Partners' Share (3,680) (2,744) (936) ------- ------- ------- (6,423) (365) (6,058) TDS Telecom (1,072) (746) (326) ------- ------- ------- $(7,495) $(1,111) $(6,384) ======= ======= ======= Interest expense increased 3.2% ($879,000) in 1994. The increase was primarily due to an increase in long-term interest expense. TDS Telecom's long-term borrowings have increased $34.3 million since September 30, 1993 (including $22.7 million from acquired companies.) Income tax expense increased 52.1% ($11.4 million) in 1994 compared with 1993 as pretax income increased. The effective income tax rate was 44.0% in the first nine months of 1994 and 1993. State income taxes increased 39.8% ($1.8 million) in 1994, due primarily to the increase in pretax income. Net income before the cumulative effect of a change in accounting principle improved to $42.2 million in 1994 from $27.7 million in 1993. Earnings per common share before the cumulative effect of a change in accounting principle were $.75 in 1994 and $.56 in 1993. The weighted average number of common shares outstanding increased 14.6% since September 30, 1993. The increase is primarily due to the issuance of 4.5 million Common Shares in connection with acquisitions and 420,000 Common Shares for cash since September 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 Nine Months Ended September 30, ------------------------------------------------- Change Change Due To Excluding 1994 1993 Change Acquisitions Acquisitions ------------------------------------------------- (Dollars in thousands, except per access line amounts) Operating Revenues Local Service $ 60,711 $ 53,978 $ 6,733 $ 1,175 $ 5,558 Network Access and Long-Distance 130,672 119,319 11,353 7,905 3,448 Miscellaneous 29,938 26,546 3,392 1,043 2,349 -------- -------- ------- -------- -------- 221,321 199,843 21,478 10,123 11,355 -------- -------- ------- -------- -------- Operating Expenses Network Operations 35,887 30,613 5,274 3,909 1,365 Customer Operations 31,595 29,113 2,482 1,085 1,397 Corporate and Other 36,397 34,448 1,949 1,768 181 Depreciation 47,141 41,395 5,746 1,297 4,449 Amortization 2,788 2,631 157 231 (74) -------- -------- ------- -------- -------- 153,808 138,200 15,608 8,290 7,318 -------- -------- ------- -------- -------- Operating Income $ 67,513 $ 61,643 $ 5,870 $ 1,833 $ 4,037 ======== ======== ======= ======== ======== Telephone Revenues as a Percent of Total Revenues 42.1% 49.1% Additions to Property, Plant and Equipment* $ 72,463 $ 54,375 Identifiable Assets $938,730 $815,209 Companies 95 92 Access Lines 385,000 350,600 Growth in access lines in past 12 months: Acquisitions 18,600 20,000 Internal growth 15,800 13,700 Average monthly revenue per access line** $ 66 $ 66 * Does not include cash expenditures (in thousands) of $3,430 and $864, respectively, which relate to additions in prior periods. ** Excludes revenues of long distance carrier in 1994. Operating revenues from telephone operations increased 10.7% ($21.5 million) in the first nine months 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 5.1% ($10.1 million) in 1994. TDS has acquired four telephone companies serving 18,600 access lines since September 30, 1993. Telephone results of operations include the results of these acquired companies since the respective dates of acquisition. Local service revenues increased 12.5% ($6.7 million) in 1994 with acquisitions increasing such revenues 2.2% ($1.2 million). Internal access line growth and sales of custom-calling and other features increased revenues 6.7% ($3.6 million). Certain extended community calling ("ECC") revenues previously reported as network access revenues and changes in settlement plans increased local service revenues 2.1% ($1.2 million). -5- Network access and long-distance revenues increased 9.5% ($11.4 million) in 1994 with acquisitions increasing such revenues 6.6% ($7.9 million). An August 1994 acquisition added a long-distance carrier to TDS Telecom's operations. Increased usage of the network generated 3.4% ($4.1 million) of additional network access and long-distance revenue. These revenues increased 3.6% ($4.3 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 .8% ($1.0 million) in 1994. These revenues also decreased 1.8% ($2.1 million) in 1994 due to changes in settlement plans and because certain ECC revenues are now reported as local service revenues. Miscellaneous revenues increased 12.8% ($3.4 million) in 1994 with acquisitions increasing such revenues 3.9% ($1.0 million). Higher sales and leases of customer premise equipment increased miscellaneous revenues 4.2% ($1.1 million), changes in settlement plans increased these revenues 3.6% ($949,000), and call plan programming services provided to other carriers increased these revenues 1.4% ($384,000). Operating expenses increased 11.3% ($15.6 million) in 1994. Acquisitions increased operating expenses 6.0% ($8.3 million). Network operations expenses increased 17.2% ($5.3 million) with acquisitions increasing these expenses 12.8% ($3.9 million). As discussed above, an August 1994 acquisition added a long-distance carrier to TDS Telecom's operations. The remainder of the increase was primarily due to salary and work force changes along with the effects of general inflation. Depreciation expense increased 13.9% ($5.7 million) with acquisitions increasing such expenses 3.1% ($1.3 million). Additional provisions for depreciation retroactive to January 1, 1994 increased depreciation expenses 4.3% ($1.8 million). The remaining increase was due primarily to increases in plant facilities. Customer operations expenses increased 8.5% ($2.5 million) with acquisitions increasing such expenses 3.7% ($1.1 million). 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 increased 5.7% ($1.9 million) with acquisitions increasing such expenses 5.1% ($1.8 million). Operating income from telephone operations increased 9.5% ($5.9 million) in 1994, with acquisitions increasing such income 3.0% ($1.8 million). The telephone operating margin was 30.5% in 1994 compared to 30.8% 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. -6- CELLULAR TELEPHONE OPERATIONS Nine Months Ended September 30, ------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands, except per unit amounts) Operating Revenues Service* $ 227,101 $ 144,919 $ 82,182 Equipment Sales 9,715 7,051 2,664 ---------- ----------- ---------- 236,816 151,970 84,846 ---------- ----------- ---------- Operating Expenses System Operations* 33,890 24,941 8,949 Marketing and Selling 46,089 28,249 17,840 Cost of Equipment Sold 25,847 16,633 9,214 General and Administrative 68,258 52,607 15,651 Depreciation 28,192 18,238 9,954 Amortization 18,926 13,894 5,032 ---------- ----------- ---------- 221,202 154,562 66,640 ---------- ----------- ---------- Operating Income (Loss) $ 15,614 $ (2,592) $ 18,206 ========== =========== ========== Cellular Telephone Revenues as a Percent of Total Revenues 45.1% 37.3% Additions to Property, Plant and Equipment** $ 110,644 $ 56,742 Identifiable Assets $1,532,912 $ 1,201,539 Majority-Owned, Managed and Consolidated Markets: Population equivalents (000s) 18,793 17,682 Total population (000s) 20,531 18,290 Customers 364,000 225,400 Market penetration 1.77% 1.23% Markets in operation 124 111 Cell sites in service 686 444 Average monthly service revenue per unit* $ 81 $ 85 Churn rate per month 2.2% 2.2% Marketing cost per net customer addition $ 676 $ 661 * Amounts for 1993 have been reclassified to conform to current year presentation. ** Does not include cash expenditures (in thousands) of $6,489 and $193, respectively, which relate to additions in prior periods. USM owns, operates and invests in cellular markets. USM owned or had the right to acquire interests, both majority and minority, in 208 cellular telephone markets at September 30, 1994, representing 24,192,000 population equivalents. USM expects to divest two of these markets and manage the operations of six additional markets in the future. In total, USM expects to manage 146 markets under agreements currently in place. 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 124 markets are included in 1994 consolidated results compared to 111 markets in 1993. Operating revenues increased 55.8% ($84.8 million) in 1994. The revenue increase is primarily the result of 61.5% customer growth in the systems serving its majority-owned and managed markets, growth in roamer revenues and acquisitions. Acquisitions and start-ups increased revenues 10.4% ($15.8 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 USM's markets for this roaming service, and the net amount is included in system operations expense. -7- Service revenues and system operations expense for 1993 have been reclassified for 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 $81 in 1994 from $85 in 1993. Service revenues from local customers' usage of USM's systems increased 60.6% ($50.4 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 $47 in 1994 from $49 in 1993. Monthly local minutes of use averaged 97 in the first nine months 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. Inbound roamer revenues, earned when customers of other systems use USM's cellular systems, increased 48.4% ($24.4 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 $27 in 1994 and $30 in 1993. Long-distance revenues increased 70.1% ($6.8 million) as the volume of long-distance calls billed by USM increased. Equipment sales revenue reflects the sale of 98,200 and 52,700 cellular telephone units in 1994 and 1993, respectively, plus installation and accessories revenue. The average revenue per telephone unit sold was $99 in 1994 compared to $134 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 nine months 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 43.1% ($66.6 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 14.0% ($21.7 million) in 1994. System operations expenses increased 35.9% ($8.9 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 11.6% ($1.5 million) in 1994. Maintenance, utility and cell site expenses grew 63.6% ($7.4 million) in 1994, reflecting growth in the number of cells to 686 in 1994 from 444 in 1993 and in the number of switches in service, and the effects of acquisitions and start-ups. -8- Marketing and selling expenses increased 63.2% ($17.8 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 increase in of 1994 promotional sales activity discussed above, offset somewhat by declining manufacturers' prices per unit. The average cost of a telephone unit sold was $263 in 1994 compared to $316 in 1993. General and administrative expenses increased 29.8% ($15.7 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. USM is using an ongoing clustering strategy to combine local operations wherever feasible in order to gain operational efficiencies and reduce its administrative expenses. Of the increase in general and administrative expenses in 1994, approximately $1.5 million was specifically due to legal expenses incurred to defend the Company against claims totalling more than $200 million. The Company was successful at trial, however, the plaintiffs have appealed the decision. As a result, the Company will likely incur additional legal expenses in the future related to this case. Depreciation expense increased 54.6% ($10.0 million) in 1994, reflecting a 56.9% increase in average fixed assets since September 30, 1993. Amortization expense, primarily amortization of license costs, increased 36.2% ($5.0 million) in 1994. This additional amortization reflects the 22.2% ($183 million) increase in license costs for consolidated operational markets since September 30, 1993. Operating income was $15.6 million in 1994 compared to an operating loss of $2.6 million in 1993. Operating margin on service revenues improved to 6.9% in 1994 from (1.8%) 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 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 markets. Additionally, management believes there exists a seasonality in both service revenues and operating expenses, especially marketing expenses. As a result, decreased operating income, or an 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 costs related to those minority interests. -9- CELLULAR INVESTMENT INCOME Net of License Cost Amortization Nine Months Ended September 30, --------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands) Cellular Systems Managed by USM $ 773 $ (171) $ 944 Cellular Systems Managed by Others 18,929 10,766 8,163 ------- ------- ------- $19,702 $10,595 $ 9,107 ======= ======= ======= Net income from cellular telephone operations was $12.4 million in 1994 compared to a net loss of $11.9 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 63,879,673 shares of common stock of USM at September 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 September 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 Nine Months Ended September 30, --------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands, except per unit amounts) Service Operations Revenues* $ 56,451 $ 46,968 $ 9,483 ------- ------- ------- Costs and Expenses Cost of Services* 13,865 12,112 1,753 Selling and Advertising 9,713 8,307 1,406 General and Administrative* 20,397 18,441 1,956 Depreciation 10,333 8,262 2,071 Amortization* 1,822 1,560 262 ------- ------- ------- 56,130 48,682 7,448 ------- ------- ------- Service Operating Income (Loss) 321 (1,714) 2,035 ------- ------- ------- Equipment Sales Revenue 10,904 8,115 2,789 Cost of Equipment Sold 10,740 8,179 2,561 ------- ------- ------- Equipment Sales Income (Loss) 164 (64) 228 ------- ------- ------- Operating Income (Loss) $ 485 $ (1,778) $ 2,263 ======= ======= ======= Radio Paging Revenues as a Percent of Total Revenues 12.8% 13.6% Additions to Property and Equipment** $ 21,095 $ 17,284 Identifiable Assets $ 81,596 $ 67,359 Pagers in Service 578,400 432,900 Average monthly service revenue per unit $ 12.15 $ 13.91 Transmitters in service 888 625 Disconnect rate per month 2.7% 2.9% Marketing cost per net customer unit addition $ 84 $ 83 * Amounts for 1993 have been reclassified to conform to year-end 1993 presentation. ** Does not include cash expenditures (in thousands) of $1,227 in 1994 which relate to additions in 1993. Includes noncash expenditures (in thousands) of $332 in 1993. Service revenues increased 20.2% ($9.5 million) in the first nine months of 1994 from 1993, primarily as a result of the 33.6% growth in the number of pagers in service. A net additional 145,500 pagers have been placed in service since September 30, 1993. However, a continuing decline in average revenue per pager has slowed service revenue growth. Average monthly service revenue per pager declined 12.7% to $12.15 in the first nine months of 1994 from $13.91 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 15.3% ($7.4 million) in 1994 from 1993, primarily as a result of the costs of system expansion and serving new customers. However, average monthly operating cost per unit improved 18.5% to $7.38 in 1994 from $9.05 in 1993 as a result of achieving increasing economies of scale and operating efficiencies. Cost of services increased 14.5% ($1.8 million) in 1994 reflecting the additional costs of providing service to the increased customer base, the costs of upgrading and expanding the systems to improve system reliability and coverage as well as the activation of regional systems in Oklahoma, Washington D.C., Minnesota, and central Florida. APP's transmitters in service increased to 888 at September 30, 1994 from 625 at September 30, 1993. Selling and advertising expense increased 16.9% ($1.4 -11- million) in 1994 over 1993. The growth in gross sales caused an increase of approximately $1.2 million that relates to an increase in the number of sales employees as well as increased sales commissions paid to both sales employees and retailers. Selling and advertising expense increased at a slower rate than the rate of growth in pagers in service due to improved productivity of sales personnel and increased use of lower- cost distribution channels such as resellers and retail outlets. General and administrative expense increased 10.6% ($2.0 million) due primarily to additional bad debt expense ($552,000), additional billing costs due to an enhancement of APP's customer billing system ($340,000), increases in employee-related costs ($600,000) and additional costs of being a public company ($200,000). 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 23.8% ($2.3 million) in 1994, reflecting increased investment in pagers and related equipment, additional amortization expense due to a June 1993 acquisition and a write-down of approximately $200,000 of obsolete pagers in second quarter 1994. Based on a study of useful lives, APP shortened the estimated useful lives of pagers and transmitters beginning July 1, 1994. The change in estimated useful lives increased depreciation expense by approximately $725,000 for the third quarter of 1994 and is expected to increase depreciation expense by approximately $780,000 in the fourth quarter of 1994 and $3.8 million for 1995. Equipment sales revenue increased 34.4% ($2.8 million) due to APP's increased emphasis on selling pagers to customers, particularly through retail stores and resellers. Cost of equipment sold increased 31.3% ($2.6 million) also due to the increased focus on pager sales. Operating income was $485,000 in 1994 compared to operating 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 and ii) increased operating expenses due to the growth in customer units and costs of upgrading the systems to improve reliability and coverages, tempered by APP's efforts to reduce costs through process improvements and economies of scale. Net loss from radio paging operations totalled $351,000 in 1994 compared to a net loss of $3.3 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 $1.0 million charge to cease operations at APN, as discussed previously. Nine Months Ended September 30, ----------------------- 1994 1993 ---------- ---------- (Dollars in thousands) Additions to Property and Equipment* $ 5,716 $ 6,238 Identifiable Assets $ 81,702 $ 83,352 * Does not include cash expenditures (in thousands) of $175 and $566, respectively, which relate to additions in 1993. -12- Three Months Ended 9/30/94 Compared to Three Months Ended 9/30/93 CONSOLIDATED Operating revenues grew 29.4% ($43.9 million) in 1994 primarily as a result of the growth in customers served. Operating expenses rose 25.6% ($32.7 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 52.9% to $32.3 million in the third quarter of 1994 from $21.1 million in 1993. The increase in operating income reflects the strong gains from cellular telephone operations. Three Months Ended September 30, -------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands) CONSOLIDATED OPERATING INCOME Telephone Operations $21,941 $20,901 $ 1,040 Cellular Telephone Operations 11,095 228 10,867 Radio Paging Operations (733) (7) (726) ------- ------- ------- $32,303 $21,122 $11,181 ======= ======= ======= Operating Margins: Telephone 27.4% 30.0% Cellular Telephone* 12.8% .4% Radio Paging* (3.8)% - * Computed on Service Revenues Investment and other income decreased 7.0% ($696,000) in the third quarter of 1994 over the third quarter of 1993. Cellular investment income increased 97.6% ($4.4 million), reflecting improvement in USM's equity-method markets managed by others. Minority share of income increased $2.8 million as shown in the following table. Gain on sale of cellular interests, $4.9 million in 1993, reflects the sale of two cellular minority interests. 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 September 30, --------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands) United States Cellular Minority Shareholders' Share $(2,000) $ 142 $(2,142) Minority Partners' Share (1,366) (757) (609) ------- ------- ------- (3,366) (615) (2,751) TDS Telecom (244) (218) (26) ------- ------- ------- $(3,610) $ (833) $(2,777) ======= ======= ======= -13- Interest expense increased 2.7% ($269,000) in 1994, primarily due to an increase in short-term notes payable. Income tax expense increased 47.8% ($4.5 million) in 1994 compared with 1993 as pretax income increased. The effective income tax rate was 44% in the third quarter of 1994 and 1993. Net income increased to $17.6 million in the third quarter of 1994 from $11.9 million in 1993. Earnings per common share were $.31 in 1994 and $.23 in 1993. The weighted average number of common shares outstanding increased 12.4% in 1994. TELEPHONE OPERATIONS Three Months Ended September 30, -------------------------------------------------- Change Change Due To Excluding 1994 1993 Change Acquisitions Acquisitions -------------------------------------------------- (Dollars in thousands, except per access line amounts) Operating Revenues Local Service $ 21,213 $ 19,030 $ 2,183 $ 442 $ 1,741 Network Access and Long-Distance 48,372 41,326 7,046 5,428 1,618 Miscellaneous 10,388 9,281 1,107 452 655 -------- -------- ------- -------- ------- 79,973 69,637 10,336 6,322 4,014 Operating Expenses Network Operations 14,187 11,057 3,130 3,190 (60) Customer Operations 11,311 10,081 1,230 555 675 Corporate and Other 13,700 11,608 2,092 1,028 1,064 Depreciation 17,845 15,071 2,774 676 2,098 Amortization 989 919 70 72 (2) -------- -------- ------- -------- ------- 58,032 48,736 9,296 5,521 3,775 -------- -------- ------- -------- ------- Operating Income $ 21,941 $ 20,901 $ 1,040 $ 801 $ 239 ======== ======== ======= ======== ======= Average monthly revenue per access line* $ 70 $ 67 * Excludes revenues of long distance carrier in 1994. Operating revenues from telephone operations increased 14.8% ($10.3 million) in the third quarter of 1994 compared to 1993. The increase in revenues was primarily due to the effects of acquisitions, internal access line growth, recovery of increased costs of providing network access and sales of custom-calling and other features. Local service revenues increased 11.5% ($2.2 million) in 1994, network access and long-distance revenues increased 17.1% ($7.0 million), and miscellaneous revenues increased 11.9% ($1.1 million) for reasons generally the same as for the first nine months. Operating expenses increased 19.1% ($9.3 million) in 1994, for reasons generally the same as for the first nine months. -14- CELLULAR TELEPHONE OPERATIONS Three Months Ended September 30, --------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands, except per unit amounts) Operating Revenues Service* $86,675 $57,869 $28,806 Equipment Sales 3,251 2,081 1,170 ------- ------- ------- 89,926 59,950 29,976 ------- ------- ------- Operating Expenses System Operations* 12,086 9,405 2,681 Marketing and Selling 16,058 10,615 5,443 Cost of Equipment Sold 8,826 8,252 574 General and Administrative 25,052 19,597 5,455 Depreciation 10,050 6,720 3,330 Amortization 6,759 5,133 1,626 ------- ------- ------- 78,831 59,722 19,109 ------- ------- ------- Operating Income $11,095 $ 228 $10,867 ======= ======= ======= Average monthly service revenue per unit* $ 83 $ 91 Churn rate per month 2.2% 2.5% Marketing cost per net customer addition $ 698 $ 626 * Amounts for 1993 have been reclassified to conform to current year presentation. Service revenues increased 49.8% ($28.8 million) in the third quarter of 1994. The revenue increase is primarily the result of 61.5% 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 $83 in 1994 from $91 in 1993. Monthly local minutes of use averaged 99 in the third quarter of 1994 compared to 107 in 1993. Revenues from local customers' usage of USM's systems increased 55.9% ($17.5 million) in 1994 primarily due to the increased number of customers served. Inbound roamer revenues increased 40.0% ($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 47.1% ($2.1 million) as the volume of long- distance calls billed by USM increased. Equipment sales revenue reflects the sale of 35,100 and 28,300 cellular telephone units in 1994 and 1993, respectively. The average revenue per telephone unit sold was $93 in 1994 compared to $73 in 1993. Operating expenses increased 32.0% ($19.1 million) in the third quarter of 1994 for reasons generally the same as for the first nine months. Operating income was $11.1 million in 1994 compared to $228,000 in 1993. Operating margin on service revenues improved to 12.8% in 1994 from .4% 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 September 30, ------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands) Cellular Systems Managed by USM $ 393 $ 122 $ 271 Cellular Systems Managed by Others 8,425 4,341 4,084 ------- ------- ------- $ 8,818 $ 4,463 $ 4,355 ======= ======= ======= Net income from cellular telephone operations was $8.9 million in 1994 compared to a net loss of $701,000 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 September 30, --------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands, except per unit amounts) Service Operations Revenues* $19,488 $ 16,865 $ 2,623 ------- ------- ------- Costs and Expenses Cost of Services* 5,196 4,382 814 Selling and Advertising 3,615 2,961 654 General and Administrative* 6,913 6,171 742 Depreciation 3,970 2,971 999 Amortization* 619 647 (28) ------- ------- ------- 20,313 17,132 3,181 ------- ------- ------- Service Operating Loss (825) (267) (558) ------- ------- ------- Equipment Sales Revenue 3,718 2,739 979 Cost of Equipment Sold 3,626 2,479 1,147 ------- ------- ------- Equipment Sales Income 92 260 (168) ------- ------- ------- Operating Loss $ (733) $ (7) $ (726) ======= ======= ======= Average monthly service revenue per unit $ 11.66 $ 13.50 Disconnect rate per month 2.6% 3.0% Marketing cost per net customer unit addition $ 86 $ 87 * Amounts for 1993 have been reclassified to conform to year-end 1993 presentation. Service revenues increased 15.6% ($2.6 million) in the third quarter of 1994 from 1993, primarily as a result of the 33.6% growth in the number of pagers in service. Service expenses increased 18.6% ($3.2 million) in 1994 from 1993, primarily as a result of the costs of system expansion and serving new customers. Depreciation expense increased approximately $725,000 due to a change in the estimated useful lives of pagers and transmitters. Operating loss was $733,000 in 1994 compared to $7,000 in 1993. Net loss from radio paging operations totalled $573,000 in 1994 compared to a net loss of $691,000 in 1993. -16- FINANCIAL RESOURCES AND LIQUIDITY --------------------------------- Cash flows from operating activities totalled $158.3 million in the first nine months of 1994 compared to $113.7 million in 1993. Consolidated operating cash flow totalled $192.8 million in 1994 compared to $143.3 million in 1993. The 34.6% increase in operating cash flow reflects improved operating cash flow in all three of TDS's primary business units. Nine Months Ended September 30, ------------------------------- 1994 1993 Change ------- -------- -------- (Dollars in thousands) OPERATING CASH FLOW Telephone Operations $ 117,442 $ 105,669 $ 11,773 Cellular Telephone Operations 62,732 29,540 33,192 Radio Paging Operations 12,640 8,044 4,596 ------- ------- ------ $ 192,814 $ 143,253 $ 49,561 ======= ======= ====== 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 $34.5 million in the first nine months of 1994 compared to $29.5 million in 1993. Cash flows from financing activities totalled $107.1 million in the first nine months of 1994 compared to $117.8 million in 1993. Sales of common stock by TDS and APP and long- and short-term borrowings provided most of the Company's external financing requirements during the first nine months 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 nine months 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 $260.3 million in the first nine months of 1994 compared to $211.8 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 $221.2 million in the first nine months of 1994 compared to $135.9 million in 1993. Cash used for acquisitions totalled $25.3 million and $47.9 million in the first nine months of 1994 and 1993, respectively. Additions to telephone plant and equipment totalled $72.5 million for the first nine months of 1994. Management expects that plant and equipment additions will total about $107 million in 1994, exclusive of acquisitions. This construction budget includes $34 million for digital switches, $58 million for outside plant upgrades such as the installation of fiber optic cables and $15 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 $110.6 million for the first nine months of 1994. Management expects such cellular telephone expenditures during 1994 to total about $147 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 $21.1 million for the first nine months of 1994. Management expects that such property and equipment additions will total about $27 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 $5.7 million for the first nine months 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 $25.3 million in the first nine months of 1994 compared to $47.9 million in 1993. During the first nine months of 1994, TDS purchased controlling interests in nine cellular markets and several minority cellular interests representing a total of 1.2 million population equivalents and two telephone companies. 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 $189.1 million, consisting of $30.1 million in cash, 3.4 million TDS Common Shares ($154.3 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 September 30, 1994, to acquire controlling interests in five cellular markets and one minority interest representing approximately 878,000 population equivalents, four telephone companies and one paging company for an aggregate consideration of approximately $131.4 million. If all of these pending acquisitions are completed as planned, TDS will issue approximately 2.5 million Common Shares ($108.1 million), 125,000 Preferred Shares ($12.5 million) and will pay approximately $10.8 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 812,000 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. On November 8, 1994, APP acquired five regional narrowband Personal Communications Services ("PCS") licenses at auction by the Federal Communications Commission ("FCC"). Each of these five licenses consists of a 50 kHz channel paired with a 12.5 kHz return channel. The licenses, when granted, will authorize APP to introduce two-way wireless messaging services including acknowledgement paging, data and telemetry services, and digitized voice messaging throughout the United States. APP intends to begin deploying services in early 1996 in some of its existing markets. APP's bid for the licenses aggregated $53.6 million. According to FCC auction procedures, APP will make a 20% down payment on the licenses by November 15, 1994, and pay the remaining 80% five days after the FCC has granted the licenses. See "Liquidity" for a discussion of the Company's financial resources. -18- 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 will evaluate what impact the proceedings in the La Star matter may have on the Wisconsin proceeding. Liquidity. Management believes that TDS has adequate internal and external resources to finance its business development, construction and acquisition programs. TDS and its subsidiaries had cash and temporary investments totalling $81.0 million and longer-term investments totalling $71.1 million at September 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 $113.1 million of bank lines of credit for general corporate purposes at September 30, 1994, all of which were committed. Unused amounts of such lines totalled $33.2 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 4.3 million unissued shares at September 30, 1994, including 2.5 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 September 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 Nine Months Ended September 30, September 30, ------------------- ------------------- 1994 1993 1994 1993 --------- -------- -------- -------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Telephone $ 79,973 $ 69,637 $221,321 $ 199,843 Cellular telephone 89,926 59,950 236,816 151,970 Radio paging 23,206 19,604 67,355 55,083 --------- --------- --------- --------- 193,105 149,191 525,492 406,896 --------- --------- --------- --------- OPERATING EXPENSES Telephone 58,032 48,736 153,808 138,200 Cellular telephone 78,831 59,722 221,202 154,562 Radio paging 23,939 19,611 66,870 56,861 --------- --------- --------- --------- 160,802 128,069 441,880 349,623 --------- --------- --------- --------- OPERATING INCOME 32,303 21,122 83,612 57,273 --------- --------- --------- --------- INVESTMENT AND OTHER INCOME Interest and dividend income 3,148 2,117 7,652 5,663 Minority share of income (3,610) (833) (7,495) (1,111) Cellular investment income, net oflicense cost amortization 8,818 4,463 19,702 10,595 Gain on sale of cellular interests - 4,851 - 4,970 Other income (expense), net 879 (667) 588 (71) --------- --------- --------- --------- 9,235 9,931 20,447 20,046 --------- --------- --------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 41,538 31,053 104,059 77,319 Interest expense 10,067 9,798 28,760 27,881 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 31,471 21,255 75,299 49,438 Income tax expense 13,848 9,368 33,132 21,781 --------- --------- --------- --------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 17,623 11,887 42,167 27,657 Cumulative effect of accounting changes - - (723) - --------- --------- --------- --------- NET INCOME 17,623 11,887 41,444 27,657 Preferred Dividend Requirement (457) (594) (1,733) (1,789) --------- --------- --------- --------- NET INCOME AVAILABLE TO COMMON $ 17,166 $ 11,293 $ 39,711 $ 25,868 ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES (000s) 54,282 48,302 53,121 46,339 EARNINGS PER COMMON SHARE: Before cumulative effect of accounting changes $ .31 $ .23 $ .75 $ .56 Cumulative effect of accounting changes - - (.01) - --------- --------- --------- --------- Net Income $ .31 $ .23 $ .74 $ .56 ========= ========= ========= ========= DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .09 $ .085 $ .27 $ .255 ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. - 20 - TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited --------- Nine Months Ended Septmber 30, -------------------- 1994 1993 -------- -------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 41,444 $ 27,657 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting changes 723 - Depreciation and amortization 117,061 93,437 Deferred taxes 14,155 9,171 Investment income (22,549) (14,405) Minority share of income 7,495 1,111 Gain on sale of cellular interests - (4,970) Other noncash expense 4,220 6,264 Change in accounts receivable (20,968) (13,587) Change in accounts payable 7,341 5,505 Change in accrued taxes 4,808 1,633 Change in other assets and liabilities 4,577 1,912 -------- -------- 158,307 113,728 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 8,994 119,900 Repayments of long-term debt (22,837) (29,386) Change in notes payable 73,600 (9,726) Common stock issued 8,366 50,689 Minority partner capital contributions (distributions) 9,458 (605) Redemption of preferred stock (268) (104) Dividends paid (15,483) (13,165) Sale of stock by a subsidiary 45,253 241 -------- -------- 107,083 117,844 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (221,239) (135,930) Investments in and advances to cellular minority partnerships (17,274) (14,478) Distributions from partnerships 12,647 8,157 Proceeds from investment sales - 6,750 Other investments (8,355) (28,327) Acquisitions, excluding cash acquired (25,252) (47,940) Change in temporary investments (844) 8 -------- -------- (260,317) (211,760) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 5,073 19,812 CASH AND CASH EQUIVALENTS - Beginning of period 55,666 40,810 -------- -------- End of period $ 60,739 $ 60,622 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements. - 21 - TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) September 30, 1994 December 31, 1993 ------------------ ----------------- (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 60,739 $ 55,666 Temporary investments 20,217 17,719 Accounts receivable from customers and others 106,853 80,796 Materials and supplies, at average cost, and other current assets 30,521 25,375 ----------- ------------ 218,330 179,556 ----------- ------------ INVESTMENTS Cellular limited partnership interests 115,430 101,210 Cellular license acquisition costs, net 115,961 92,277 Marketable equity securities 22,760 19,368 Other 130,347 115,532 ----------- ------------ 384,498 328,387 ----------- ------------ PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 715,030 638,848 Cellular telephone plant and license costs, net 1,209,209 1,014,103 Radio paging, net 60,864 52,945 Other, net 35,267 32,402 ----------- ------------ 2,020,370 1,738,298 ----------- ------------ OTHER ASSETS AND DEFERRED CHARGES 11,742 12,941 ----------- ------------ $2,634,940 $ 2,259,182 =========== ============ The accompanying notes to consolidated 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) September 30, 1994 December 31, 1993 ------------------ ----------------- (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt and preferred stock $ 36,565 $ 24,859 Notes payable 79,909 6,309 Accounts payable 86,746 82,878 Advance billings and customer deposits 19,582 17,273 Accrued interest 3,852 8,968 Accrued taxes 13,024 7,995 Other current liabilities 23,798 15,249 ----------- ------------ 263,476 163,531 ----------- ------------ DEFERRED LIABILITIES AND CREDITS 103,746 90,979 ----------- ------------ LONG-TERM DEBT, excluding current portion 521,046 514,442 ----------- ------------ REDEEMABLE PREFERRED STOCK, excluding current portion 15,401 25,632 ----------- ------------ MINORITY INTEREST in subsidiaries 266,129 223,480 ----------- ------------ NONREDEEMABLE PREFERRED STOCK 16,421 16,833 ----------- ------------ COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 47,392 43,504 Series A Common Shares, par value $1 per share 6,887 6,881 Common Shares issuable (41,908 and 304,328 shares, respectively) 1,995 15,189 Capital in excess of par value 1,277,427 1,069,022 Retained earnings 115,020 89,689 ----------- ------------ 1,448,721 1,224,285 ----------- ------------ $2,634,940 $ 2,259,182 =========== ============ The accompanying notes to consolidated financial statements are an integral part of these statements. TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The September 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 as amended with respect to Note 7 of the Combined Financial Statements of the Los Angeles SMSA Limited Partnership, Nashville/Clarksville MSA Limited Partnership and Baton Rouge MSA Limited Partnership, 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, and with respect to certain commitments and contingencies, Note 5 of the Notes to Consolidated Financial Statements included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 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 September 30, 1994, and the results of operations and cash flows for the nine months ended September 30, 1994 and 1993. The results of operations for the nine months ended September 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, less an amount due to a subsidiaries issuable securities, by the weighted average number of common and common equivalent shares outstanding during the period. Dilutive common stock equivalents at September 30, 1994, consist of dilutive Common Share options. 3. Assuming that acquisitions accounted for as purchases during the period January 1, 1993, to September 30, 1994, had taken place on January 1, 1993, pro forma results of operations from continuing operations would have been, for the nine months ended September 30, 1994: operating revenues $548.1 million, net income before cumulative effect of accounting changes $42.2 million and primary earnings per common share before cumulative effect of accounting changes $.74; and would have been, for the nine months ended September 30, 1993: operating revenues $452.2 million, net income before cumulative effect of accounting changes $18.4 million and primary earnings per common share before cumulative effect of accounting changes $.32. - 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 one telephone company during the first nine months of 1994 and two telephone companies and one paging company during the first nine months of 1993. In conjunction with these acquisitions, the following assets were acquired and liabilities assumed, and Common Shares and Preferred Shares issued. Nine Months Ended September 30, -------------------------------- 1994 1993 ------------- ------------ (Dollars in thousands) Property, plant and equipment $ 68,021 $ 65,586 Cellular licenses 142,341 272,097 Increase (decrease) in equity method investment in cellular interests (6,207) (4,670) Long-term debt (21,931) (22,934) Deferred credits (5,478) (3,907) Other assets and liabilities, excluding cash and cash equivalents 5,447 2,267 Minority interest 621 (11,471) Common Shares issued and issuable (156,283) (235,466) Preferred Shares issued - (3,000) USM Stock issued and issuable (1,279) (7,653) Subsidiary preferred stock issued - (2,909) --------- --------- Decrease in cash due to acquisitions $ 25,252 $ 47,940 ========= ========= The following table summarizes interest and income taxes paid, and other non-cash transactions. Nine Months Ended September 30, -------------------------------- 1994 1993 ------------- ------------ (Dollars in thousands) Interest paid $ 33,748 $ 28,942 Income taxes paid 13,288 13,129 Common Shares issued by TDS for conversion of TDS and Subsidiary Preferred Stock $ 411 $ 1,949 - 25 - PART II. OTHER INFORMATION ---------------------------- Item 1. Legal Proceedings -------------------------- Townes Telecommunications, Inc., et. al. v. TDS, et. al. ------------------------------------------------------- Plaintiffs Townes Telecommunications, Inc. ("Townes"), Tatum Telephone Company ("Tatum Telephone") and Tatum Cellular Telephone Company ("Tatum Cellular") filed a suit in the District Court of Rusk County, Texas, against both TDS and USM as defendants. Plaintiff Townes alleged that it entered into an oral agreement with defendants which established a joint venture to develop cellular business in certain markets. Townes alleged that defendants usurped a joint venture opportunity and breached fiduciary duties to Townes by purchasing interests in nonwireline markets in Texas RSA #11 and the Tyler (Texas) MSA on their own behalf rather than on behalf of the alleged joint venture. In its Fifth Amendment Original Petition Townes sought unspecified damages not to exceed $33 million for usurpation, breach of fiduciary duty, civil conspiracy, breach of contract and tortious interference. Townes also sought imposition of a constructive trust on defendants' profits from Texas RSA #11 and the Tyler (Texas) MSA and transfer of those interests to the alleged joint venture. In addition, Townes sought reasonable attorneys' fees equal to one-third of the judgement, along with prejudgement interest. Plaintiffs Tatum Telephone and Tatum Cellular sought a declaration that transfers by defendants of a 49% interest in Tatum Cellular violated a five-year restriction on alienation of Tatum Cellular shares contained in a written shareholders' agreement. Tatum Telephone and Tatum Cellular sought to void the transfers. All plaintiffs together sought as much as $200 million in punitive damages. The case went to trial on April 25, 1994. On May 5, 1994 the jury returned a verdict in favor of TDS and USM on all issues. Plaintiffs thereafter made a motion for a mistrial which the Court denied on June 17, 1994. On June 17, the Court also entered judgement on the jury's verdict in favor of TDS and USM. On July 15, 1994 Plaintiffs filed a motion for a new trial. That motion was denied on August 11, 1994. The Plaintiffs filed an appeal of the case on September 12, 1994. Defendants intend to vigorously contest any issues raised on appeal. 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 27 - Financial Data Schedule (d) Exhibit 99.1 - Unaudited Consolidated Statements of Income for the Twelve Months Ended September 30, 1994 and 1993. Exhibit 99.2 - Pro Forma Financial Information. (e) Reports on Form 8-K filed during the quarter ended September 30, 1994: No reports on Form 8-K were filed during the quarter ended September 30, 1994. - 26 - 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 November 10, 1994 MURRAY L. SWANSON ----------------- ---------------------------------- Murray L. Swanson Executive Vice President-Finance Date November 10, 1994 GREGORY J. WILKINSON ----------------- ---------------------------------- Gregory J. Wilkinson Vice President and Controller (Principal Accounting Officer) - 27 - 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 September 30, 1994 1993 --------------------------------------------------------------------------- Primary Earnings Net Income $17,623 $11,887 Dividends on Preferred Shares (457) (594) ------- ------- Net Income Available to Common $17,166 $11,293 ======= ======= Minority Income Adjustment (1) $ (103) $ - ======= ======= Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 53,601 48,018 Additional shares assuming issuance of: Options and Stock Appreciation Rights 170 270 Convertible Preferred Shares 469 - Common Shares Issuable 42 - ------- ------- Primary Shares 54,282 48,288 ======= ======= Primary Earnings per Common Share $ .31 $ .23 ======= ======= Fully Diluted Earnings* Net Income $17,623 $11,887 Dividends on Preferred Shares (394) (594) ------- ------- Net Income Available to Common $17,229 $11,293 ======= ======= Minority Income Adjustment (1) $ (104) $ - ======= ======= Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 53,601 48,018 Additional shares assuming issuance of: Options and Stock Appreciation Rights 182 274 Convertible Preferred Shares 739 - Common Shares Issuable 42 - ------- ------- Fully Diluted Shares 54,564 48,292 ======= ======= Fully Diluted Earnings per Common Share $ .31 $ .23 ======= ======= * 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%. (1) The minority income adjustment, which is deducted from net income before cumulative effect of accounting changes applicable to Common, reflects the additional minority share of the subsidiary's income computed as if all of the subsidiary's issuable securities were outstanding. Exhibit 11 Telephone and Data Systems, Inc. Computation of Earnings Per Common Share (in thousands, except per share amounts) Nine Months Ended September 30, 1994 1993 --------------------------------------------------------------------------- Primary Earnings Net Income before cumulative effect of accounting changes $42,167 $27,657 Dividends on Preferred Shares (1,733) (1,789) ------- ------- Net income before cumulative effect of accounting changes applicable to Common 40,434 25,868 Cumulative effect of accounting changes (723) - ------- ------- Net Income Available to Common $39,711 $25,868 ======= ======= Minority Income Adjustment (1) $ (229) $ - ======= ======= Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 52,860 46,064 Additional shares assuming issuance of: Options and Stock Appreciation Rights 183 275 Convertible Preferred Shares 38 - Common Shares Issuable 40 - ------- ------- Primary Shares 53,121 46,339 ======= ======= Primary Earnings per Common Share Net Income before cumulative effect of accounting changes $ .75 $ .56 Cumulative effect of accounting changes (.01) - ------- ------- Net Income $ .74 $ .56 ======= ======= (1) The minority income adjustment, which is deducted from net income before cumulative effect of accounting changes applicable to Common, reflects the additional minority share of the subsidiary's income computed as if all of the subsidiary's issuable securities were outstanding. Telephone and Data Systems, Inc. Computation of Earnings Per Common Share (in thousands, except per share amounts) Nine Months Ended September 30, 1994 1993 --------------------------------------------------------------------------- Fully Diluted Earnings* Net Income before cumulative effect of accounting changes $42,167 $27,657 Dividends on Preferred Shares (1,541) (1,789) ------- ------- Net income before cumulative effect of accounting changes applicable to Common 40,626 25,868 Cumulative effect of accounting changes (723) - ------- ------- Net Income Available to Common $39,903 $25,868 ======= ======= Minority Income Adjustment (1) $ (230) $ - ======= ======= Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 52,860 46,064 Additional shares assuming issuance of: Options and Stock Appreciation Rights 193 308 Convertible Preferred Shares 309 - Common Shares Issuable 40 - ------- ------- Fully Diluted Shares 53,402 46,372 ======= ======= Fully Diluted Earnings per Common Share Net Income before cumulative effect of accounting changes $ .75 $ .56 Cumulative effect of accounting changes (.01) - ------- ------- Net Income $ .74 $ .56 ======= ======= * 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%. (1) The minority income adjustment, which is deducted from net income before cumulative effect of accounting changes applicable to Common, reflects the additional minority share of the subsidiary's income computed as if all of the subsidiary's issuable securities were outstanding. EX-12 3 EXHIBIT12 Exhibit 12 TELEPHONE AND DATA SYSTEMS, INC. RATIO OF EARNINGS TO FIXED CHARGES For the Nine Months Ended September 30, 1994 (Dollars In Thousands) EARNINGS: Income from Continuing Operations before income taxes $ 75,299 Add (Deduct): Minority Share of Cellular Losses (97) Earnings on Equity Method (22,548) Distributions from Minority Subsidiaries 11,739 Amortization of Non-Telephone Capitalized Interest 19 Minority interest in majority-owned subsidiaries that have fixed charges 4,114 --------- 68,526 Add fixed charges: Consolidated interest expense 28,644 Interest Portion (1/3) of Consolidated Rent Expense 3,685 Amortization of debt expense and discount on indebtedness 117 --------- $ 100,972 ========= FIXED CHARGES: Consolidated interest expense $ 28,644 Interest Portion (1/3) of Consolidated Rent Expense 3,685 Amortization of debt expense and discount on indebtedness 117 --------- $ 32,446 ========= RATIO OF EARNINGS TO FIXED CHARGES 3.11 ========= Tax-Effected Redeemable Preferred Dividends $ 1,733 Fixed Charges 32,446 --------- Fixed Charges and Redeemable Preferred Dividends $ 34,179 ========= RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 2.95 ========= Tax-Effected Preferred Dividends $ 3,107 Fixed Charges 32,446 --------- Fixed Charges and Preferred Dividends $ 35,553 ========= RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 2.84 ========= EX-27 4 EXHIBIT27
5 This schedule contains summary financial information extracted from the consolidated financial statements of Telephone and Data Systems, Inc. as of September 30, 1994, and for the nine months then ended, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 60,739 22,760 72,650 0 16,205 218,330 2,619,913 599,543 2,634,940 263,476 521,046 54,279 15,401 16,421 1,394,442 2,634,940 0 525,492 0 441,880 (20,447) 0 28,760 75,299 33,132 42,167 0 0 (723) 41,444 0.74 0.74
EX-99 5 EXHIBIT99-1 Exhibit 99.1 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited --------- Twelve Months Ended September 30, ---------------------- 1994 1993 ---------- --------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Telephone $ 289,600 $ 262,508 Cellular telephone 299,156 193,107 Radio paging 87,635 70,704 --------- --------- Total operating revenues 676,391 526,319 --------- --------- OPERATING EXPENSES Telephone 204,620 182,524 Cellular telephone 289,606 202,306 Radio paging 86,093 73,533 --------- --------- Total operating expenses 580,319 458,363 --------- --------- OPERATING INCOME 96,072 67,956 --------- --------- INVESTMENT AND OTHER INCOME Interest and dividend income 10,071 7,734 Minority share of income (6,859) (2,809) Cellular investment income, net of license cost amortization 24,811 13,037 Gain on sale of cellular properties and investments - 22,035 Other income, net 504 (841) --------- --------- 28,527 39,156 --------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 124,599 107,112 Interest expense 38,345 36,363 --------- --------- INCOME BEFORE INCOME TAXES 86,254 70,749 Income tax expense 37,848 31,349 --------- --------- NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 48,406 39,400 Extraordinary item - (769) Cumulative effect of accounting changes (723) - --------- --------- NET INCOME 47,683 38,631 Preferred Dividend Requirement (2,318) (2,351) --------- --------- NET INCOME AVAILABLE TO COMMON $ 45,365 $ 36,280 ========= ========= WEIGHTED AVERAGE COMMON SHARES (000s) 52,365 44,910 EARNINGS PER COMMON SHARE: Before extraordinary item and cumulative effect of accounting changes $ .88 $ .82 Extraordinary item - (.01) Cumulative effect of accounting changes (.01) - ---------- --------- Net Income $ .87 $ .81 ========== ========= DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .355 $ .335 ========== ========= EX-99 6 EXHIBIT99-2 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 September 30, 1994, the Company acquired two telephone companies and controlling interests in nine cellular markets and several minority cellular interests representing a total of approximately 1.2 million population equivalents. The total consideration paid for these acquisitions was approximately $189.1 million, consisting of $30.1 million in cash, 3.4 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 September 30, 1994, the Company had pending agreements to acquire four telephone companies, one paging company and controlling interests in five cellular markets and one minority interest representing a total of approximately 878,000 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 $131.4 million. If these acquisitions are completed as planned, the Company will issue approximately 2.5 million TDS Common Shares, 125,000 TDS Preferred Shares and will pay approximately $10.8 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 September 30, 1994 Unaudited Condensed Pro Forma Consolidated Statement of Income for the Nine Months Ended September 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 September 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 $ 218,330 $ 8,622 $ - $ 226,952 ---------- -------- -------- ---------- INVESTMENTS Cellular limited partnership interests 115,430 566 - 115,996 Cellular license acquisition costs, net 115,961 3,487 - 119,448 Marketable equity securities 22,760 - - 22,760 Other 130,347 756 - 131,103 ---------- -------- -------- ---------- 384,498 4,809 - 389,307 ---------- -------- -------- ---------- PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 715,030 23,535 36,395 (1) 774,960 Cellular telephone plant and license costs, net 1,209,209 8,231 76,445 (1) 1,293,885 Radio paging, net 60,864 543 11,119 (1) 72,526 Other, net 35,267 - - 35,267 ---------- -------- -------- ---------- 2,020,370 32,309 123,959 2,176,638 ---------- -------- -------- ---------- OTHER ASSETS AND DEFERRED CHARGES 11,742 2,057 - 13,799 ---------- -------- -------- ---------- $2,634,940 $ 47,797 $123,959 $2,806,696 ========== ======== ======== ========== 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 September 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 $ 263,476 $ 11,828 $ 10,855 (1) $ 286,159 ---------- -------- -------- ---------- DEFERRED LIABILITIES AND CREDITS 103,746 2,350 - 106,096 ---------- -------- -------- ---------- LONG-TERM DEBT, excluding current portion 521,046 26,098 - 547,144 ---------- -------- -------- ---------- REDEEMABLE PREFERRED STOCK, excluding current portion 15,401 - 12,508 (1) 27,909 ---------- -------- -------- ---------- MINORITY INTEREST in subsidiaries 266,129 56 - 266,185 ---------- -------- -------- ---------- NONREDEEMABLE PREFERRED STOCK 16,421 - - 16,421 ---------- -------- -------- ---------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 47,392 105 2,380 (1) 49,877 Series A Common Shares, par value $1 per share 6,887 - - 6,887 Common Shares Issuable 1,995 - - 1,995 Capital in excess of par value 1,277,427 4,595 100,981 (1) 1,383,003 Retained earnings 115,020 2,765 (2,765)(1) 115,020 ---------- -------- -------- ---------- 1,448,721 7,465 100,596 1,556,782 ---------- -------- -------- ---------- $2,634,940 $ 47,797 $123,959 $2,806,696 ========== ======== ======== ========== 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 Nine Months Ended September 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 $ 221,321 $ 28,431 $ - $ 249,752 Cellular telephone 236,816 9,861 - 246,677 Radio paging 67,355 3,464 - 70,819 ---------- -------- -------- ---------- Total operating revenues 525,492 41,756 - 567,248 ---------- -------- -------- ---------- OPERATING EXPENSES Telephone 153,808 23,546 1,102 (3) 178,456 Cellular telephone 221,202 11,288 2,054 (3) 234,544 Radio paging 66,870 3,090 778 (3) 70,738 ---------- -------- -------- ---------- Total operating expenses 441,880 37,924 3,934 483,738 ---------- -------- -------- ---------- OPERATING INCOME 83,612 3,832 (3,934) 83,510 ---------- -------- -------- ---------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 7,652 5 (120)(5) 7,537 Minority share of income (7,495) - 132 (2) (6,488) 875 (6) Cellular investment income, net of license cost amortization 19,702 - (102)(4) 19,600 Other, net 588 479 - 1,067 ---------- -------- -------- ---------- 20,447 484 785 21,716 ---------- -------- -------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 104,059 4,316 (3,149) 105,226 Interest expense 28,760 2,553 (120)(5) 32,154 961 (7) ---------- -------- -------- ---------- INCOME BEFORE INCOME TAXES 75,299 1,763 (3,990) 73,072 Income tax expense 33,132 1,440 (2,275)(8) 32,297 ---------- -------- -------- ---------- NET INCOME(c) 42,167 323 (1,715) 40,775 Preferred Dividend Requirement (1,733) - (516)(9) (2,249) ---------- -------- -------- ---------- NET INCOME AVAILABLE TO COMMON(c) $ 40,434 $ 323 $ (2,231) $ 38,526 ========== ======== ======== ========== WEIGHTED AVERAGE COMMON SHARES (000s) 53,121 3,829 56,950 ========== ======== ========== EARNINGS PER COMMON SHARE(c) $ .75 .67 ========== ========== 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 Acquisitions(b) (Decrease) Consolidated ------------------------------------------------------- OPERATING REVENUES Telephone $ 268,122 $ 45,291 $ - $ 313,413 Cellular telephone 214,310 18,639 - 232,949 Radio paging 75,363 4,618 - 79,981 ---------- -------- -------- ---------- Total operating revenues 557,795 68,548 - 626,343 ---------- -------- -------- ---------- OPERATING EXPENSES Telephone 189,012 38,239 1,633 (3) 228,884 Cellular telephone 222,966 21,436 3,704 (3) 248,106 Radio paging 76,084 4,120 1,037 (3) 81,241 ---------- -------- -------- ---------- Total operating expenses 488,062 63,795 6,374 558,231 ---------- -------- -------- ---------- OPERATING INCOME 69,733 4,753 (6,374) 68,112 ---------- -------- -------- ---------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 8,082 265 (188)(5) 8,159 Minority share of income (475) - 45 (2) (1,701) (1,271)(6) Cellular investment income, net of license cost amortization 15,704 - (124)(4) 15,580 Gain on sale of cellular interests 4,970 - - 4,970 Other, net (155) 4,890 - 4,735 ---------- -------- -------- ---------- 28,126 5,155 (1,538) 31,743 ---------- -------- -------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 97,859 9,908 (7,912) 99,855 Interest expense 37,466 4,114 (188)(5) 43,511 2,119 (7) ---------- -------- -------- ---------- INCOME BEFORE INCOME TAXES 60,393 5,794 (9,843) 56,344 Income tax expense 26,497 2,403 (5,115)(8) 23,785 ---------- -------- -------- ---------- NET INCOME (c) 33,896 3,391 (4,728) 32,559 Preferred Dividend Requirement (2,386) - (688)(9) (3,074) ---------- -------- -------- ---------- NET INCOME AVAILABLE TO COMMON (c) $ 31,510 $ 3,391 $ (5,416) $ 29,485 ========== ======== ======== ========== WEIGHTED AVERAGE COMMON SHARES (000s) 47,266 5,890 53,156 ========== ======== ========== EARNINGS PER COMMON SHARE (c) $ .67 $ .55 ========== ========== 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) $ 131,424 Less: TDS's proportionate share of acquired companies' equity at September 30, 1994 7,465 --------- Purchase price to be allocated $ 123,959 ========= Purchase price in excess of book value-- Cellular operations $ 76,445 Telephone operations 36,395 Paging operations 11,119 --------- $ 123,959 ========= 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-----