-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JBpXkvpdyOseBdX4XRijFyZMlUachauL+oUbXpDyuMV1zcwJxCBRA7qIDQQRFpcq egpJkjgtFhgHGgc+gdjt/A== 0000096966-95-000051.txt : 19951119 0000096966-95-000051.hdr.sgml : 19951119 ACCESSION NUMBER: 0000096966-95-000051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC CENTRAL INDEX KEY: 0000096966 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [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: 95589450 BUSINESS ADDRESS: STREET 1: 30 NORTH LASALLE STREET SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 6088288324 MAIL ADDRESS: STREET 1: 30 NORTH LASALLE STREE SUITE 400 CITY: CHICAGO STATE: IL ZIP: 60602 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC STOCK OPTION PLANS DATE OF NAME CHANGE: 19741118 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC DATE OF NAME CHANGE: 19740509 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 ------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- --------------- Commission File Number 1-8251 - ------------------------------------------------------------------------------- TELEPHONE AND DATA SYSTEMS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Iowa 36-2669023 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30 North LaSalle Street, Chicago, Illinois 60602 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-1900 Not Applicable (Former address of principal executive offices) (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x/ No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 1995 Common Shares, $1 par value 51,091,104 Shares Series A Common Shares, $1 par value 6,888,480 Shares - ------------------------------------------------------------------------------- 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 2-21 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1995 and 1994 22 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1995 and 1994 23 Consolidated Balance Sheets - September 30, 1995 and December 31, 1994 24-25 Notes to Consolidated Financial Statements 26-28 Part II Other Information 29 Signatures 30 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 9/30/95 Compared to Nine Months Ended 9/30/94 CONSOLIDATED Telephone and Data Systems, Inc.'s ("TDS" or the "Company") consolidated results of operations for the first nine months of 1995 reflect: o rapid growth in cellular customer units which resulted in a substantial increase in revenues, improved cash flow and operating results, o steady growth in telephone access lines and revenues, o slower growth in pagers served and significantly higher operating costs in the paging business unit, o significant gains and cash proceeds from sales and trades of non-strategic cellular assets and marketable securities, o increases in interest and income tax expense and o an increase in weighted average shares outstanding due to the Company's continuing acquisition program. Operating revenues grew 33% to $698.6 million in the first nine months of 1995 over 1994, operating cash flow increased 26% to $243.3 million and operating income rose 24% to $103.5 million. Gains on sales of cellular interests and other investments of $79.7 million ($39.8 million after income taxes and USM's minority share) were recognized in 1995. Net income available to common rose 119% to 86.9 million in the first nine months of 1995 over 1994. Earnings per share grew 101% to $1.49 in 1995 over 1994, reflecting the significantly improved operating results and the gains on sales of cellular interests, offset somewhat by a 10% increase in weighted average common shares. On a comparable basis, excluding the gains on sales in 1995 and a $1.5 million insurance refund (net of income taxes and USM's minority share) in 1994, net income available to common increased 21% to $47.1 million and earnings per share rose 9% to $.81. United States Cellular Corporation (AMEX symbol "USM"), TDS's 80.8%-owned subsidiary, has added a net of 14 markets to consolidated operations since September 30, 1994, through acquisitions, divestitures and the initiation of cellular operations. USM currently provides cellular service to 618,000 customers in 138 majority-owned and managed markets. TDS Telecommunications Corporation ("TDS Telecom"), TDS's wholly owned subsidiary, has acquired five telephone companies since September 30, 1994. These acquisitions added 16,100 access lines while internal growth added 20,900 lines. TDS Telecom currently operates 100 telephone companies serving 422,000 access lines. American Paging, Inc. (AMEX symbol "APP"), TDS's 82.4%-owned subsidiary, has acquired two paging companies since September 30, 1994, which added approximately 54,200 pagers. APP provides service to 776,900 customers through 37 sales and service operating centers. -2- In March 1995, American Portable Telecom, Inc. ("APT"), TDS's wholly owned subsidiary, was the successful bidder for eight broadband Personal Communications Services ("PCS") licenses. The eight 30 megahertz PCS licenses cover the Major Trading Areas of Minneapolis-St. Paul, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City, Columbus, Alaska and Guam-N. Mariana Islands, and account for 27.9 million population equivalents. APT is in the process of building its management and operating team to develop and construct APT's PCS systems in its major markets. Recently, APT announced the selection of GSM "PCS-1900" as its choice of technology for its PCS network. Operating revenues grew 33% ($173.1 million) in 1995 primarily as a result of the growth in customers served. Cellular telephone revenues increased as a result of the 70% customer growth in majority-owned and managed markets as well as the increased use of USM's systems by customers of other systems while roaming. This customer growth resulted in increased local retail and access revenue, offset somewhat by an 8% decline in average monthly service revenue per customer. Telephone revenues increased primarily due to acquisitions and internal access line growth. Radio paging revenues increased primarily as a result of the 34% growth in the number of pagers in service, offset somewhat by changes in distribution channel mix and pricing declines within the distribution channels which resulted in a 12% decline in average monthly service revenue per unit. Operating expenses rose 35% ($153.2 million) in 1995 as a result of the continued rapid growth in USM's operations and the steady growth in TDS Telecom's operations and significantly higher operating costs in APP's operations. USM's operating expense increase reflects the additional marketing and selling expenses incurred to add new customers as well as the costs of providing services to the increased customer base. Telephone operating expenses increased due to the effects of acquisitions and growth in internal operations. APP expenses increased due to additional costs to serve current customers and to add new customers as well as costs associated with the planned restructuring of its operations. Operating income increased 24% to $103.5 million in the first nine months of 1995 from $83.6 million in 1994. The increase in operating income reflects primarily improved operating results in the cellular telephone business unit, as shown in the following table. Nine Months Ended September 30, ------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands) CONSOLIDATED OPERATING INCOME Cellular Telephone Operations $ 36,883 $ 15,614 $ 21,269 Telephone Operations 73,036 67,513 5,523 Radio Paging Operations (6,378) 485 (6,863) --------- --------- --------- $ 103,541 $ 83,612 $ 19,929 Operating Margins: ========= ========= ========= Cellular Telephone* 11% 7% Telephone 28% 31% Radio Paging* (9%) 1% * Computed on Service Revenues Management anticipates increasing growth in cellular and paging units in service and revenues as USM and APP continue their expansion and development programs. Marketing and system operations expenses associated with this rapid expansion may reduce the rate of growth in operating cash flow and operating income over the next several quarters. -3- Additionally, management believes there exists a seasonality at USM in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth. This seasonality may cause operating income to vary from quarter to quarter. Investment and other income increased to $93.5 million in 1995 from $20.4 million in 1994. Cellular investment income, net increased $9.4 million to $29.1 million, reflecting improvement in USM's equity method markets. Gain on sale of cellular interests and other investments was $79.7 million in the first nine months of 1995. USM recognized $77.7 million in gains on the sale of five majority-owned markets, four minority interests and various marketable equity securities. TDS Telecom recognized gains of $2.1 million as a result of the sale of two minority cellular interests held by one of its telephone subsidiaries and the sale of marketable equity securities. Minority share of income increased $12.9 million in the first nine months of 1995 over 1994, as shown in the table below. Minority share of (income) loss includes (a) the minority shareholders' share of USM's net income, (b) the minority partners' share of income or loss of the cellular markets majority-owned by USM, (c) the minority shareholders' share of income of a telephone company majority-owned by TDS and (d) the minority shareholders' share of APP's loss. The minority shareholders' share of USM's net income increased $12.5 million in the first nine months of 1995 over 1994 due to the improvement in USM's operating results and gains on the sale of cellular interests and other investments. MINORITY SHARE OF (INCOME) LOSS Nine Months Ended September 30, ------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands) United States Cellular Minority Shareholders' Share $(15,251) $ (2,743) $(12,508) Minority Partners' Share (5,713) (3,680) (2,033) -------- -------- -------- (20,964) (6,423) (14,541) TDS Telecom (1,506) (1,072) (434) American Paging 2,050 -- 2,050 -------- -------- -------- $(20,420) $ (7,495) $(12,925) ======== ======== ======== Interest expense increased 36% ($10.4 million) in 1995. Interest on long-term debt increased 33% ($9.0 million) in 1995 compared to 1994. Long-term debt outstanding increased to $895.1 million as of September 30, 1995 from $545.9 million as of September 30, 1994 due in part to the completion of convertible debt financing at USM. The Company's balance of short-term notes payable increased to $147.3 million in 1995 from $79.9 million in 1994, resulting in an increase in short-term interest expense of $1.5 million in the first nine months of 1995 compared with the first nine months of 1994. Interest expense would have been greater but, the Company capitalized interest on the debt incurred to finance the broadband PCS licenses of APT. As of September 30, 1995, TDS has capitalized a total of $6.5 million of interest charges on debt with an average interest rate of approximately 7.4%. Income tax expense increased 110% ($36.3 million) in 1995 compared with 1994 as pretax income increased. The effective income tax rate was 44% in the first nine months of 1995 and 1994. -4- Net income before the cumulative effect of a change in accounting principle improved to $88.4 million in 1995 from $42.2 million in 1994. Earnings per common share before the cumulative effect of a change in accounting principle were $1.49 in 1995 and $.75 in 1994. The weighted average number of common shares outstanding increased 10% in 1995. The increase is primarily due to the issuance of 3.2 million Common Shares since September 30, 1994 in connection with acquisitions. Cumulative effect of accounting change: Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of the new principle on years prior to 1994 reduced 1994 net income and earnings per share by $723,000 and $.01, respectively. -5- CELLULAR TELEPHONE OPERATIONS Nine Months Ended September 30, ----------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands, except per unit amounts) Operating Revenues Service $ 344,454 $ 227,101 $ 117,353 Equipment Sales 10,985 9,715 1,270 -------- -------- -------- 355,439 236,816 118,623 -------- -------- -------- Operating Expenses System Operations 52,413 33,890 18,523 Marketing and Selling 69,204 46,089 23,115 Cost of Equipment Sold 38,393 25,847 12,546 General and Administrative 94,271 68,258 26,013 Depreciation 40,595 28,192 12,403 Amortization 23,680 18,926 4,754 -------- --------- ---------- 318,556 221,202 97,354 -------- --------- ---------- Operating Income $ 36,883 $ 15,614 $ 21,269 ======== ========= ========== Cellular Telephone Revenues as a Percent of Total Revenues 51% 45% Additions to Property, Plant and Equipment* $ 162,142 $ 110,644 Identifiable Assets $1,833,984 $1,532,912 Majority-Owned, Managed and Consolidated Markets: Population equivalents (000s) 19,911 19,048 Total population (000s) 22,210 20,531 Customers 618,000 364,000 Market penetration 2.78% 1.77% Markets in operation 138 124 Cell sites 1n service 1,041 686 Average monthly service revenue per customer $ 75 $ 81 Churn rate per month 2.0% 2.2% Marketing cost per net customer addition $ 586 $ 676 * Includes (in thousands) $(1,278) and $(6,489), respectively, of unpaid amounts for current year additions less cash amounts paid in the current year for prior year additions. USM owns, operates and invests in cellular markets. USM owns or has the right to acquire interests, both majority and minority, in 203 cellular telephone markets at September 30, 1995, representing 24.6 million population equivalents. USM manages the operations in 149 markets at September 30, 1995. USM expects to divest its controlling interests in seven of these markets and manage the operations of one additional market in the future. In total, USM expects to manage 143 markets under agreements in place as of September 30, 1995. The remaining interests in 60 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 138 markets are included in 1995 consolidated results compared to 124 markets in 1994. Operating revenues increased 50% ($118.6 million) in 1995. The revenue increase is primarily the result of 70% customer growth in the systems serving its majority-owned and managed markets, growth in roaming revenues and acquisitions. Acquisitions increased -6- revenues 13% ($30.3 million). 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 revenue per customer declined to $75 in 1995 from $81 in 1994. The 8% decrease in average monthly service revenue per customer in 1995 was primarily a result of the decline in average local minutes of use per customer and a decrease in per customer inbound roaming revenue. Monthly local minutes of use averaged 93 in the first nine months of 1995 compared to 97 in the same period in 1994. 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 customers in a market to be the heaviest users. It also reflects USM's and the cellular industry's continued penetration of the consumer market, which tends to include more lower-usage customers. Management anticipates that average local minutes of use and average monthly service revenue per customer will continue to decline as USM adds more customers. Service revenues from local customers' usage of USM's systems increased 55% ($74.0 million) in 1995. 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 $45 in 1995 from $48 in 1994. Inbound roaming revenues, earned when customers of other systems use USM's cellular systems when roaming, increased 45% ($34.0 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 inbound roaming revenue per customer averaged $24 in 1995 and $27 in 1994. Long-distance revenues increased 51% ($8.4 million) as the volume of long-distance calls billed by USM increased. Equipment sales revenue reflects the sale of 191,900 and 98,200 cellular telephone units in 1995 and 1994, respectively, plus installation and accessories revenue. The average revenue per telephone unit sold was $57 in 1995 compared to $99 in 1994. The average revenue decline reflects USM's decision to reduce sales prices on cellular telephones to increase the number of customers, to maintain its market position and to meet competitive prices as well as reduced manufacturers' prices. Operating expenses increased 44% ($97.4 million) in 1995. 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 increased operating expenses 11% ($23.9 million) in 1995. System operations expenses increased 55% ($18.5 million) in 1995 as a result of increases in customer usage expenses and costs associated with operating USM's cellular systems. Customer usage expenses represent charges from other telecommunications service providers for local interconnection to the landline network, toll charges and roaming expenses from USM's customers' use of systems other than their local systems, offset somewhat by increased pass-through roaming revenue. Customer usage expenses increased 72% ($10.7 million) in 1995 reflecting higher utilization of services. Maintenance, utility and cell site expenses grew 41% ($7.8 million) in 1995, reflecting growth in the number of cells to 1,041 in 1995 from 686 in 1994 and the effects of acquisitions. Marketing and selling expenses increased 50% ($23.1 million) in 1995, due primarily to the increased number of gross customer activations in 1995 and the effects of acquisitions. -7- 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 offset somewhat by falling manufacturers' prices. The average cost of a telephone unit sold was $200 in 1995 compared to $263 in 1994. General and administrative expenses increased 38% ($26.0 million) in 1995. These expenses include the costs of operating USM's local business offices and its corporate expenses. The increase results from the growth in the number of consolidated markets, the growth in the customer base in existing markets and an expansion of both local administrative office and corporate staff, necessitated by growth in USM's business and the acquisition of additional operations. USM is using an ongoing clustering strategy to combine local operations wherever feasible in order to gain operational efficiencies and reduce its administrative expenses. Depreciation expense increased 44% ($12.4 million) in 1995, reflecting a 52% increase in average fixed assets since September 30, 1994. Amortization expense, primarily amortization of license costs, increased 25% ($4.8 million) in 1995. This additional amortization reflects a 2% ($22.7 million) increase in license costs for operational consolidated markets since September 30, 1994. Operating income was $36.9 million in 1995 compared to $15.6 million in 1994. Operating margin on service revenues improved to 11% in 1995 from 7% in 1994. The increase in operating income reflects 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. USM expects to divest a net of five markets from consolidated operations by mid-1996, through the acquisition of majority interests in two operational markets and the divestiture of seven markets currently majority-owned and managed by USM. Cellular investment income includes USM's and TDS's share of the net income or loss of cellular markets in which they have a minority interest and for which they follow the equity method of accounting, net of amortization of license costs related to these minority interests. Cellular investment income increased 48% ($9.4 million) in 1995, due to improved results in markets managed by others. Net income from cellular telephone operations was $64.7 million in 1995 compared to $12.4 million in 1994. The 1995 improvement resulted from the gains on sales of cellular interests, improved operating results and increased investment income. Net income from cellular telephone operations excludes the USM minority shareholders' share of such income. USM is included in a consolidated federal income tax return with other members of the TDS consolidated group. 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 67,052,931 shares of common stock of USM at September 30, 1995, representing 80.8% of the combined total of USM's outstanding Common and Series -8- A Common Shares and 95.8% of their combined voting power. Assuming USM's Common Shares are issued in all instances in which USM has the choice to issue its Common Shares or other consideration and assuming all issuances of USM's common stock to TDS and third parties for completed and pending acquisitions and redemptions of USM Preferred Stock and TDS Preferred Shares had been completed at September 30, 1995, TDS would have owned 80.1% of the total outstanding common stock of USM and controlled 95.6% of the combined voting power of both classes of its common stock. In addition, USM has issued debt which may be converted into USM Common Shares. The conversion of such debt would also reduce TDS's equity ownership and voting control of USM. 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 tax purposes. If this occurs, TDS would lose the ability to offset any tax losses against the taxable income of USM and its subsidiaries and certain other benefits which the tax consolidation of TDS and USM permits. TDS and USM have structured certain acquisition transactions involving the issuance of USM Common Shares to permit delivery of TDS Common Shares and/or cash in lieu of USM Common Shares. In addition, at the election of USM, any conversion of the convertible debt issued by USM may be satisfied by the payment of cash equal to the value of the USM Common Shares issuable at the time of conversion. These and other arrangements are designed to permit TDS and USM to defer a tax deconsolidation. Nevertheless, the continued issuance of USM Common Shares to parties other than TDS may eventually result in the tax deconsolidation of TDS and USM unless other actions are taken to defer or prevent such a deconsolidation. -9- TELEPHONE OPERATIONS Nine Months Ended September 30, -------------------------------- Change Change Due To Excluding Acquis- Acquis- 1995 1994 Change itions itions ---- ---- ------ --------- --------- (Dollars in thousands, except per access line amounts) Operating Revenues Local Service $ 70,461 $ 60,711 $ 9,750 $ 3,836 $ 5,914 Network Access and Long-Distance 160,816 130,672 30,144 22,393 7,751 Miscellaneous 31,532 29,938 1,594 955 639 --------- -------- -------- -------- -------- 262,809 221,321 41,488 27,184 14,304 --------- -------- -------- -------- -------- Operating Expenses Network Operations 50,669 35,887 14,782 11,245 3,537 Customer Operations 35,948 31,595 4,353 2,666 1,687 Corporate and Other 45,567 36,397 9,170 5,010 4,160 Depreciation 53,558 47,141 6,417 3,702 2,715 Amortization 4,031 2,788 1,243 282 961 --------- -------- -------- -------- -------- 189,773 153,808 35,965 22,905 13,060 --------- -------- -------- -------- -------- Operating Income $ 73,036 $ 67,513 $ 5,523 $ 4,279 $ 1,244 ========= ======== ======== ======== ======== Telephone Revenues as a Percent of Total Revenues 38% 42% Additions to Property, Plant and Equipment* $ 65,839 $ 72,463 Identifiable Assets $1,022,439 $938,730 Companies 100 95 Access Lines 422,000 385,000 Growth in access lines for nine months: Acquisitions 12,900 16,500 Internal growth 16,600 12,300 Average monthly revenue per acccss line $ 72 $ 68 * Includes (in thousands) $(8,907) and $(3,430), respectively, of unpaid amounts for current year additions less cash amounts paid in the current year for prior year additions. Operating revenues from telephone operations increased 19% ($41.5 million) in the first nine months of 1995 compared to 1994. The increase in revenues was primarily due to the effects of acquisitions, internal access line growth and recovery of increased costs of providing network access to long-distance providers. Acquisitions increased telephone revenues 12% ($27.2 million) in 1995. TDS has acquired five telephone companies serving 16,100 access lines since September 30, 1994. Telephone results of operations include the results of those companies acquired since their respective dates of acquisition. Local service revenues increased 16% ($9.8 million) in 1995 with acquisitions increasing such revenues 6% ($3.8 million). Internal access line growth and sales of custom-calling and other features increased revenues 7% ($4.1 million). Certain extended community calling -10- ("ECC") revenues and extended area service revenues previously reported as network access revenues increased local service revenues 3% ($1.7 million). Network access and long-distance revenues increased 23% ($30.1 million) in 1995 with acquisitions increasing such revenues 17% ($22.4 million). These revenues increased 3% ($4.2 million) due to recovery of increased costs of providing access to long-distance carriers. Increased usage of the network generated 3% ($3.5 million) of additional network access and long-distance revenue. Settlements received from toll pools relating to prior years' activity increased these revenues 1% ($1.1 million). These revenues decreased 1% ($1.6 million) in 1995 as certain ECC revenues are now reported as local service revenues. Miscellaneous revenues increased 5% ($1.6 million) in 1995, with acquisitions increasing such revenues 3% ($1.0 million). Higher sales and leases of customer premise equipment increased these miscellaneous revenues 2% ($540,000). Operating expenses increased 23% ($36.0 million) in 1995. The effects of acquisitions increased expenses 15% ($22.9 million). Network operations expenses increased 41% ($14.8 million) with acquisitions increasing these expenses 31% ($11.2 million). Customer operations expenses increased 14% ($4.4 million) with acquisitions increasing such expenses 8% ($2.7 million). Corporate and other expenses increased 25% ($9.2 million) with acquisitions increasing such expenses 14% ($5.0 million). The remainder of the increases were due primarily to increases in wages, staffing levels and general inflation. Depreciation expense increased 14% ($6.4 million) with acquisitions increasing such expenses 8% ($3.7 million). The remaining increase was due primarily to increases in plant facilities. Operating income from telephone operations increased 8% ($5.5 million) in 1995, with acquisitions increasing such income 6% ($4.3 million). The telephone operating margin was 28% in 1995 compared to 31% in 1994. The 1995 operating margin was reduced to 28% by both the acquisition of a long-distance company in August of 1994 which produces lower margins than the local telephone operations and earnings pressures from regulatory agencies and long-distance providers. The operating margin in the remainder of 1995 is anticipated to continue to be lower than in 1994 for the same reasons. -11- RADIO PAGING OPERATIONS Nine Months Ended September 30, ------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands, except per unit amounts) Service Operations Revenue $ 69,212 $ 56,451 $ 12,761 -------- --------- --------- Costs and Expenses Cost of Services 17,477 13,865 3,612 Selling and Advertising 11,923 9,713 2,210 General and Administrative 28,254 20,397 7,857 Depreciation 14,996 10,333 4,663 Amortization 2,917 1,822 1,095 -------- --------- --------- 75,567 56,130 19,437 -------- --------- --------- Service Operating (Loss) Income (6,355) 321 (6,676) -------- --------- --------- Equipment Sales Revenue 11,114 10,904 210 Cost of Equipment Sold 11,137 10,740 397 -------- --------- --------- Equipment Sales (Loss) Income (23) 164 (187) -------- --------- --------- Operating (Loss) Income $ (6,378) $ 485 $ (6,863) ======== ========= ========= Radio Paging Revenues as a Percent of Total Revenues 11% 13% Additions to Property and Equipment* $ 19,703 $ 21,095 Identifiable Assets $152,841 $ 81,596 Pagers in service 776,900 578,400 Average monthly service revenue per unit $ 11 $ 12 Transmitters in service 1,012 888 Disconnect rate per month 2.5% 2.7% Marketing cost per net customer unit addition $ 113 $ 84 * Includes (in thousands) $(528) and $(1,227), respectively, of unpaid amounts for current year additions less cash amounts paid in the current year for prior year additions. Service revenues increased 23% ($12.8 million) in the first nine months of 1995 from 1994, primarily as a result of the 34% growth in the number of pagers in service. A net additional 198,500 pagers have been placed in service since September 30, 1994. However, a continuing shift toward lower revenue producing distribution channels such as resellers and retail stores as well as competitive factors has slowed service revenue growth. Average monthly service revenue per pager declined 12% to $11 in the first nine months of 1995 from $12 in the same period of 1994. Of the decline, 8% was due to a change in distribution channel mix and 4% was due to pricing declines within the distribution channels. Service operating expenses increased 35% ($19.4 million) in 1995 from 1994, primarily to serve the expanded customer base as well as to increase system capacity and geographic coverage. APP also recorded $2.2 million in restructure charges related to the planned consolidation of the administrative functions of its 17 operating centers into one location which is expected to continue into 1996. The expense includes charges related to the subleasing excess office space it will be vacating, employee severance and related costs and accelerated depreciation charges. Cost of services increased 26% ($3.6 million) in 1995 reflecting the additional costs of providing service to the increased customer base as well as the costs of upgrading and expanding the systems to improve system reliability and coverage ($3.0 million). APP's transmitters in service increased to 1,012 at September 30, 1995 from 888 at September 30, 1994. Selling and advertising expense increased 23% ($2.2 million) in 1995 over 1994 primarily to support reseller and direct marketing programs which failed to produce planned -12- customer growth. General and administrative expense increased 39% ($7.9 million) due primarily to increases in general office expenses and employee-related expenses to support the increased customer base ($3.5 million), bad debt expenses ($1.5 million) and a portion of the restructure charges ($1.8 million). Depreciation charges increased 45% ($4.7 million) in 1995 reflecting increase due to the increased investment in pagers and related equipment, an increase of approximately $1.7 million in depreciation expense due to the change in depreciable lives of pagers and transmitters that occurred July 1, 1994, and $450,000 of accelerated depreciation on certain assets to be removed from service as a result of the restructuring. Operating loss was $6.4 million in 1995 compared to operating income of $485,000 in 1994. The decrease in operating results reflects i) a continuing decline in average monthly service revenue per unit and ii) increased operating expenses due to the growth in customers, efforts to expand the customer base, the restructuring charges, increased bad debts from the consumer market and increased depreciation charges. Management expects slower unit and revenue growth through the initial stages of the restructuring period as a result of refocusing the sales force on direct sales and the retraining of customer service representatives. Net loss from radio paging operations totalled $9.6 million in 1995 compared with $351,000 in 1994. The 1995 increase relates to the increase in operating loss and the increase in APP's interest expense of $3.9 million, the majority of which is related to borrowings for the purchase of five narrowband PCS licenses. -13- PARENT AND SERVICE COMPANY OPERATIONS Other income, net includes the gross income of TDS's computer, printing and other service companies and costs of corporate operations including APT. Nine Months Ended September 30, ------------------ 1995 1994 ---- ---- (Dollars in thousands) Additions to Property and Equipment* $ 9,489 $ 5,716 Identifiable Assets** $391,362 $81,702 * Includes (in thousands) $239 and $(175), respectively, of unpaid amounts for current year additions less cash amounts paid in the current year for prior year additions. ** Includes PCS license cost of $295.7 million in 1995. Three Months Ended 9/30/95 Compared to Three Months Ended 9/30/94 CONSOLIDATED Operating revenues grew 33% ($63.4 million) in the third quarter of 1995 primarily as a result of the growth in customers served. Operating expenses rose 34% ($55.1 million) in 1995 as a result of the continued rapid growth in USM's operations and the steady growth in TDS Telecom's and APP's operations. Operating income increased 26% to $40.6 million in the third quarter of 1995 from $32.3 million in 1994. The increase in operating income principally reflects improved operating results in the cellular telephone business unit. Three Months Ended September 30, -------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands) CONSOLIDATED OPERATING INCOME Cellular Telephone Operations $ 17,967 $ 11,095 $ 6,872 Telephone Operations 24,932 21,941 2,991 Radio Paging Operations (2,339) (733) (1,606) -------- -------- -------- $ 40,560 $ 32,303 $ 8,257 ======== ======== ======== Operating Margins: Cellular Telephone* 13% 13% Telephone 28% 27% Radio Paging* (10%) (4)% * Computed on Service Revenues Investment and other income increased $38.4 million in the third quarter of 1995 over 1994. Cellular investment income increased 26% ($2.3 million), reflecting improvement in USM's equity-method markets managed by others. Gain on sale of cellular interests and other investments was $43.4 million in the third quarter of 1995. Minority share of income increased $4.4 million as shown in the table below. Minority share of income includes (a) the minority shareholders' share of USM's net income (b) the minority partners' share of income or loss of the cellular markets majority-owned by USM, (c) the minority shareholders' share of income of a telephone company majority-owned by TDS and (d) the minority shareholders' share of APP's loss. -14- MINORITY SHARE OF (INCOME) LOSS Three Months Ended September 30, -------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands) United States Cellular Minority Shareholders' Share $(6,185) $(2,000) $(4,185) Minority Partners' Share (1,950) (1,366) (584) ------- ------- ------- (8,135) (3,366) (4,769) TDS Telecom (695) (244) (451) American Paging 865 -- 865 ------- ------- ------- $(7,965) $(3,610) $(4,355) ======= ======= ======= Interest expense increased 20% ($2.1 million) in 1995, primarily reflecting increases in long-term and short-term debt. Interest expense would have been greater but, the Company capitalized interest on the debt incurred to finance the broadband PCS licenses of APT. As of September 30, 1995, TDS has capitalized a total of $6.5 million of interest charges on debt with an average interest rate of approximately 7.4%. Income tax expense increased 142% ($19.6 million) in 1995 compared with 1994 as pretax income increased. The effective income tax rate was 44% in the third quarter of 1995 and 1994. Net income increased to $42.6 million in the third quarter of 1995 from $17.6 million in 1994. Earnings per common share were $.72 in 1995 and $.31 in 1994. The weighted average number of common shares outstanding increased 9% in 1995. On a comparable basis, excluding nonrecurring and unusual items, net income available to common increased 25% to $21.3 million and earnings per share rose 16% to $.36. CELLULAR TELEPHONE OPERATIONS Three Months Ended September 30, -------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands) Operating Revenues Service $134,554 $86,675 $47,879 Equipment Sales 4,013 3,251 762 -------- ------- ------- 138,567 89,926 48,641 -------- ------- ------- Operating Expenses System Operations 21,972 12,086 9,886 Marketing and Selling 25,571 16,058 9,513 Cost of Equipment Sold 14,356 8,826 5,530 General and Administrative 35,131 25,052 10,079 Depreciation 15,143 10,050 5,093 Amortization 8,427 6,759 1,668 -------- ------- ------- 120,600 78,831 41,769 -------- ------- ------- Operating Income $ 17,967 $11,095 $ 6,872 ======== ======= ======= Operating revenues increased 54% ($48.6 million) in the third quarter of 1995. The revenue increase is primarily the result of 70% customer growth in the systems serving USM's majority-owned and managed markets, growth in roamer revenues and the effects of acquisitions. Average monthly service revenue per customer declined to $77 in 1995 from $83 -15- in 1994. Monthly local minutes of use averaged 97 in the third quarter of 1995 compared to 99 in 1994. Revenues from local customers' usage of USM's systems increased 63% ($30.8 million) in 1995 primarily due to the increased number of customers served. Inbound roaming revenues increased 47% ($14.1 million) in 1995. The increase in inbound roaming 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 54% ($3.6 million) as the volume of long-distance calls billed by USM increased. Equipment sales revenue reflects the sale of 72,500 and 35,100 cellular telephone units in 1995 and 1994, respectively. The average revenue per telephone unit sold was $55 in 1995 compared to $93 in 1994. Operating expenses increased 53% ($41.8 million) in the third quarter of 1995 for reasons generally the same as for the first nine months. Operating income was $18.0 million in 1995 compared to $11.1 million in 1994. Operating margin on service revenues remained relatively stable at 13%. The improvement in operating income was primarily due to increased revenues from growth in the number of customers served, partially offset by the costs associated with the growth of USM's operations and the addition of new markets. Cellular investment income increased 26% ($2.3 million) in the third quarter of 1995, due to improved results in markets managed by others. Net income from cellular telephone operations was $26.1 million in 1995 compared to $8.9 million in 1994. Net income from cellular telephone operations excludes the USM minority shareholders' share of such income. USM is included in a consolidated federal income tax return with other members of the TDS consolidated group. 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. -16- TELEPHONE OPERATIONS Three Months Ended September 30, -------------------------------- Change Change Due To Excluding 1995 1994 Change Acquisitions Acquisitions ---- ---- ------ ------------ ------------ (Dollars in thousands) Operating Revenues Local Service $ 24,070 $21,213 $ 2,857 $ 1,100 $ 1,757 Network Access and Long-Distance 55,515 48,372 7,143 4,345 2,798 Miscellaneous 10,813 10,388 425 348 77 ------ ------ ------- ------- ------- 90,398 79,973 10,425 5,793 4,632 Operating Expenses ------ ------- ------- ------- ------- Network Operations 17,831 14,187 3,644 2,025 1,619 Customer Operations 11,927 11,311 616 678 (62) Corporate and Other 16,214 13,700 2,514 1,271 1,243 Depreciation 18,098 17,845 253 857 (604) Amortization 1,396 989 407 44 363 ------- ------- ------- ------- ------- 65,466 58,032 7,434 4,875 2,559 ------- ------- ------- ------- ------- Operating Income $24,932 $21,941 $ 2,991 $ 918 $ 2,073 ======= ======= ======= ======= ======= Operating revenues from telephone operations increased 13% ($10.4 million) in the third quarter of 1995 compared to 1994. 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 13% ($2.9 million) in 1995, network access and long-distance revenues increased 15% ($7.1 million), and miscellaneous revenues increased 4% ($425,000) for reasons generally the same as for the first nine months. Operating expenses increased 13% ($7.4 million) in 1995, for reasons generally the same as for the first nine months. RADIO PAGING OPERATIONS Three Months Ended September 30, -------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands) Service Operations Revenues $ 24,109 $ 19,488 $ 4,621 --------- -------- -------- Costs and Expenses Cost of Services 6,052 5,196 856 Selling and Advertising 3,472 3,615 (143) General and Administrative 10,171 6,913 3,258 Depreciation 5,608 3,971 1,637 Amortization 1,021 618 403 --------- -------- -------- 26,324 20,313 6,011 --------- -------- --------- Service Operating Loss (2,215) (825) (1,390) --------- -------- -------- Equipment Sales Revenue 3,434 3,718 (284) Cost of Equipment Sold 3,558 3,626 (68) -------- -------- -------- Equipment Sales (Loss) Income (124) 92 (216) -------- -------- -------- Operating $ (2,339) $ (733) $ (1,606) ======== ======== ======== -17- Service revenues increased 24% ($4.6 million) in the third quarter of 1995 from 1994, primarily as a result of the 34% growth in the number of pagers in service. Service operating expenses increased 30% ($6.0 million) in 1995 from 1994, $2.2 million of which was due to the restructuring charges recorded in the third quarter. The remaining increase is primarily due to the same reasons as the first nine months. Operating loss was $2.3 million in 1995 compared to $733,000 in 1994. Net loss from radio paging operations totalled $4.0 million in 1995 compared to $573,000 in 1994. FINANCIAL RESOURCES AND LIQUIDITY Cash flows from operating activities totalled $159.1 million in the first nine months of 1995 compared to $158.3 million in 1994. Consolidated operating cash flow (operating income plus depreciation and amortization) totalled $243.3 million in 1995 compared to $192.8 million in 1994. The 26% increase in operating cash flow reflects primarily improved operating cash flow in cellular telephone operations. Nine Months Ended September 30, ------------------------------- 1995 1994 Change ---- ---- ------ (Dollars in thousands) OPERATING CASH FLOW Cellular Telephone Operations $101,158 $ 62,732 $ 38,426 Telephone Operations 130,625 117,442 13,183 Radio Paging Operations 11,535 12,640 (1,105) -------- -------- -------- $243,318 $192,814 $ 50,504 ======== ======== ======== 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 $84.2 million in the first nine months of 1995 compared to $34.5 million in the first nine months of 1994. Cash flows from financing activities totalled $342.7 million in the first nine months of 1995 compared to $107.1 million in 1994. Long-term borrowings, primarily the convertible debt financing completed at USM and USM's vendor financing arrangements used to construct cell sites, provided most of the Company's external financial requirements during the first nine months of 1995. Sales of common stock by TDS and APP and short-term borrowings provided most of the Company's external financing requirements during the first nine months of 1994. 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 $476.4 million in the first nine months of 1995 compared to $260.3 million in 1994. In the first nine months of 1995, $319.0 million was paid for the acquisition and development of broadband and narrowband PCS licenses. The remaining cash requirements primarily consisted of additions to property, plant and equipment and acquisitions offset somewhat by the proceeds on the sale of non-strategic cellular assets. PCS Development APT's successful bid commitment totalled $289.2 million for the eight broadband PCS licenses, or $10.35 per population equivalent. Management anticipates that initial construction -18- will begin in late 1995 or early 1996 following detailed engineering and site procurement. Marketing and selling activities along with commercial operations are anticipated to commence in late 1996 or early 1997. APT anticipates that construction, development and introduction of PCS networks and services will require substantial capital and operating expenditures over the next several years. While construction (including microwave relocation), start-up and market development activities may be impacted by many factors, APT estimates that between now and the year 2000, it will need approximately $500-550 million for capital expenditures and $180-200 million for working capital, start-up costs and market development activities. TDS anticipates that start-up and development of high-quality networks and the marketing of systems in APT's major markets may reduce the rate of growth in TDS's operating and net income from levels which would otherwise be achieved during 1995 and future years. TDS plans to finance APT's 1995 and 1996 capital and operating expenditures using a variety of resources, including, but not limited to, internally generated cash, vendor financing and equity investors in APT. USM recently received approximately $221 million in net proceeds from the sale of convertible debt securities, of which $208.4 million was used to repay its borrowings from TDS. TDS and USM have also arranged sales of non-strategic cellular and other assets involving estimated total proceeds of more than $175 million, of which approximately $145 million have been completed. In addition, TDS has a $300 million short-term credit facility to provide the interim funding needed until the long-term funding activities mentioned above are completed. APP was the successful bidder in 1994 for five regional narrowband PCS licenses, providing equivalent coverage to that of a nationwide license, at auction by the Federal Communications Commission ("FCC"). APP's bids for the licenses, aggregating $53.6 million, have been paid. APP is currently evaluating several uses for the licenses. APP does not intend to begin deploying PCS services until 1996 and does not believe that it will incur significant additional capital spending in 1995 related to these licenses. However, significant funds will be required when APP begins expanding its infrastructure to accommodate the services that these licenses will allow. Property, Plant and Equipment Additions to cellular telephone plant and equipment totalled $162.1 million for the first nine months of 1995. Management expects such cellular telephone expenditures during 1995 to total about $180 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 internally generated cash flow, the Company's short-term bank financing and vendor financing. Additions to telephone plant and equipment totalled $65.8 million for the first nine months of 1995. Management expects that plant and equipment additions will total about $110 million in 1995, exclusive of acquisitions. This construction budget includes $37 million for new digital switches and $54 million for outside plant upgrades such as the installation of fiber optic cables. The Company plans to finance its telephone construction programs primarily using internally generated funds supplemented by long-term financing obtained under federal government programs. -19- Additions to radio paging property and equipment totalled $19.7 million for the first nine months of 1995. Management expects that such property and equipment additions will total about $30 million in 1995, 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 $9.5 million for the first nine months of 1995. Management expects that these additions will total about $25 million in 1995 and will be financed primarily using short-term bank notes along with internally generated cash. Acquisitions and Divestitures Cash flows used for acquisitions, net of cash acquired, totalled $48.9 million in the first nine months of 1995 compared to $25.3 million in 1994. During the first nine months of 1995, TDS purchased controlling interests in ten cellular markets and several minority cellular interests representing a total of 1.4 million population equivalents and four telephone companies. The aggregate consideration for the acquisitions completed in 1995 was $179.1 million, consisting of 2.8 million TDS Common Shares ($121.9 million), $44.6 million in cash and 417,000 USM Common Shares ($12.6 million). TDS's acquisition program may require external financing during the remainder of 1995. TDS and APP had agreements pending at September 30, 1995, to acquire controlling interests in two telephone companies and one paging company, respectively. At September 30, 1995, USM had agreements pending to acquire a controlling interest in one market and to exchange a controlling interest in one market for a controlling interest in another market. 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. USM sold its majority interests in five markets, its minority interests in four markets and various marketable securities while TDS Telecom sold two minority interests held by one of its telephone subsidiaries and various marketable securities for aggregate cash proceeds of $147.6 million. At September 30, 1995, USM had agreements pending to divest controlling interests in six other markets and to settle litigation related to an investment interest which was divested earlier in 1995. Pursuant to the divestiture agreements, USM will divest 612,000 population equivalents and receive $104.7 million in cash. Management believes the acquisitions and exchanges currently pending will enhance USM's clustering strategy by divesting markets which are less strategic for cash or markets which add to its current clusters. All of the pending exchange, acquisition, divestiture and litigation settlement agreements discussed above are expected to be completed by mid-1996. Certain of the divestitures and the litigation settlement will generate substantial gains for book and tax purposes. TDS and USM continue to assess the makeup of its cellular holdings in order to maximize the benefits derived from clustering its markets. As the number of opportunities for outright acquisitions has decreased and as USM's clusters have grown to realize greater economies of scale, USM's focus has shifted toward exchanges and divestitures of managed and investment interests. TDS and APP are also currently negotiating agreements for the acquisition of additional telephone and paging companies, respectively. -20- 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 unrestricted cash and temporary investments totalling $74.5 million and longer-term investments totalling $61.3 million at September 30, 1995. 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 $468.0 million of bank lines of credit for general corporate purposes at September 30, 1995, $443.0 million of which were committed. Unused amounts of such lines totalled $323.4 million, $298.4 million of which were committed. Such bank lines of credit include a one-year $300 million revolving credit agreement dated May 19, 1995. The outstanding balance on this agreement bears interest at the Eurodollar Rate plus .32%. As of September 30, 1995, $177 million was unused and available under this agreement. The remaining line of credit agreements provide for borrowings at negotiated rates up to the prime rate. TDS and USM also have access to debt and equity capital markets, including shelf registration statements to issue common stock and preferred stock for acquisitions. TDS's shelf registration statement for Common Shares for acquisitions had approximately 1.1 million unissued shares at September 30, 1995. TDS increases this shelf registration from time to time as needs warrant. 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, 1995, $238.4 million remained unused on the universal shelf. The unused amount may be used for debt or equity security issuances including the sale of debt under TDS's $150 million Series C Medium-Term Note Program, of which $110.8 million was unused at September 30, 1995. 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 for use in connection with 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. -21- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------- 1995 1994 1995 1994 --------------------------------------------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Cellular telephone $ 138,567 $ 89,926 $ 355,439 $ 236,816 Telephone 90,398 79,973 262,809 221,321 Radio paging 27,543 23,206 80,326 67,355 --------- --------- --------- --------- 256,508 193,105 698,574 525,492 --------- --------- --------- --------- OPERATING EXPENSES Cellular telephone 120,600 78,831 318,556 221,202 Telephone 65,466 58,032 189,773 153,808 Radio paging 29,882 23,939 86,704 66,870 --------- --------- --------- --------- 215,948 160,802 595,033 441,880 --------- --------- --------- --------- OPERATING INCOME 40,560 32,303 103,541 83,612 -------- --------- --------- --------- INVESTMENT AND OTHER INCOME Interest and dividend income 3,998 3,148 9,803 7,652 Minority share of income (7,965) (3,610) (20,420) (7,495) Cellular investment income, net of license cost amortization 11,117 8,818 29,083 19,702 Gain on sale of cellular interests and other investments 43,375 -- 79,749 -- Other income (expense), net (2,900) 879 (4,763) 588 ------- -------- -------- --------- 47,625 9,235 93,452 20,447 ------- -------- -------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 88,185 41,538 196,993 104,059 Interest expense 12,121 10,067 39,191 28,760 ------- -------- -------- --------- INCOME BEFORE INCOME TAXES 76,064 31,471 157,802 75,299 Income tax expense 33,468 13,848 69,433 33,132 ------- -------- -------- --------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 42,596 17,623 88,369 42,167 Cumulative effect of accounting change -- -- -- (723) ------ -------- -------- --------- NET INCOME 42,596 17,623 88,369 41,444 Preferred Dividend Requirement (258) (457) (1,453) (1,733) ------- -------- -------- --------- NET INCOME AVAILABLE TO COMMON $42,338 $ 17,166 $ 86,916 $ 39,711 ======= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES (000s) 59,038 54,282 58,191 53,121 EARNINGS PER COMMON SHARE: Before cumulative effect of accounting change $ .72 $ .31 $ 1.49 $ .75 Cumulative effect of accounting change -- -- -- (.01) --------- --------- --------- --------- Net Income $ .72 $ .31 $ 1.49 $ .74 ========= ========= ========= ========= DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .095 $ .09 $ .285 $ .27 ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements. -22- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Nine Months Ended September 30, ------------------ 1995 1994 ---- ---- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 88,369 $ 41,444 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting changes -- 723 Depreciation and amortization 148,441 117,061 Deferred taxes 15,930 14,155 Investment income (30,937) (22,549) Minority share of income 20,420 7,495 Gain on sale of cellular interests and other investments (79,749) -- Other noncash expense 14,188 4,220 Change in accounts receivable (32,439) (20,968) Change in accounts payable (7,990) 7,341 Change in accrued taxes 24,516 4,808 Change in other assets and liabilities (1,686) 4,577 ---------- --------- 159,063 158,307 ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 333,174 8,994 Repayments of long-term debt (24,246) (22,837) Change in notes payable 44,629 73,600 Common stock issued 6,346 8,366 Minority partner capital contributions (distributions) 373 9,458 Redemption of preferred stock (534) (268) Dividends paid (17,942) (15,483) Sale of stock by a subsidiary 915 45,253 ---------- --------- 342,715 107,083 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (267,647) (221,239) Investments in and advances to cellular minority partnerships (8,726) (17,274) Distributions from partnerships 7,616 12,647 Investments in PCS licenses (318,963) -- Proceeds from investment sales 152,387 -- Other investments 12,187 (8,355) Acquisitions, excluding cash acquired (48,859) (25,252) Change in temporary investments (4,414) (844) ---------- --------- (476,419) (260,317) ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 25,359 5,073 CASH AND CASH EQUIVALENTS - Beginning of period 24,733 55,666 ---------- --------- End of period $ 50,092 $ 60,739 ========== ========= The accompanying notes to consolidated financial statements are an integral part of these statements. -23- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited) September 30, 1995 December 31, 1994 ------------------------------------- (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 50,092 $ 24,733 Temporary investments 24,395 19,833 Accounts receivable from customers and others 145,776 110,266 Materials and supplies, at average cost, and other current assets 34,691 31,086 ---------- ---------- 254,954 185,918 ---------- ---------- INVESTMENTS Cellular limited partnership interests 143,237 111,733 Cellular license acquisition costs, net 108,352 94,470 PCS license acquisition costs 350,567 74,501 Marketable equity securities 735 25,604 Marketable non-equity securities 60,531 71,314 Other 62,398 60,806 --------- ---------- 725,820 438,428 --------- ---------- PROPERTY, PLANT AND EQUIPMENT Cellular telephone plant and license costs, net 1,476,050 1,289,837 Telephone plant and franchise costs, net 807,024 760,221 Radio paging, net 74,063 70,817 Other, net 35,067 32,700 --------- ---------- 2,392,204 2,153,575 --------- ---------- OTHER ASSETS AND DEFERRED CHARGES 27,648 12,206 --------- ---------- $3,400,626 $2,790,127 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. -24- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) September 30, 1995 December 31, 1994 ------------------ ----------------- (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt and preferred shares $ 34,477 $ 37,447 Notes payable 147,264 98,608 Accounts payable 97,418 112,967 Due to FCC-PCS licenses -- 42,897 Advance billings and customer deposits 24,421 20,898 Accrued interest 6,719 10,054 Accrued taxes 31,611 3,894 Other current liabilities 31,056 19,419 ---------- ---------- 372,966 346,184 ---------- ---------- DEFERRED LIABILITIES AND CREDITS 134,390 119,076 ---------- ---------- LONG-TERM DEBT, excluding current portion 874,086 536,509 ---------- ---------- REDEEMABLE PREFERRED SHARES, excluding current portion 1,664 13,209 ---------- ---------- MINORITY INTEREST in subsidiaries 320,985 272,292 ---------- ---------- NONREDEEMABLE PREFERRED SHARES 30,010 29,819 ---------- ---------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 50,948 47,938 Series A Common Shares, par value $1 per share 6,888 6,887 Common Shares issuable (31,431 and 41,908 shares, respectively) 1,496 1,995 Capital in excess of par value 1,409,345 1,288,453 Retained earnings 197,848 127,765 ---------- ---------- 1,666,525 1,473,038 ---------- ---------- $3,400,626 $2,790,127 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements. -25- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 1995 and December 31, 1994, and the results of operations and cash flows for the nine months ended September 30, 1995 and 1994. The results of operations for the nine months ended September 30, 1995 and 1994, are not necessarily indicative of the results to be expected for the full year. 2. Earnings per Common Share were computed by dividing Net Income Available to Common by the weighted average number of common and common equivalent shares outstanding during the period. Dilutive common stock equivalents at September 30, 1995, consist of dilutive Common Share options. 3. Assuming that acquisitions accounted for as purchases during the period January 1, 1994, to September 30, 1995, had taken place on January 1, 1994, unaudited pro forma results of operations from continuing operations would have been as follows: Nine Months Ended September 30, ------------------ 1995 1994 ---- ---- (Dollars in thousands,except per share amounts) Operating revenues $ 721,943 $ 602,763 Net income before cumulative effect of accounting change 75,287 25,792 Earnings per share before cumulative effect of accounting change $ 1.26 $ .41 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 greater than three months to twelve months are classified as temporary investments. -26- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TDS acquired certain cellular licenses and operating companies in 1995 and 1994. TDS also acquired four telephone companies during the first nine months of 1995. 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, -------------------- 1995 1994 ---- ---- (Dollars in thousands) Property, plant and equipment $ 77,696 $ 68,021 Cellular licenses 119,364 142,341 Decrease in equity method investment in cellular interests (19) (6,207) Long-term debt (8,933) (21,931) Deferred credits (214) (5,478) Other assets and liabilities, excluding cash and cash equivalents (2,618) 5,447 Minority interest (1,912) 621 Common Shares issued and issuable (121,864) (156,283) USM Stock issued and issuable (12,641) (1,279) --------- --------- Decrease in cash due to acquisitions $ 48,859 $ 25,252 ========= ========= The following table summarizes interest and income taxes paid, and other noncash transactions. Nine Months Ended September 30, ----------------- 1995 1994 ---- ---- (Dollars in thousands) Interest paid $ 42,351 $ 33,748 Income taxes paid 27,629 13,288 Common Shares issued by TDS and Subsidiary for conversion of TDS Preferred Stock $ 13,653 $ 411 -27- TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Gain on Sale of Cellular Interests and Other Investments The gains in 1995 reflect the sales of minority- and majority-owned cellular interests and other investments as follows: (a) USM recognized $77.7 million on the sales of non- strategic cellular interests. USM sold its majority interests in five markets, its minority interests in four markets and an equity investment during the first nine months of 1995. (b) TDS Telecom recognized $2.1 million on the sales of marketable equity securities and two minority cellular interests held by one of its telephone subsidiaries. 6. Capitalized Interest During the third quarter, the Company began capitalizing interest as a component of the cost of readying its broadband PCS licenses for use. Total interest capitalized during the period was $6.5 million. 7. Contingencies The Company's material contingencies as of September 30, 1995, include the collectibility of a $5.5 million note receivable under a long-term financing agreement with a cellular company and a $9.9 million standby letter of credit in support of a bank loan to an entity minority-owned by the Company. For further discussion of these contingencies, see Note 14 of Notes to Consolidated Financial Statements included in the Company's 1994 Report on Form 10-K for the year ended December 31, 1994. -28- PART II. OTHER INFORMATION Item 1. Legal Proceedings La Star and Wisconsin RSA 8 Applications. On September 28, 1995, TDS and USM announced that on September 27, 1995, a FCC administrative law judge found both companies fully qualified to be FCC licensees. The decision favorably resolves candor issues raised in the La Star and Wisconsin RSA 8 matters. A copy of the news release was filed under cover of Form 8-K on October 3, 1995. 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, 1995 and 1994. (e) Reports on Form 8-K filed during the quarter ended September 30, 1995: No reports on Form 8-K were filed during the quarter ended September 30, 1995. -29- 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, 1995 /s/ MURRAY L. SWANSON --------------------- ----------------------------------- Murray L. Swanson, Executive Vice President-Finance Date November 10, 1995 /s/ GREGORY J. WILKINSON -------------------- ---------------------------------- Gregory J. Wilkinson, Vice President and Controller (Principal Accounting Officer) -30- 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, 1995 1994 - -------------------------------------------------------------------------------- Primary Earnings Net Income before cumulative effect of accounting change $ 42,596 $ 17,623 Dividends on Preferred Shares (258) (457) Minority income adjustment assuming issuance of a subsidiaries issuable securities` -- (103) -------- -------- Net Income Available to Common $ 42,338 $ 17,063 ======== ======== Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 57,805 53,601 Additional shares assuming issuance of: Options and Stock Appreciation Rights 154 170 Convertible Preferred Shares 1,048 469 Common Shares Issuable 31 42 -------- -------- Primary Shares 59,038 54,282 -------- -------- Primary Earnings per Common Share $ .72 $ .31 ======== ======== Fully Diluted Earnings* Net Income before cumulative effect of accounting change $ 42,596 $ 17,623 Dividends on Preferred Shares (110) (394) Minority income adjustment assuming issuance of a subsidiaries issuable securities -- (104) -------- -------- Net Income Available to Common $ 42,486 $ 17,125 ======== ======== Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 57,805 53,601 Additional shares assuming issuance of: Options and Stock Appreciation Rights 160 182 Convertible Preferred Shares 1,542 739 Common Shares Issuable 31 42 ------ ------ Fully Diluted Shares 59,538 54,564 ======= ======== Fully Diluted Earnings per Common Share $ .71 $ .31 ======== ======== * This calculation is submitted in accordance with Securities Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. Exhibit 11 Telephone and Data Systems, Inc. Computation of Earnings Per Common Share (in thousands, except per share amounts) Nine Months Ended September 30, 1995 1994 - -------------------------------------------------------------------------------- Primary Earnings Net Income before cumulative effect of accounting change $ 88,369 $ 42,167 Dividends on Preferred Shares (1,453) (1,733) -------- -------- Net income before cumulative effect of accounting change applicable to Common 86,916 40,434 Cumulative effect of accounting change -- (723) Minority income adjustment assuming issuance of a subsidiaries issuable securities -- (229) --------- -------- Net Income Available to Common $ 86,916 $ 39,482 ========= ======== Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 57,289 52,860 Additional shares assuming issuance of: Options and Stock Appreciation Rights 160 183 Convertible Preferred Shares 708 38 Common Shares Issuable 34 40 --------- -------- Primary Shares 58,191 53,121 ========= ======== Primary Earnings per Common Share Net Income before cumulative effect of accounting change $ 1.49 $ .75 Cumulative effect of accounting change -- (.01) --------- -------- Net Income $ 1.49 $ .74 ========= ======== Fully Diluted Earnings* Net Income before cumulative effect of accounting change $ 88,369 $ 42,167 Dividends on Preferred Shares (1,137) (1,541) --------- -------- Net income before cumulative effect of accounting change applicable to Common 87,232 40,626 Cumulative effect of accounting change -- (723) Minority income adjustment assuming issuance of a subsidiaries issuable securities -- (230) --------- -------- Net Income Available to Common $ 87,232 $ 39,673 ========= ======== Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 57,289 52,860 Additional shares assuming issuance of: Options and Stock Appreciation Rights 163 193 Convertible Preferred Shares 1,033 309 Common Shares Issuable 34 40 --------- -------- Fully Diluted Shares 58,519 53,402 ========= ======== Fully Diluted Earnings per Common Share Net Income before cumulative effect of accounting change $ 1.49 $ .75 Cumulative effect of accounting change -- (.01) --------- -------- Net Income $ 1.49 $ .74 ========= ======== * This calculation is submitted in accordance with Securities Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-12 3 EXHIBIT 12 Exhibit 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES For the Nine Months September 30, 1995 (Dollars In Thousands) EARNINGS: Income from Continuing Operations before income taxes $ 157,802 Add (Deduct): Minority Share of Losses (2,156) Earnings on Equity Method (30,937) Distributions from Minority Subsidiaries 7,604 Amortization of Non-Telephone Capitalized Interest 20 Minority interest in majority-owned subsidiaries that have fixed charges 16,758 --------- 149,091 Add fixed charges: Consolidated interest expense 39,058 Interest Portion (1/3) of Consolidated Rent Expense 3,827 Amortization of debt expense and discount on indebtedness 133 --------- $ 192,109 ========= FIXED CHARGES: Consolidated interest expense $ 39,058 Capitalized Interest 6,502 Interest Portion (1/3) of Consolidated Rent Expense 3,827 Amortization of debt expense and discount on indebtedness 133 --------- $ 49,520 ========= RATIO OF EARNINGS TO FIXED CHARGES 3.88 ========= Tax-Effected Redeemable Preferred Dividends $ 1,446 Fixed Charges 49,520 --------- Fixed Charges and Redeemable Preferred Dividends $ 50,966 ========= RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 3.77 ========= Tax-Effected Preferred Dividends $ 3,370 Fixed Charges 49,520 --------- Fixed Charges and Preferred Dividends $ 52,890 ========= RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 3.63 ========= EX-27 4 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated financial statements of Telephone and Data Systems, Inc. as of September 30, 1995, and for the nine months then ended, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 50,092 735 112,564 4,053 19,665 254,954 3,128,394 736,190 3,400,626 372,966 874,086 57,836 1,664 30,010 1,608,689 3,400,626 0 698,574 0 595,033 (93,452) 0 39,191 157,802 69,433 88,369 0 0 0 88,369 1.49 1.49
EX-99 5 EXHIBIT 99-1 Exhibit 99.1 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited Twelve Months Ended September 30, ------------------- 1995 1994 ---------------------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Cellular telephone $ 451,027 $ 299,156 Telephone 347,829 289,600 Radio paging 105,036 87,635 -------- --------- Total operating revenues 903,892 676,391 -------- --------- OPERATING EXPENSES Cellular telephone 412,373 289,606 Telephone 250,700 204,620 Radio paging 112,068 86,093 -------- --------- Total operating expenses 775,141 580,319 -------- --------- OPERATING INCOME 128,751 96,072 -------- --------- INVESTMENT AND OTHER INCOME Interest and dividend income 12,763 10,071 Minority share of income (22,004) (6,859) Cellular investment income, net of license cost amortization 35,399 24,811 Gain on sale of cellular interests and other investments 87,206 -- Other income, net (6,673) 504 -------- --------- 106,691 28,527 -------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 235,442 124,599 Interest expense 51,682 38,345 -------- --------- INCOME BEFORE INCOME TAXES 183,760 86,254 Income tax expense 77,014 37,848 -------- --------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 106,746 48,406 Cumulative effect of accounting changes -- (723) -------- --------- NET INCOME 106,746 47,683 Preferred Dividend Requirement (1,933) (2,318) -------- -------- NET INCOME AVAILABLE TO COMMON $ 104,813 $ 45,365 ======== ======== WEIGHTED AVERAGE COMMON SHARES (000s) 57,592 52,365 EARNINGS PER COMMON SHARE: Before cumulative effect of accounting changes $ 1.82 $ .88 Cumulative effect of accounting changes -- (.01) --------- --------- Net Income $ 1.82 $ .87 ========= ========= DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .375 $ .355 ========= ========= -----END PRIVACY-ENHANCED MESSAGE-----