-----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, CNfHFO4tZpUYbXfDXYFDbLZM/309LVFg178qCp2h2J64y+O46kh78rtcv0qZWlF6 CgoTF5aJHjAlyCTSlaLq8g== 0000096966-96-000033.txt : 19961115 0000096966-96-000033.hdr.sgml : 19961115 ACCESSION NUMBER: 0000096966-96-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC CENTRAL INDEX KEY: 0000096966 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 362669023 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08251 FILM NUMBER: 96661551 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 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 X For the quarterly period ended September 30, 1996 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, 1996 ------------------------- ------------------------------ Common Shares, $1 par value 54,219,146 Shares Series A Common Shares, $1 par value 6,907,109 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 2-15 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1996 and 1995 16 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1995 17 Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 18-19 Notes to Consolidated Financial Statements 20-22 Part II. Other Information 23 Signatures 24 PART I. FINANCIAL INFORMATION TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Nine Months Ended 9/30/96 Compared to Nine Months Ended 9/30/95 CONSOLIDATED Telephone and Data Systems, Inc. ("TDS" or the "Company") reported net income available to common of $115.3 million, or $1.89 per share, in the first nine months of 1996, compared to $86.9 million, or $1.49 per share, in the first nine months of 1995. Consolidated operating results for the first nine months of 1996 compared to 1995 primarily reflect: * strong growth in cellular customer units resulting in substantial increases in cellular revenue, operating cash flow and operating income; * steady growth in telephone access lines and revenues, higher operating costs due to development of new service offerings and a centralized network management center resulting in small increases in operating cash flow and operating income; * declining growth in pagers served in the nine months of 1996, reduced paging revenue and higher operating costs, including additional restructuring charges, resulting in a decrease in paging operating cash flow and an increase in operating loss; * significant gains and cash proceeds from sales and trades of non-strategic cellular interests and other investments; and * significant increases in Personal Communications Services ("PCS")development costs as American Portable Telecom, Inc. proceeds to develop and construct its PCS networks. Excluding gains on the sales of cellular interests and other investments, PCS development costs and paging restructuring charges, along with the related income taxes and minority interest, net income available to common would have been $72.1 million, or $1.18 per share, in the first nine months of 1996, compared to $52.8 million, or $.91 per share, in the first nine months of 1995. Nine Months Ended September 30, ------------------------------- 1996 1995 ---- ---- (Dollars in thousands, except per share amounts) Net Income Available to Common As Reported $ 115,281 86,916 Add: PCS Development Costs 10,797 4,641 Paging Restructuring Costs 4,238 1,013 Less: Effects of Gains (58,238) (39,777) --------- --------- As Adjusted $ 72,078 $ 52,793 ========= ========= Earnings Per Share As Reported $ 1.89 $ 1.49 Add: PCS Development Costs .18 .08 Paging Restructuring Costs .07 .02 Less: Effects of Gains (.96) (.68) -------- --------- As Adjusted $ 1.18 $ .91 ======== ========= 2 Operating Revenues increased 26% ($179.7 million) during the first nine months of 1996 primarily as a result of increases in customer units served. Consolidated cellular telephone, telephone and radio paging customer units increased 22% (18% attributable to cellular telephone) since September 30, 1995. Cellular telephone revenues increased 44% ($154.8 million) in 1996 on a 52% increase in customer units and strong inbound roaming revenues. Cellular customers increased to 940,000 at September 30, 1996 from 618,000 at September 30, 1995. Local retail revenue increased 53% ($109.3 million) in the first nine months of 1996 due primarily to the 52% customer growth. Average monthly local retail revenue per customer declined to $42.84 in the first nine months of 1996 from $45.05 in 1995, while average local minutes of use per retail customer increased to 106 in 1996 from 93 in 1995. U.S. Cellular's use of incentive programs in 1996 that encourage lower-priced weekend and off-peak usage, in order to stimulate overall usage, resulted in an increase in average minutes of use and a lower average revenue per minute of use. Inbound roaming revenue (charges to customers of other systems who use U.S. Cellular's cellular systems when roaming) increased 28% ($30.9 million) in the first nine months of 1996 due to increased minutes of use. Average monthly inbound roaming revenue per customer declined to $18.88 in 1996 compared to $23.62 in 1995. The decrease is the result of roaming revenue growing at a slower rate than U.S. Cellular's customer base (28% versus 52%) and negotiated reductions in roaming rates. Long-distance and other revenue increased 46% ($12.9 million) in the first nine months of 1996 primarily due to the increased volume of long-distance calls billed by U.S. Cellular. Average monthly long-distance and other revenue per customer was $5.53 in the first nine months of 1996 and $6.09 in 1995. Total average monthly service revenue per customer was $67.25 in the first nine months of 1996 and $74.75 in 1995. Equipment sales revenue increased 16% ($1.8 mill ion) in 1996 reflecting the increase in the number of cellular telephone units sold partially offset by a decrease in revenue per unit sold. Telephone revenues increased 10% ($26.0 million) in 1996 as a result of the effects of acquisitions ($12.1 million), recovery of increased costs of providing long-distance services ($5.4 million), increased network usage ($3.4 million), internal access line growth of 6% since September 30, 1995 ($ 4.0 million) and increased sales of custom calling and advanced features ($2.0 million). The number of telephone access lines increased 14% to 479,700 at September 30, 1996 from 422,000 at September 30, 1995. Average monthly revenue per access line decreased to $66.36 for the first nine months of 1996 from $67.31 in 1995. Radio paging revenues decreased 1% ($1.2 million) in 1996. Service revenue increased 3% ($1.8 million) on a 1% increase in paging units in service. The number of pagers in service increased to 788,300 in 1996 from 776,900 in 1995. Average revenue per unit decreased 7% to $9.92 in 1996 from $10.70 in 1995 reflecting a shift in distribution channel mix and competitive pricing declines. Equipment sales revenue decreased $2.9 million reflecting the slow growth in pager sales. Operating Expenses rose 27% ($161.9 million) in the first nine months of 1996 due primarily to added expenses to serve the growing customer base. Cellular telephone expenses increased 37% ($116.8 million) during 1996. System operations expenses increased 52% ($27.3 million) in 1996 as a result of increases in customer usage expenses and costs associated with the growing number of cell sites within U.S. Cellular's systems. Customer usage expenses grew 87% ($22.3 million) as minutes of use increased, primarily related to the 52% increase in customer units and increased roaming usage. Also contributing to the increase was $9.3 million of additional costs related to fraudulent use of U.S. Cellular's customers' telephone numbers. U.S. Cellular continues to implement procedures in its markets to combat this fraud, which is primarily related to roaming usage. Maintenance, utility and cell site expenses 3 increased 19% ($5.1 million) reflecting primarily the increase in the number of cell sites to 1,270 in 1996 from 1,041 in 1995. Marketing and selling expenses incurred to add new customers increased 39% ($42.3 million), including a $11.2 million increase in cost of equipment sold. Cost per gross customer addition declined to $368 in 1996 from $373 in 1995 as gross customer activations increased to 373,000 in 1996 from 259,000 in 1995. General and administrative expenses increased 34% ($32.2 million) due to the growing customer base in existing markets and an expansion of local office and corporate staff necessitated by the U.S. Cellular's growth. Depreciation and amortization increased 23% ($14.9 million) primarily due to the increase in average fixed assets since September 30, 1995. Telephone expenses increased 13% ($25.4 million) during 1996 due to the effects of acquisitions ($10.4 million), growth in internal operations ($4.8 million) and increased depreciation and amortization ($3.7 million). The development of a centralized network management center to provide more effective network monitoring and maintenance and the development of new service offerings caused expenses to increase $5.6 million. These expenditures are expected to begin producing cost efficiencies and new revenues in the next several quarters and beyond. Operating margin declined to 25.5% in 1996 from 27.8% in 1995. Paging expenses increased 23% ($19.8 million) in 1996. During September 1995, American Paging announced a plan to restructure key operating areas to increase sales, improve customer mix, lower administrative costs and improve customer service. Through this restructuring, American Paging has committed additional resources to sales and sales support with the intent to increase unit sales, service revenue and productivity. Although anticipated, American Paging has experienced slower unit and revenue growth and increased operating expenses through the third quarter as a result of continued work force disruptions caused by the refocusing of the sales force on direct sales and reengineering of the customer service organization. An additional $7.0 million of restructuring charges were identified in the third quarter of 1996 once the customer service functions were transferred to the new centralized customer service center. In total, $9.3 million of restructuring charges were incurred during the first nine months of 1996. Cost of services increased 25% ($4.4 million) primarily due to increasing costs of serving the customer base, maintenance and repair of pagers and increased re seller costs. Selling, general and administrative expenses increased 24% ($9.7 million), including $4.0 million of restructuring charges related to duplicate staffing, employee severance and legal and consulting fees. Programming services performed during the conversion to a new customer service center amounted to $1.3 million. Cost of equipment sold decreased 30% ($3.4 million) as a result of the slow growth in unit sales. Depreciation and amortization increased 51% ($9.1 million) as a result of the write-offs of $2.8 million of obsolete inventory, $2.2 million for obsolete software and $300,000 for assets retired as a result of the restructuring and the increased investment in fixed assets. 4 Operating Income increased 17% ($17.8 million) in the first nine months of 1996 due to improved cellular operating results offset somewhat by the decline in paging operating results. Nine Months Ended September 30, ------------------------------------------ 1996 1995 Change ---- ---- ------ (Dollars in thousands) Operating Income Cellular telephone $ 74,937 $ 36,883 $ 38,054 Telephone 73,711 73,036 675 Radio paging (27,347) (6,378) (20,969) -------------- -------- -------- $ 121,301 $103,541 $ 17,760 ============== ======== ======== Operating Margins Cellular telephone* 15.1% 10.7% Telephone 25.5% 27.8% Radio paging* (38.5%) (9.2%) Consolidated 13.8% 14.8% * Computed on Service Revenues Management anticipates continued growth in consolidated customer units and revenues as the business units continue their expansion and development programs. The rate of revenue growth is expected to be somewhat slower than historical trends as cellular and paging revenue per unit continue to decline. Expenses should increase, driven by customer growth, although at a slower rate than revenues, yielding continued growth in operating income and operating cash flow. Management believes there exists a seasonality at U.S. Cellular 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. Additionally, competitors licensed to provide PCS services have initiated service in certain of the U.S. Cellular's markets in recent months. U.S. Cellular anticipates that PCS operators will initiate service in several other of its markets later in 1996 and 1997. U.S. Cellular's management is monitoring these and other PCS providers' strategies, but cannot at this time anticipate what effect, if any, this additional competition will have on U.S. Cellular's future strategies and results. Investment and Other Income totaled $136.6 million in 1996 and $93.5 million in 1995. Gain on Sale of Cellular Interests and Other Investments totaled $136.0 million in the first nine months of 1996 compared to $79.7 million in 1995 as the Company has sold or traded certain non-strategic cellular interests and sold other investments. PCS Development Costs totaled $24.3 million in 1996 and $2.8 million in 1995. American Portable Telecom, Inc. ("American Portable") has been devoting substantially all of its efforts to recruiting an experienced management team, developing and executing a business plan, raising capital and designing and constructing its PCS networks. As of September 30, 1996, a total of 118 microwave paths have been cleared, with an additional 52 paths having pending agreements with incumbents. Management anticipates that by year-end 1996, sufficient paths will have been cleared to allow service launch in all six markets. Over 500 cell sites have been secured as zoning and installation work continues. The National Operations Center is substantially complete. Friendly user (customer) trials are planned to begin late in the fourth quarter of 1996 and conclude in the first quarter of 1997, with roll-out of commercial service after successful customer trials. The Company expects to incur significant expenditures for the development of PCS activities during 1996 and 1997. 5 Cellular Investment Income, the Company's share of income of cellular markets in which the Company has a minority interest and follows the equity method of accounting, increased 31% ($9.1 million ) in the first nine months of 1996 as income from the cellular markets increased. Cellular investment income is net of amortization of license costs relating to these minority interests. Minority Share of Income, the minority shareholders' share of U.S. Cellular's, American Paging's, and American Portable's net income or loss and other minority shareholders' and partners' share of subsidiaries' net income or loss, increased 20% ($4.0 million) in the first nine months of 1996 due primarily to the increase in U.S. Cellular's net income offset somewhat by increased losses at American Paging and American Portable. Minority shareholders' share of gains on the sales of cellular interests was $12.9 million and $14.9 million in the first nine months of 1996 and 1995, respectively. Interest Expense decreased 23% ($8.8 million) in the first nine months of 1996. TDS capitalized $21.2 million of interest expense associated with expenditures for broadband and narrowband PCS licenses and capitalized construction costs in 1996 and $6.5 million in 1995. Long-term interest expense increased $6.7 million in 1996 as a result of the completion of U.S. Cellular's convertible debt offering in June of 1995. Income Tax Expense increased 61% ($42.1 million) in 1996 compared with 1995. The increase reflects additional income taxes of about $32.1 million due to the 44% increase in pretax income and additional income tax expense of about $10.0 million due to tax gains in excess of book gains associated with the sale of certain cellular interests. The effective income tax rate was 49% in the first nine months of 1996 and 44% in 1995. The increase in the effective rate reflects the additional income taxes related to the gain on sale of certain cellular interests. Net Income Available to Common increased $28.4 million to $115.3 million in the first nine months of 1996 from $86.9 million in the first nine months of 1995. Earnings Per Common Share were $1.89 in the first nine months of 1996 and $1.49 in the first nine months of 1995. TDS anticipates that the development of American Portable and its entrance into the PCS business is expected to reduce the rate of growth in TDS's net income from levels which would otherwise be achieved during the next few years. 6 Three Months Ended 9/30/96 Compared to Three Months Ended 9/30/95 CONSOLIDATED Net income available to common for the third quarter of 1996 and 1995 included significant gains from the sales of non-strategic cellular interests and certain other investments, increased PCS development costs and paging restructuring charges. Excluding these gains, PCS development costs and paging restructuring charges, along with the related income taxes and minority interest, net income available to common would have been $26.9 million, or $.44 per share, in the third quarter of 1996, compared to $25.5 million, or $.44 per share, in the third quarter of 1995. Three Months Ended September 30, -------------------------------- 1996 1995 ----------- ----------- (Dollars in thousands, except per share amounts) Net Income Available to Common As Reported $ 22,200 $ 42,338 Add: PCS Development Costs 3,467 3,250 Paging Restructuring Costs 3,223 1,013 Less: Effects of Gains (1,982) (21,081) ----------- ----------- As Adjusted $ 26,908 $ 25,520 =========== =========== Earnings Per Share As Reported $ .36 $ .72 Add: PCS Development Costs .06 .06 Paging Restructuring Costs .05 .02 Less: Effects of Gains (.03) (.36) ----------- ----------- As Adjusted $ .44 $ .44 =========== =========== Operating Revenues increased 23% ($59.4 million) during the third quarter of 1996 for reasons generally the same as the first nine months. Cellular telephone revenues increased 35% ($49.0 million) in 1996. Local retail revenue increased 45% ($36.1 million) in the third quarter of 1996, while inbound roaming revenue increased 18% ($8.1 million). Average monthly service revenue per customer was $67.88 in the third quarter of 1996 and $76.93 in 1995. Telephone revenues increased 13% ($11.4 million) in the third quarter of 1996. Acquisitions increased telephone revenues by 7% ($6.5 million) in the third quarter of 1996. Average revenue per access line remained stable at $67.46 in the third quarter of 1996 compared to $67.44 in 1995. Radio paging revenues decreased 4% ($1.0 million) in 1996. Average revenue per unit decreased 6% to $9.96 in 1996 from $10.63 in 1995. Operating Expenses rose 27% ($58.7 million) during the third quarter of 1996 for reasons generally the same as the first nine months except for American Paging which had an additional $7.0 million of restructuring expenses in the third quarter of 1996. Cellular telephone expenses increased 28% ($33.9 million). System operations expense increased 24% ($5.4 million), including $4.0 million of costs related to fraudulent use of U.S. Cellular's customers' telephone numbers. Marketing and selling expenses, including cost of equipment sold, increased 40% ($15.8 million). Cost per gross customer addition increased to $386 in the third quarter of 1996 from $366 in 1995. General and administrative expenses increased 25% ($8.8 million). Telephone expenses increased 18% ($11.5 million). Acquisitions increased telephone expenses by $6.0 million while depreciation expense increased $2.3 million. The development of a centralized network management center to provide more effective network monitoring and maintenance and the development of new service offerings caused expenses to increase $2.2 million. Paging operating expenses increased 45% ($13.4 million). Selling, general and admi nistrative expenses increased 54% ($7.4 million), including $2.0 million of additional restructuring expenses. Depreciation and amortization increased 86% ($5.7 million) primarily due to the $2.8 million write-off of obsolete inventory and $2.2 million write-off of obsolete software. 7 Operating Income increased 2% ($703,000) in the third quarter of 1996. Improved cellular operating results were substantially offset by the decline in paging results. Three Months Ended September 30, ----------------------------------------- 1996 1995 Change ----------------------------------------- (Dollars in thousands) CONSOLIDATED OPERATING INCOME Cellular Telephone Operations $ 33,094 $ 17,967 $ 15,127 Telephone Operations 24,863 24,932 (69) Radio Paging Operations (16,694) (2,339) (14,355) ----------- ---------- -------- $ 41,263 $ 40,560 $ 703 =========== ========== ======== Operating Margins: Cellular Telephone* 18.1% 13.4% Telephone 24.4% 27.6% Radio Paging* (70.2%) (9.7%) Consolidated 13.1% 15.8% * Computed on Service Revenues Investment and Other Income totaled $12.5 million in 1996 and $47.6 million in 1995. Gain on Sale of Cellular Interests and Other Investments totaled $7.8 million in the third quarter of 1996 compared to $43.4 million in 1995 as the Company has sold or traded certain non-strategic cellular interests and sold other investments. PCS Development Costs totaled $10.8 million in 1996 and $1.9 million in 1995 reflecting activities taking place to develop and construct PCS networks. Cellular Investment Income increased 44% ($4.9 million), reflecting improvement in U.S. Cellular's equity-method markets managed by others. Minority Share of Income decreased 55% ($4.4 million) in the third quarter of 1996 due primarily to the increase in American Portable's and American Paging's net losses, offset somewhat by the increase in U.S. Cellular's net income. Minority shareholders' share of gains on the sales of cellular interests were $435,000 and $8.2 million in the third quarter of 1996 and 1995, respectively. Interest Expense decreased 23% ($2.8 million) in the third quarter of 1996. TDS capitalized $7.1 million of interest expense associated with expenditures for broadband and narrowband PCS licenses and capitalized construction costs in 1996 and $6.5 million in 1995. The remaining decrease is primarily attributable to the reduction in average notes payable outstanding between 1996 and 1995. Income Tax Expense decreased 35% ($11.7 million) in 1996 compared with 1995 primarily due to the $35.6 million decrease in gain on sales of cellular interests and other investments. The effective income tax rate was 49% in the third quarter of 1996 and 44% in 1995. The increase in the effective rate reflects additional income taxes related to certain sales of cellular interests. Net Income Available to Common decreased to $22.2 million in the third quarter of 1996 from $42.3 million in 1995 reflecting the decrease of $19.1 million gain on the sales of cellular interests and other investments (net-of-tax and minority interest). Earnings Per Common Share were $.36 in 1996 and $.72 in 1995. 8 BUSINESS SEGMENT HIGHLIGHTS Telephone and Data Systems, Inc. is a diversified telecommunications company with established cellular telephone, local telephone and radio paging operations and developing personal communications services operations. Following are operating highlights for each major business unit for the nine months ended September 30, 1996 and the operating results for the nine months and three months ended September 30, 1996 and 1995. CELLULAR TELEPHONE OPERATIONS TDS provides cellular telephone service through United States Cellular Corporation [AMEX: USM], an 80.6%-owned subsidiary. Consolidated operating results for the first nine months of 1996 compared to 1995 reflect: * strong growth in customer units to 940,000 units in 130 markets from 618,000 units in 138 markets; * a 44% increase in revenue related to the increase in customer units; * and a 52% increase in operating cash flow and a 103% increase in operating income. TELEPHONE OPERATIONS TDS manages its local landline telephone service through its wholly owned subsidiary TDS Telecommunications Corporation ("TDS Telecom"). At September 30, 1996, TDS Telecom operated 105 telephone companies which served 479,700 access lines in 28 states. Consolidated operating results for the first nine months of 1996 compared to 1995 reflect: * steady growth in telephone access lines, 6% internal growth and 8% growth due to acquisitions; * a 10% increase in revenue with revenue per access line decreasing slightly; and * a 13% increase in operating costs including $5.6 million for the development of a centralized network management center and new service offerings. PAGING OPERATIONS TDS manages its radio paging business through American Paging, Inc. [AMEX: APP], an 82.3%-owned subsidiary. APP provides wireless messaging communications to 788,300 subscribers in 21 states and the District of Columbia. Consolidated operating results for the first nine months of 1996 compared to 1995 reflect: * a 1% growth in pagers served, but a 1% decline in paging revenue; and * a 23% increase in operating costs including $9.3 million from restructuring costs, resulting in an increased operating loss. PCS OPERATIONS TDS manages its broadband personal communications services business through American Portable Telecom, Inc. [NASDAQ: APTI], an 82.8%-owned subsidiary. American Portable's licenses cover the Major Trading Areas of Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus and account for approximately 27.3 million population equivalents. Results from the first nine months of 1996 compared to 1995 reflect significant increases in PCS development costs as American Portable proceeds to develop and construct its PCS network. 9 CELLULAR TELEPHONE OPERATIONS Nine Months Ended September 30, ---------------------------------------------------------- Change Change Due To Excluding 1996 1995 Change Acquisitions Acquisitions ---- ---- ------ ------------ ------------- (Dollars in thousands) Operating Revenues Local retail $ 316,900 $ 207,568 $ 109,332 $ 13,909 $ 95,423 Inbound roaming 139,689 108,837 30,852 (1,297) 32,149 Long-distance 39,309 24,832 14,477 1,148 13,329 Other 1,592 3,217 (1,625) (1,558) (67) ---------- ---------- ---------- ----------- ------------- Service Revenues 497,490 344,454 153,036 12,202 140,834 Equipment sales 12,790 10,985 1,805 534 1,271 ---------- ---------- ---------- ----------- ------------- 510,280 355,439 154,841 12,736 142,105 ---------- ---------- ---------- ----------- ------------- Operating Expenses System operations 79,728 52,413 27,315 1,774 25,541 Marketing and selling 100,307 69,204 31,103 5,497 25,606 Cost of equipment sold 49,631 38,393 11,238 2,840 8,398 General and administrative 126,461 94,271 32,190 3,131 29,059 Depreciation and amortization 79,216 64,275 14,941 199 14,742 ----------- ---------- ---------- ----------- ------------- 435,343 318,556 116,787 13,441 103,346 ----------- ---------- ---------- ----------- ------------- Operating Income $ 74,937 $ 36,883 $ 38,054 $ (705) $ 38,759 =========== ========== ========== =========== ============= Consolidated Markets: Market penetration 4.38% 2.78% Churn rate per month 1.9% 2.0% Three Months Ended September 30, ---------------------------------------------------------- Change Change Due To Excluding 1996 1995 Change Acquisitions Acquisitions ---- ---- ------ ------------ ------------ (Dollars in thousands) Operating Revenues Local retail $ 115,671 $ 79,577 $ 36,094 $ (873) $ 36,967 Inbound roaming 52,256 44,181 8,075 (2,194) 10,269 Long-distance 14,720 10,274 4,446 (177) 4,623 Other 622 522 100 (485) 585 ---------- ---------- ----------- ------------ ----------- Service Revenues 183,269 134,554 48,715 (3,729) 52,444 Equipment sales 4,325 4,013 312 (84) 396 ---------- ---------- ----------- ------------ ----------- 187,594 138,567 49,027 (3,813) 52,840 ---------- ---------- ----------- ------------ ----------- Operating Expenses System operations 27,339 21,972 5,367 (1,449) 6,816 Marketing and selling 37,486 25,571 11,915 (55) 11,970 Cost of equipment sold 18,241 14,356 3,885 (235) 4,120 General and administrative 43,969 35,131 8,838 (1,049) 9,887 Depreciation and amortization 27,465 23,570 3,895 (905) 4,800 ---------- ---------- ----------- ------------ ----------- 154,500 120,600 33,900 (3,693) 37,593 ---------- ---------- ----------- ------------ ----------- Operating Income $ 33,094 $ 17,967 $ 15,127 $ (120) $ 15,247 ========== ========== =========== ============ =========== Consolidated Markets: Market penetration 4.38% 2.78% Churn rate per month 2.0% 2.1% 10 TELEPHONE OPERATIONS Nine Months Ended September 30, --------------------------------------------------------- Change Change Due to Excluding 1996 1995 Change Acquisitions Acquisitions ---- ---- ------ ------------ ------------ (Dollars in thousands) Operating Revenues Local service $ 81,037 $ 70,461 $ 10,576 $ 4,108 $ 6,468 Network access and long-distance 172,170 160,816 11,354 6,228 5,126 Miscellaneous 35,630 31,532 4,098 1,795 2,303 --------- ---------- ---------- ------------ ------------ 288,837 262,809 26,028 12,131 13,897 --------- ---------- ---------- ------------ ------------ Operating Expenses Network operations 61,958 50,669 11,289 2,867 8,422 Depreciation and Amortization 63,941 57,589 6,352 2,600 3,752 Customer operations 42,437 35,948 6,489 1,824 4,665 Corporate and other 46,790 45,567 1,223 3,096 (1,873) --------- ---------- ---------- ------------ ------------ 215,126 189,773 25,353 10,387 14,966 --------- ---------- ---------- ------------ ------------ Operating Income $ 73,711 $ 73,036 $ 675 $ 1,744 $ (1,069) ========= ========== ========== ============ ============ Growth in access lines from prior year-end: Acquisitions 33,100 12,900 Internal growth 20,700 16,600 Three Months Ended September 30, --------------------------------------------------------- Change Change Due to Excluding 1996 1995 Change Acquisitions Acquisitions ---- ---- ------ ------------ ------------ (Dollars in thousands) Operating Revenues Local service $ 28,492 $ 24,070 $ 4,422 $ 2,081 $ 2,341 Network access and long-distance 60,129 55,515 4,614 3,308 1,306 Miscellaneous 13,170 10,813 2,357 1,104 1,253 ---------- ---------- ----------- ----------- ------------ 101,791 90,398 11,393 6,493 4,900 ---------- ---------- ----------- ----------- ------------ Operating Expenses Network operations 22,861 17,831 5,030 1,777 3,253 Depreciation and Amortization 23,036 19,494 3,542 1,319 2,223 Customer operations 15,532 11,927 3,605 1,105 2,500 Corporate and other 15,499 16,214 (715) 1,843 (2,558) ---------- ---------- ----------- ----------- ------------ 76,928 65,466 11,462 6,044 5,418 ---------- ---------- ----------- ----------- ------------ Operating Income $ 24,863 $ 24,932 $ (69) $ 449 $ (518) ========== ========== =========== =========== ============ Growth in access lines from prior quarter-end: Acquisitions 800 0 Internal growth 7,900 6,000 11 RADIO PAGING OPERATIONS Nine Months Ended September 30, -------------------------------------- 1996 1995 Change ---- ---- ------ (Dollars in thousands, except per unit amounts) Revenues Service revenues $ 70,967 $ 69,212 $ 1,755 Equipment sales 8,178 11,114 (2,936) --------- --------- --------- Total Revenue 79,145 80,326 (1,181) --------- --------- --------- Costs and expenses Cost of services 21,835 17,477 4,358 Selling, general and administrative 49,910 40,177 9,733 Cost of equipment sold 7,760 11,137 (3,377) Depreciation and amortization 26,987 17,913 9,074 --------- --------- --------- 106,492 86,704 19,788 --------- --------- --------- Operating (Loss) $ (27,347) $ (6,378) $ (20,969) ========= ========= ========= Churn rate per month 3.1% 2.5% Marketing cost per gross customer unit addition $ 86 $ 45 Three Months Ended September 30, --------------------------------------- 1996 1995 Change ---- ---- ------ (Dollars in thousands, except per unit amounts) Revenues Service revenues $ 23,766 $ 24,109 $ (343) Equipment sales 2,773 3,434 (661) -------- -------- -------- Total Revenues 26,539 27,543 (1,004) -------- -------- -------- Costs and expenses Cost of services 7,716 6,052 1,664 Selling, general and administrative 20,999 13,643 7,356 Cost of equipment sold 2,194 3,558 (1,364) Depreciation and amortization 12,324 6,629 5,695 -------- --------- -------- 43,233 29,882 13,351 -------- --------- -------- Operating (Loss) $(16,694) $ (2,339) $(14,355) ======== ========= ======== Churn rate per month 3.9% 2.6% Marketing cost per gross customer unit addition $ 103 $ 45 12 FINANCIAL RESOURCES AND LIQUIDITY TDS and its subsidiaries operate relatively capital-intensive businesses. Rapid growth has caused expenditures for construction, expansion and acquisition programs to exceed internally generated cash flow in recent years. Accordingly, TDS has obtained substantial funds from external sources in the past to finance construction of cellular telephone systems and to fund acquisitions. Although the steady internal cash flow from TDS Telecom and increasing internal cash flow from U.S. Cellular have reduced the need for external financing, the development and construction activities of American Portable will require substantial additional funds from external sources. Cash Flows From Operating Activities. TDS is generating substantial internal funds from the rapid growth in customer units and revenues. Operating cash flow (operating income plus depreciation and amortization) increased 20% to $291.4 million in the first nine months of 1996 from $243.3 million in 1995. The increase represents primarily the 52% ($53.0 million) increase in cellular telephone operating cash flow. 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 $105.4 million in the first nine months of 1996 and $84.3 million in 1995. Nine Months Ended September 30, -------------------------------------- 1996 1995 Change ---- ---- ------ (Dollars in thousands) Operating cash flow Cellular telephone $ 154,153 $ 101,158 $ 52,995 Telephone 137,652 130,625 7,027 Radio paging (360) 11,535 (11,895) --------- --------- --------- 291,445 243,318 48,127 Other operating activities (105,418) (84,255) (21,163) --------- --------- --------- $ 186,027 $ 159,063 $ 26,964 ========= ========= ========= Cash Flows from Financing Activities. TDS has used short-term debt to finance its cellular telephone, radio paging and PCS operations, for acquisitions and for general corporate purposes. TDS takes advantage of attractive opportunities to retire short-term debt with the proceeds from long-term debt and equity sales. Cash flows from financing activities totaled $69.8 million in the first nine months of 1996 compared to $342.7 million in 1995. American Portable Telecom sold 12,250,000 common shares for net proceeds, after underwriters fees, totaling $195.3 million in an initial public offer ing in the second quarter of 1996, providing most of the Company's external financing requirements during the first nine months of 1996. TDS reduced its short-term debt by $89.4 million in the first nine months of 1996. Increases in long-term debt, primarily $221.5 million received from the sale of convertible debt at U.S. Cellular, $58.7 million from vendor financing and $39.5 million from the sale of TDS medium-term notes, and increases in short-term debt provided most of the Company's external financing requirements during the first nine months of 1995. Cash Flows From Investing Activities. TDS makes substantial investments each year to acquire, construct, operate and maintain modern, high-quality communications networks and facilities. Cash flows from investing activities required $198.2 million in the first nine months of 1996 compared to $476.4 million in 1995. Additions to property, plant and equipment totaled $347.7 million in 1996 and $264.9 million in 1995. Also in 1995, $319.0 million was expended for broadband and narrowband PCS license purchases. The sales of non-strategic cellular interests and other investments provided $ 212.5 million in 1996 and $128.3 million in 1995. Property, Plant and Equipment. The primary purpose of TDS's construction and expansion 13 program is to provide for normal growth, to upgrade service, to expand into new communication areas, and to take advantage of service-enhancing and cost-reducing technological developments. Additions to property, plant and equipment totaled $347.7 million in the first nine months of 1996 consisting of $172.9 million for cellular plant and equipment, $91.1 million for telephone plant and equipment, $26.3 million for radio paging property and equipment, $51.3 million for broadband PCS property and equipment and $6.1 million for other assets. Acquisitions. TDS seeks to acquire cellular telephone, telephone and paging interests which add value to the organization. During the first nine months of 1996, the Company purchased controlling interests in one cellular market and five telephone companies and minority interests in several cellular markets. The aggregate consideration for these acquisitions was $147.6 million primarily consisting of 2.6 million TDS Common Shares and $33.9 million cash. TDS is currently reviewing opportunities for the acquisition of additional cellular, telephone and paging companies. LIQUIDITY Management believes TDS has sufficient internal and external resources to finance the anticipated requirements of its business development, construction and acquisition programs. TDS is generating substantial internal funds to finance business development and construction programs. Operating cash flow for the twelve months ended September 30, 1996 increased to $371.6 million from $310.8 million in 1995. Twelve Months Ended September 30, ---------------------------------- 1996 1995 Change ---- ---- ------ (Dollars in thousands) Operating Cash Flow Cellular telephone $185,208 $121,265 $ 63,943 Telephone 182,621 173,667 8,954 Radio paging 3,800 15,904 (12,104) -------- -------- -------- $371,629 $310,836 $ 60,793 ======== ======== ======== TDS and its subsidiaries have cash and temporary investments totaling $142 million and longer-term cash investments totaling $37 million at September 30, 1996. These investments are primarily the result of telephone operations' internally generated cash. While certain regulated telephone subsidiaries' debt agreements place limits on intercompany dividend payments, these restrictions are not expected to affect the Company's ability to meet its cash obligations. TDS and its subsidiaries also have access to a variety of external capital sources. TDS and its subsidiaries had $646 million of committed bank lines of credit for general corporate purposes at September 30, 1996 of which $552 million was unused. These line of credit agreements provide for borrowings at negotiated rates up to the prime rate. TDS has $238 million remaining on its universal shelf registration statement which may be used from time-to-time to issue debt securities and/or Common Shares for cash. TDS and USM have shelf registration statements covering the issuance of equity for acquistions. In addition, the Company has issued Common Shares for acquistions pursuant to registration statements filed specifically for particular acquistions. The Company's property, plant and equipment additions are anticipated to aggregate approximately $412 million for 1996 (excluding PCS construction and development expenditures as explained more fully below) consisting of $240 million for cellular capital additions, $125 million for telephone capita l additions, $32 million for the radio paging property and equipment, including capitalized interest and $15 million for other fixed asset expenditures. 14 U.S. Cellular plans to finance its construction program using primarily internally generated cash supplemented by proceeds from the sale of non-strategic assets. TDS Telecom plans to finance its construction program using internally generated cash supplemented by long-term financing from federal government programs. American Paging plans to finance its property and equipment expenditures primarily through borrowings under TDS's short-term lines of credit. PCS Development. American Portable is proceeding with planned microwave relocation and cell site acquisition activities in each of its six major markets. Management anticipates that by year-end 1996, sufficient paths will have been cleared to allow service launch in all six markets. Service will be launched with more than 500 cell sites in place, which will provide wide-area metropolitan coverage. Friendly user (customer) trials are planned to begin late in the fourth quarter of 1996 and conclude in the first quarter of 1997, with roll-out of commercial service after successful customer trials. American Portable anticipates 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), and other start-up activities may be impacted by many factors, American Portable estimates that the aggregate funds required through December 31, 1998 will total approximately $865 million ($345 million in 1996, $415 million in 1997 and $105 million in 1998). This amount includes an estimated $620 million of capital expenditures for construction of the PCS networks ($300 million in 1996, $275 million in 1997 and $45 million in 1998) and $245 million of estimated working capital requirements. TDS expects American Portable's 1996 capital expenditures and expenditures for start-up and development activities to be financed using a variety of sources, including but not limited to, borrowings under TDS's short-term bank lines of credit, vendor financing and equity investors in American Portable. In March 1996, American Portable selected Nokia Telecommunications, Inc. ("Nokia") as its sole supplier of digital radio channel and switching infrastructure equipment during the initial build out of its PCS networks. Nokia has agreed to provide up to $200 million in financing for equipment purchases through a Credit Agreement dated June 19,1996 ("Credit Agreement"). In April of 1996, American Portable sold 12,250,000 of its Common Shares, approximately 17.2% of total outstanding shares, at a price of $17 per share in an initial public offering. The net proceeds from the offering, after underwriting discounts and commissions, was $195 million. On November 4, 1996 American Portable issued $226.2 million in aggregate principal amount at maturity Series A Zero Coupon Notes ("Notes") due in 2006. The issue price of the Notes was 44.2% of the principal amount at maturity or $100 million and there is no periodic payment of interest. The per annum yield to maturity on the Notes is 8.34%. TDS anticipates the development of American Portable and its entrance into the PCS business will reduce the rate of growth in TDS's net income from levels which would otherwise be achieved during the next few years. Management believes TDS's internal cash flows 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 help meet its short- and long-term financing needs. Moreover, TDS and its sub sidiaries 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. However, the Company has no agreements, commitments or understandings with respect to any such transactions. 15 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited Three Months Ended Nine Months Ended September 30 September 30, ------------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- (Dollars in thousands, except per share amounts) OPERATING REVENUES Cellular telephone $ 187,594 $ 138,567 $ 510,280 $ 355,439 Telephone 101,791 90,398 288,837 262,809 Radio paging 26,539 27,543 79,145 80,326 ------------ ----------- --------- --------- 315,924 256,508 878,262 698,574 ------------ ----------- --------- --------- OPERATING EXPENSES Cellular telephone 154,500 120,600 435,343 318,556 Telephone 76,928 65,466 215,126 189,773 Radio paging 43,233 29,882 106,492 86,704 ------------ ----------- --------- --------- 274,661 215,948 756,961 595,033 ------------ ----------- --------- --------- OPERATING INCOME 41,263 40,560 121,301 103,541 ------------ ----------- --------- --------- INVESTMENT AND OTHER INCOME Interest and dividend income 3,925 3,998 10,048 9,803 Cellular investment income, net of license cost amortization 15,992 11,117 38,221 29,083 PCS development costs (10,805) (1,856) (24,312) (2,758) Gain on sale of cellular interests and other investments 7,797 43,375 136,049 79,749 Other income (expense), net (786) (1,044) 979 (2,005) Minority share of income (3,595) (7,965) (24,397) (20,420) ----------- ----------- ---------- --------- 12,528 47,625 136,588 93,452 ----------- ----------- ---------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 53,791 88,185 257,889 196,993 Interest expense 9,346 12,121 30,343 39,191 ----------- ----------- ---------- --------- INCOME BEFORE INCOME TAXES 44,445 76,064 227,546 157,802 Income tax expense 21,776 33,468 111,496 69,433 ----------- ----------- ---------- --------- NET INCOME 22,669 42,596 116,050 88,369 Preferred Dividend Requirement (469) (258) (769) (1,453) ----------- ----------- ---------- --------- NET INCOME AVAILABLE TO COMMON $ 22,200 $ 42,338 $ 115,281 $ 86,916 =========== =========== ========== ========= WEIGHTED AVERAGE COMMON SHARES (000s) 61,321 59,038 60,856 58,191 EARNINGS PER COMMON SHARE $ .36 $ .72 $ 1.89 $ 1.49 =========== =========== ========== ========= DIVIDENDS PER COMMON AND SERIES A COMMON SHARE $ .10 $ .095 $ .30 $ .285 =========== =========== ========== ========= The accompanying notes to financial statements are an integral part of these statements. 16 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Nine Months Ended September 30, ----------------- 1996 1995 ---- ---- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 116,050 $ 88,369 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 180,201 148,441 Deferred taxes 45,122 15,930 Investment income (40,747) (30,937) Minority share of income 24,397 20,420 Gain on sale of cellular interests (136,049) (79,749) Noncash interest expense 11,952 7,685 Other noncash expense 5,168 6,503 Change in accounts receivable (27,724) (32,439) Change in accounts payable (7,369) (7,990) Change in accrued taxes 11,984 24,516 Change in accrued interest (5,457) (3,366) Change in other assets and liabilities 8,499 1,680 -------- --------- 186,027 159,063 -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Long-term debt borrowings 8,904 333,174 Repayments of long-term debt (23,161) (24,246) Change in notes payable (89,434) 44,629 Proceeds from the issuance of common stock 2,723 6,346 Minority partner capital distributions (4,302) 373 Redemption of preferred stock (526) (534) Dividends paid (19,638) (17,942) Proceeds from the issuance of subsidiaries' stock 195,232 915 -------- -------- 69,798 342,715 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (347,709) (264,905) Investments in and advances to cellular minority partnerships (14,931) (11,467) Distributions from partnerships 14,959 7,616 Investments in PCS licenses (21,009) (318,963) Proceeds from investment sales 212,549 128,312 Change in other investments (2,020) (2,486) Acquisitions, net of cash acquired (33,892) (48,859) Change in temporary investments and marketable securities (6,140) 34,333 -------- -------- (198,193) (476,419) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 57,632 25,359 CASH AND CASH EQUIVALENTS - Beginning of period 55,116 24,733 --------- --------- End of period $ 112,748 $ 50,092 ========= ========= The accompanying notes to financial statements are an integral part of these statements. 17 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited) September 30, 1996 December 31, 1995 ------------------ ----------------- (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 112,748 $ 55,116 Temporary investments 29,525 25,735 Accounts receivable from customers and others 180,903 145,344 Materials and supplies, at average cost, and other current assets 38,850 35,015 ----------- ----------- 362,026 261,210 ----------- ----------- INVESTMENTS Cellular limited partnership interests 194,596 158,559 Cellular license acquisition costs, net of amortization 1,080,639 1,075,820 PCS license acquisition costs 377,143 356,561 Franchise costs and other costs in excess of the underlying book value of subsidiaries, net 177,825 168,608 Other investments 110,137 87,726 ----------- ----------- 1,940,340 1,847,274 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Cellular telephone, net 614,781 530,027 Telephone, net 735,085 657,015 PCS, net 121,840 11,978 Radio paging, net 56,843 59,452 Other, net 32,023 34,938 ----------- ----------- 1,560,572 1,293,410 ----------- ----------- OTHER ASSETS AND DEFERRED CHARGES 70,480 67,188 ----------- ----------- TOTAL ASSETS $3,933,418 $3,469,082 =========== =========== 18 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) September 30, 1996 December 31, 1995 ------------------ ----------------- (Dollars in thousands) CURRENT LIABILITIES Current portion of long-term debt and preferred shares $ 37,854 $ 49,233 Notes payable 98,236 184,320 Accounts payable 122,420 122,886 Advance billings and customer deposits 32,614 27,706 Accrued interest 6,167 11,573 Accrued taxes 22,005 2,525 Other current liabilities 51,196 29,481 ----------- ----------- 370,492 427,724 ----------- ----------- DEFERRED LIABILITIES AND CREDITS 186,979 138,295 ----------- ----------- LONG-TERM DEBT, excluding current portion 890,545 858,857 ----------- ----------- REDEEMABLE PREFERRED SHARES, excluding current portion 359 1,587 ----------- ----------- MINORITY INTEREST in subsidiaries 431,619 328,544 ----------- ----------- NONREDEEMABLE PREFERRED SHARES 29,038 29,710 ----------- ----------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 54,190 51,137 Series A Common Shares, par value $1 per share 6,898 6,893 Common Shares issuable (30,975 and 31,431 shares, respectively) 1,461 1,496 Capital in excess of par value 1,658,100 1,417,513 Retained earnings 303,737 207,326 ----------- ----------- 2,024,386 1,684,365 ----------- ----------- $3,933,418 $3,469,082 =========== =========== The accompanying notes to financial statements are an integral part of these statements. 19 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accorda nce 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, 1996 and December 31, 1995, and the results of operations and cash flows for the nine months ended September 30, 1996 and 1995. The results of operations for the nine months ended September 30, 1996 and 1995, are not necessarily indicative of the results to be expected for the full year. 2. Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. 3. Earnings per Common Share were computed by dividing Net Income Available to Common by the weighted average number of common and common equivalent shares outstanding during the period. Dilutive common stock equivalents at September 30, 1996 consist of dilutive Common Share options and dilutive convertible Preferred Shares. 4. Assuming that acquisitions accounted for as purchases during the period January 1, 1995, to September 30, 1996, had taken place on January 1, 1995, unaudited pro forma results of operations from continuing operations would have been as follows: Nine Months Ended September 30, -------------------------- 1996 1995 ---- ---- (Dollars in thousands, except per share amounts) Operating revenues $855,533 $733,987 Net income 118,052 81,035 Earnings per share $ 1.90 $ 1.30 20 5. Supplemental Cash Flow Information Cash and cash equivalents includes cash and those short-term, highly liquid investments with original maturities of three months or less. Those investments with original maturities of greater than three months to twelve months are classified as temporary investments. TDS acquired certain cellular licenses, operating companies and telephone companies in 1996 and 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, -------------------------------------- 1996 1995 ---- ---- (Dollars in thousands, except per share amounts) Property, plant and equipment $ 55,692 $ 54,223 Cellular licenses 94,454 119,364 Increase (decrease) in equity method investment in cellular interests 8,356 (19) Franchise costs 12,847 23,473 Long-term debt (22,979) (8,933) Deferred credits (7,363) (214) Other assets and liabilities, excluding cash and cash equivalents 9,613 (2,618) Minority interest (3,036) (1,912) Common Shares issued and issuable (113,658) (121,864) U.S. Cellular Stock issued and issuable (34) (12,641) --------------- ------------------- Decrease in cash due to acquisitions $ 33,892 $ 48,859 =============== =================== The following table summarizes interest and income taxes paid, and other noncash transactions. Nine Months Ended September 30, -------------------------------------- 1996 1995 ---- ---- (Dollars in thousands, except per share amounts) Interest Paid $ 56,733 $ 41,612 Income Taxes Paid 65,466 27,629 Common Shares issued by TDS for conversion of TDS Preferred Stock $ 4,545 $ 13,653 21 6. Contingencies The Company's material contingencies as of September 30, 1996, include the collectibility of a $5.5 million note receivable under a long-term financing agreement with a cellular company and a $10.0 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 Report on Form 10-K for the year ended December 31, 1995. 7. Business Segment Information The following tables summarize business segment identifiable assets at September 30, 1996, and 1995, and business segment construction expenditures for the nine months and three months ended September 30, 1996, and 1995. Identifiable Assets September 30, ------------------------------------------- 1996 1995 ---- ---- (Dollars in thousands) Cellular Telephone $ 2,067,259 $ 1,833,984 Telephone 1,164,783 1,022,439 PCS 431,103 299,013 Radio Paging 158,804 152,841 Other 111,353 92,349 -------------------- -------------------- $ 3,933,302 $ 3,400,626 ==================== ==================== Additions To Property, Plant and Equipment Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (Dollars in thousands) Cellular Telephone $ 67,147 $ 60,706 $172,916 $160,679 Telephone 36,389 27,065 91,131 74,746 PCS 28,882 185 51,337 185 Radio Paging 4,302 3,290 26,330 20,231 Other (5,695) 2,849 5,995 9,064 ----------- ---------- -------- -------- $ 131,025 $ 94,095 $347,709 $264,905 =========== ========== ======== ======== 8. Subsequent Event On November 4, 1996, American Portable issued $226.2 million in aggregate principal amount at maturity Series A Zero Coupon Notes ("Notes") due in 2006. The issue price of the Notes was 44.2% of the principal amount at maturity or $100 million, and there is no periodic payment of interest. The per annum yield to maturity on the Notes is 8.34% (computed on a semi-annual bond equivalent basis) calculated from November 4, 1996. 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 10.1 - Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996. Exhibit 11 - Computation of earnings per common share. Exhibit 12 - Statement regarding computation of ratios. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended September 30, 1996: TDS filed a Current Report on Form 8-K dated July 1, 1996, which included a copy of the new $500 million revolving credit agreement, with First National Bank of Boston, as Agent. No other reports on Form 8-K were filed during the quarter ended September 30, 1996. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEPHONE AND DATA SYSTEMS, INC. (Registrant) Date November 13, 1996 /s/ MURRAY L. SWANSON ------------------- -------------------------------- Murray L. Swanson, Executive Vice President-Finance (Chief Financial Officer) Date November 13, 1996 /s/ GREGORY J. WILKINSON ------------------- --------------------------------- Gregory J. Wilkinson, Vice President and Controller (Principal Accounting Officer) 24 EX-11 2 EXHIBIT 11 Exhibit 11 Telephone and Data Systems, Inc. Computation of Earnings Per Common Share (in thousands, except per share amounts) Three Months Ended September 30, 1996 1995 - -------------------------------------------------------------------------------- Primary Earnings Net Income $ 22,669 $ 42,596 Dividends on Preferred Shares (469) (258) -------- -------- Net Income Available to Common $ 22,200 $ 42,338 ======== ======== Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 61,084 57,805 Additional shares assuming issuance of: Options and Stock Appreciation Rights 161 154 Convertible Preferred Shares 45 1,048 Common Shares Issuable 31 31 -------- -------- Primary Shares 61,321 59,038 ======== ======== Primary Earnings per Common Share Net Income $ .36 $ .72 ======== ======== Fully Diluted Earnings* Net Income $ 22,669 $ 42,596 Dividends on Preferred Shares (331) (110) -------- -------- Net Income Available to Common $ 22,338 $ 42,486 ======== ======== Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 61,084 57,805 Additional shares assuming issuance of: Options and Stock Appreciation Rights 161 160 Convertible Preferred Shares 512 1,542 Common Shares Issuable 31 31 -------- -------- Fully Diluted Shares 61,788 59,538 ======== ======== Fully Diluted Earnings per Common Share Net Income $ .36 $ .71 ======== ======== * 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, 1996 1995 - -------------------------------------------------------------------------------- Primary Earnings Net Income $ 116,050 $ 88,369 Dividends on Preferred Shares (769) (1,453) --------- --------- Net Income Available to Common $ 115,281 $ 86,916 ========= ========= Primary Shares Weighted average number of Common and Series A Common Shares Outstanding 60,243 57,289 Additional shares assuming issuance of: Options and Stock Appreciation Rights 170 160 Convertible Preferred Shares 415 708 Common Shares Issuable 28 34 --------- -------- Primary Shares 60,856 58,191 ========= ======== Primary Earnings per Common Share Net Income $ 1.89 $ 1.49 ========= ========= Fully Diluted Earnings* Net Income $ 116,050 $ 88,369 Dividends on Preferred Shares (347) (1,137) --------- --------- Net Income Available to Common $ 115,703 $ 87,232 ========= ========= Fully Diluted Shares Weighted average number of Common and Series A Common Shares Outstanding 60,243 57,289 Additional shares assuming issuance of: Options and Stock Appreciation Rights 176 163 Convertible Preferred Shares 887 1,033 Common Shares Issuable 28 34 --------- --------- Fully Diluted Shares 61,334 58,519 ========= ========= Fully Diluted Earnings per Common Share Net Income $ 1.89 $ 1.49 ========= ========= * 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-27 3 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, 1996, and for the nine months ended, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 SEP-30-1996 112,748 37,445 137,927 6,410 19,569 362,026 2,362,609 802,038 3,933,418 370,492 890,545 61,088 359 29,038 1,963,298 3,933,418 0 878,262 0 756,961 (136,588) 0 30,343 227,546 111,496 116,050 0 0 0 116,050 1.89 1.89
EX-10 4 EXHIBIT 10.1 UNITED STATES CELLULAR CORPORATION EXECUTIVE DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT, entered into this 15th day of July, 1996, by and between H. Donald Nelson, (hereinafter referred to as "Executive") and United States Cellular Corporation, (hereinafter referred to as "Company"), a Delaware corporation, located at 8410 West Bryn Mawr Avenue, Suite 700, Chicago, IL, 60631-3486. W I T N E S S E T H: WHEREAS, the Executive is now and will in the future be rendering valuable services to the Company, and the Company desires to ensure the continued loyalty, service and counsel of the Executive; and WHEREAS, the Executive desires to defer a portion of his or her salary and bonus until retirement, resignation, disability or death, or to a specific date greater than one year from the date of this agreement. NOW, THEREFORE, in consideration of the covenants and agreements herein set forth, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. Deferred Compensation Agreement. The Company agrees to establish and maintain a book reserve(the "Deferred Compensation Account") for the purpose of measuring the amount of deferred compensation payable under this Agreement. Credits shall be made to the Deferred Compensation Account as follows: (a) On each issuance of the Executive's semi-monthly payroll check, (scheduled for the 15th and the last day of each month), during the Executive's continued active employment with the Company, there shall be deducted an amount equivalent to eight percent of the Executive's gross compensation for the pay period which will be credited to the Deferred Compensation Account. The first deduction will occur on the Executive's semi-monthly payroll check dated August 15, 1996. The deferral percentage selected by the Executive will also be applied to all normal bonus payments. (b) Commencing on September 30, 1996, and on the last day of each month thereafter during the Executive's continued employment with the Company, there shall be credited to the Deferred Compensation Account (before any amount is credited for the month then ending pursuant to paragraph 1(a)), interest compounded monthly computed at a rate equal to one-twelfth (1/12) of the sum of (a) the average thirty (30) year Treasury Bond rate of interest (as published in the Wall Street Journal for the last day of the preceding month) plus (b) 1.25 percentage points. Quarterly reports which specify the amount credited to the Executive's Deferred Compensation Account during the previous period(amount deferred plus interest) and the then current balance, shall be provided to the Executive. (c) The Deferred Compensation percentage elected in section 1(a) shall be deducted and credited to the Deferred Compensation Account for all compensation paid to the Executive, including bonus and retroactive pay increases. (d) The Executive may terminate participation in the Agreement with respect to the deferral of future compensation at any time. In the event the Executive elects to make such a discontinuance, he or she shall remain eligible to receive the benefits under Section 2 with respect to amounts already deferred. Previously deferred amounts are not payable until retirement, resignation, disability, death or the date specified by the Executive in paragraph 2 (g) (ii). After a discontinuance, Executive may not again elect to participate with respect to future deferrals until a subsequent calendar year. (e) The Deferred Compensation percentage selected in 1(a) shall be in effect for the entire plan year unless participation is terminated. The Executive may not elect to change the percentage until a new plan year commences. 2. Payment of Deferred Compensation. (a) In the event the Executive terminates his/her employment for whatever reason, the Company must compute the "Ending Balance" in the Deferred Compensation Account. This Ending Balance shall include all deferrals and interest as of the last day of the preceding month, and any deferrals made in the current month. In the event that the Executive becomes disabled, his/her employment shall for these purposes be deemed to terminate on the first day of the month in which he/she begins to receive long term disability payments provided by the Company's insurance carrier (thus, the Ending Balance shall be computed as of the preceding month). Payment of deferred compensation under these events will be in accordance with the Executive's payment method election in paragraph 2(e). (b) The Executive must elect the payment method for receiving his/her Ending Balance either in a lump sum or in an indicated number of installments. This determination must be made at the time of execution of the agreement in Section 2(e) and will apply to all deferrals. Any amendment changing the method of payment must be made at least two (2) years prior to the selected payment date or (2) years prior to termination of employment, whichever occurs first, to be considered effective. (c) In the event the Executive chooses the installment option, the Executive must inform the Company of the number of installments he or she wishes to receive. The installments will be paid quarterly (not to exceed 20 quarters) commencing with the fifteenth day of the quarter following the quarter in which the date specified in 2(g)occurs.. Installments will then be paid on the fifteenth day of each succeeding calendar quarter until the Ending Balance and all accrued interest, which includes interest earned during the installment period, has been paid. If the Executive chooses the lump sum option, such sum must be paid within forty-five (45) days after the date specified in 2(g). (d) If the Executive dies prior to the total distribution of the Ending Balance, the Company shall pay an amount equal to the then current balance including accrued interest in the Deferred Compensation Account in a lump sum within forty-five (45)days following the Executive's death to the Executive's Designated Beneficiary (as hereinafter defined). However, if the Executive is married at the time of death, the Executive may designate (at the time of entering this Agreement or upon a subsequent marriage) that the payments specified in 2(c) shall continue to the spouse. If such spouse dies before all payments are made, the procedures in 3(a) and 3(b) shall apply. (e) Payment of Deferred Compensation Election (choose one option): i) ____ Lump sum distribution; or ii) __X__ Installment method. The amount of each installment shall be equal to one-tenth (cannot be less than one-twentieth) of the Ending Balance plus accrued interest compounded monthly for the preceding calendar quarter. (f) The Executive must elect the deferral date for receiving his/her Ending Balance. This date is to be either retirement, or a specific date greater than one year from the date of this agreement. This determination must be made at the time of execution of the agreement in Section 2(g) and will apply to all deferrals. (g) Election of Deferral Date (choose one option): i) __X__ Retirement; or ii) ____ Specific Date: (must be greater than one year from the date of this agreement) (h) In the event of an unforeseeable emergency, the Executive may make withdrawals from the Deferred Compensation Account in an amount equal to that which is reasonably necessary to satisfy the emergency. An unforeseeable emergency means a severe financial hardship to the Executive resulting from a sudden and unexpected illness or accident of the Executive or of a dependent (as defined in Internal Revenue Codess. 152(a)) of the Executive, loss of the Executive's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive. The circumstances that will constitute an emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved (a) through reimbursement or compensation by insurance or otherwise; (b) by liquidation of the Executive's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or (c) by cessation of deferrals under this Agreement. Examples of what are not considered to be unforeseeable emergencies include the need to send an Executive's child to college or the desire to purchase a home. In the event the Company approves the payment of a withdrawal due to an unforeseeable emergency, such payment shall be made by the Company to the Executive in a lump sum within forty-five (45) days after approval of such request. 3. Designation of Beneficiaries. (a) The Executive may designate a beneficiary to receive any amount payable pursuant to paragraph 2(c) (the "Designated Beneficiary") by executing or filing with the Company during his/her lifetime, a Beneficiary Designation in the form attached hereto. The Executive may change or revoke any such designation by executing and filing with the Company during his/ her lifetime a new Beneficiary Designation. If the Executive is married and names someone other than his/her spouse (e.g., child) as beneficiary, the spouse must consent by signing the designated area of the Beneficiary Designation form in the presence of a Notary Public. (b) If any Designated Beneficiary predeceases the Executive, or if any corporation, partnership, trust or other entity which is a Designated Beneficiary is terminated, dissolved, becomes insolvent, is adjudicated bankrupt prior to the date of the Executive's death, or if the Executive fails to designate a beneficiary, then the following persons in the order set forth below shall receive the entire amount specified in paragraph 2(c) above, which the previous Designated Beneficiary would have been entitled to receive: i) Executive's spouse, if living; otherwise ii) Executive's then living descendants, per stirpes; and otherwise; iii) Executive's estate 4. Miscellaneous. (a) The right of the Executive or any other person to any payment of benefits under this Agreement may not be assigned, transferred, pledged or encumbered. (b) If the Company finds that any person to whom any amount is payable under this Agreement is unable to care for his/her affairs because of illness or accident, or is under any legal disability which prevents the Executive from caring for his or her affairs, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be made to the spouse, a child, a parent, or a brother or sister of such person, or to any party deemed by the Company to have incurred expenses for such person otherwise entitled to payment, in such manner and proportions as the Company may determine. Any such lump sum payment, as discussed in 2(d), shall be a complete discharge of the liability of the Company under this Agreement for such payment. (c) This Agreement shall be construed in accordance with and governed by the laws of the State of Illinois. (d) The Executive is considered to be a general unsecured creditor of the Company with regard to the deferred compensation amounts to which this Agreement pertains. (e) The deferred amounts under this Agreement are unfunded for tax and ERISA purposes. (f) The Company must deduct from all payments made hereunder all applicable federal or state taxes required to be withheld from such payments. (g) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof. (h) In the event any provision of this Agreement is held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement must be construed and enforced as if the illegal or invalid provision had not been included. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. UNITED STATES CELLULAR CORPORATION ("COMPANY"): By: /s/ Douglas S. Arnold EXECUTIVE: By: /s/ H. Donald Nelson EX-12 5 EXHIBIT 12 Exhibit 12 TELEPHONE AND DATA SYSTEMS, INC. RATIOS OF EARNINGS TO FIXED CHARGES For the Nine Months September 30, 1996 (Dollars In Thousands) EARNINGS: Income from Continuing Operations before income taxes $ 257,889 Add (Deduct): Minority Share of Losses (8,530) Earnings on Equity Method (40,747) Distributions from Minority Subsidiaries 14,959 Amortization of Non-Telephone Capitalized Interest 2 Minority interest in majority-owned subsidiaries that have fixed charges 23,729 --------- 247,302 Add fixed charges: Consolidated interest expense 29,925 Interest Portion (1/3) of Consolidated Rent Expense 4,823 Amortization of debt expense and discount on indebtedness 417 --------- $ 282,467 ========= FIXED CHARGES: Consolidated interest expense $ 29,925 Capitalized interest 21,192 Interest Portion (1/3) of Consolidated Rent Expense 4,823 Amortization of debt expense and discount on indebtedness 417 --------- $ 56,357 ========= RATIO OF EARNINGS TO FIXED CHARGES 5.01 ========= Tax-Effected Redeemable Preferred Dividends $ 769 Fixed Charges 56,357 --------- Fixed Charges and Redeemable Preferred Dividends $ 57,126 ========= RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS 4.94 ========= Tax-Effected Preferred Dividends $ 2,680 Fixed Charges 56,357 --------- Fixed Charges and Preferred Dividends $ 59,037 ========= RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 4.78 ========= -----END PRIVACY-ENHANCED MESSAGE-----