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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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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
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TELEPHONE AND DATA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Iowa 36-2669023
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 North LaSalle Street, Chicago, Illinois 60602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 630-1900
Not Applicable
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(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 29, 1994
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Common Shares, $1 par value 46,342,814 Shares
Series A Common Shares, $1 par value 6,885,573 Shares
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THIS CONFORMING PAPER FORMAT IS BEING SUBMITTED
PURSUANT TO RULE 901(d) OF REGULATION S-T.
TELEPHONE AND DATA SYSTEMS, INC.
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2ND QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial
Condition 2-19
Consolidated Statements of Income -
Three Months and Six Months Ended
June 30, 1994 and 1993 20
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993 21
Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993 22-23
Notes to Consolidated Financial Statements 24-26
Part II. Other Information 27-28
Signatures 29
PART I. FINANCIAL INFORMATION
-----------------------------------
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
---------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
--------------------------------------------------------------
AND FINANCIAL CONDITION
------------------------
RESULTS OF OPERATIONS
---------------------
Six Months Ended 6/30/94 Compared to Six Months Ended 6/30/93
CONSOLIDATED
Telephone and Data Systems, Inc.'s ("TDS" or the "Company")
consolidated results of operations for the first half of 1994
reflect i) rapid growth in cellular and paging customer units
which resulted in substantial increases in revenues, ii)
steady growth in telephone access lines and revenues, iii)
improvements in cellular and paging economies of scale and
cost-containment measures in all three business units which
resulted in improved cash flow, operating results, and cash
and operating margins, iv) increases in interest and income
tax expense and v) an increase in weighted average shares
outstanding due to the Company's continuing acquisition
program and sales of Common Shares. Operating revenues grew
29.0% to $332.4 million in the first half of 1994 over 1993,
operating cash flow increased 32.7% to $120.3 million and
operating income rose 41.9% to $51.3 million. Net income
before the cumulative effect of an accounting change rose
55.6% to $24.5 million in the first half of 1994 over 1993.
Earnings per share before the cumulative effect of an
accounting change, reflecting the significantly improved
operating results offset somewhat by a 16.3% increase in
weighted average common shares, grew 37.5% to $.44 in 1994
from $.32 in 1993. Net income and earnings per share in 1994
were reduced by $723,000 and $.01, respectively, due to TDS's
adoption of a new accounting standard for postemployment
benefits.
TDS Telecommunications Corporation ("TDS Telecom") has
acquired two telephone companies since June 30, 1993. These
acquisitions added 2,500 access lines while internal growth
added 17,200 lines. TDS Telecom provides service to customers
in 29 states. United States Cellular Corporation (AMEX symbol
"USM"), TDS's 81.4%-owned subsidiary, has added 16 markets to
consolidated operations since June 30, 1993, through
acquisitions and the initiation of cellular operations. USM
currently provides cellular service through systems serving
123 majority-owned and managed markets. American Paging, Inc.
(AMEX symbol "APP"), TDS's 82.5%-owned subsidiary, has added
approximately 136,300 pagers since June 30, 1993. APP
provides service to its customers through 38 sales and service
operating centers.
Operating revenues grew 29.0% ($74.7 million) in 1994
primarily as a result of the growth in customers served.
Cellular telephone revenues increased as a result of the 75.0%
customer growth in majority-owned markets, which resulted in
increased local retail and access revenue, and increased
roaming revenues, offset somewhat by a 5.7% decline in average
monthly service revenue per unit. Radio paging revenues
increased primarily as a result of the 34.2% growth in the
number of pagers in service offset somewhat by a 12.1% decline
in average monthly service revenue per unit. Telephone
revenues increased primarily due to acquisitions, recovery of
increased costs of providing long-distance services and
internal access line growth.
-2-
Operating expenses rose 26.9% ($59.5 million) in 1994 as a
result of the continued rapid growth in USM's cellular
telephone operations and the steady growth in TDS Telecom's
and APP's operations. Operating expenses increased in all
three business units, but at a slower rate than revenues due
to increasing economies of scale in the cellular and paging
units and cost- containment measures in all three businesses.
Operating income increased 41.9% to $51.3 million in the
first half of 1994 from $36.2 million in 1993. The increase
in operating income reflects improved operating results in all
three business units, as shown in the following table.
Six Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
CONSOLIDATED OPERATING INCOME
Telephone Operations $ 45,572 $ 40,742 $ 4,830
Cellular Telephone Operations 4,519 (2,820) 7,339
Radio Paging Operations 1,218 (1,771) 2,989
--------- -------- ----------
$ 51,309 $ 36,151 $ 15,158
========= ======== ==========
Operating Margins:
Telephone 32.2% 31.3%
Cellular Telephone* 3.2% (3.2)%
Radio Paging* 3.3% (5.9)%
* Computed on Service Revenues
Investment and other income increased 10.9% ($1.1
million) in 1994. Cellular investment income, net increased
$4.8 million to $10.9 million, reflecting improvement in USM's
equity-method markets managed by others. Minority share of
income increased $3.6 million in the first half of 1994 over
1993, as shown in the following table. Other income, net for
1994 includes a charge of $614,000 for USM's sale of obsolete
equipment. Other income, net reflects a $1.1 million pretax
charge in 1993 as American Paging elected to cease national
retailer distribution of pagers through its wholly owned
subsidiary, American Paging Network ("APN"). In addition,
1993's other income, net includes income of $580,000 related
to USM's sale of the customer base in its reseller operation
and income of $675,000 related to USM's settlement of a
lawsuit.
Minority share of income includes (a) the minority
shareholders' share of USM's net income or loss, (b) the
minority partners' share of income or loss of the cellular
markets majority-owned by USM and (c) the minority
shareholders' share of income of a telephone company majority-
owned by TDS. USM reported net income in 1994 and a net loss
in 1993, resulting in a $3.0 million increase in minority
share of income.
-3-
MINORITY SHARE OF INCOME
Six Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
United States Cellular
Minority Shareholders' Share $ (743) $ 2,237 $ (2,980)
Minority Partners' Share (2,314) (1,987) (327)
--------- -------- ----------
(3,057) 250 (3,307)
TDS Telecom (828) (528) (300)
--------- -------- ----------
$ (3,885) $ (278) $ (3,607)
========= ======== ==========
Interest expense increased 3.4% ($610,000) in 1994. The
increase was primarily due to an increase in long-term
interest expense. Since June 30, 1993, TDS has issued $14.5
million under its Medium-Term Note Program which was used to
retire higher-cost long- and short-term notes. The Company's
average balance of short-term notes payable decreased to $23.4
million in 1994 from $39.0 million in 1993, resulting in a
decrease in short-term interest expense in the first half of
1994 compared with the first half of 1993.
Income tax expense increased 55.4% ($6.9 million) in 1994
compared with 1993 as pretax income increased. The effective
income tax rate was 44.0% in the first half of 1994 and 1993.
State income taxes increased 9.1% ($251,000) in 1994, due
primarily to the increase in pretax income.
Net income before the cumulative effect of a change in
accounting principle improved to $24.5 million in 1994 from
$15.8 million in 1993. Earnings per common share before the
cumulative effect of a change in accounting principle were
$.44 in 1994 and $.32 in 1993. The weighted average number of
common shares outstanding increased 16.3% since June 30, 1993.
The increase is primarily due to the issuance of 3.7 million
Common Shares in connection with acquisitions and 1.4 million
Common Shares for cash since June 30, 1993.
Cumulative effect of accounting changes: Effective
January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting
for Postemployment Benefits." SFAS No. 112 requires employers
to recognize the obligation to provide postemployment benefits
to former or inactive employees after employment but before
retirement. The cumulative effect of the new principle on
years prior to 1994 reduced net income and earnings per share
by $723,000 and $.01, respectively.
-4-
TELEPHONE OPERATIONS
Six Months Ended June 30,
-------------------------------------------------
Change Change
Due To Excluding
1994 1993 Change Acquisitions Acquisitions
-------- -------- ------ -------- ---------
(Dollars in thousands,
except per access line amounts)
Operating Revenues
Local Service $ 39,498 $ 34,948 $4,550 $ 733 $ 3,817
Network Access and
Long-Distance 82,300 77,993 4,307 2,477 1,830
Miscellaneous 19,550 17,265 2,285 591 1,694
-------- ------- ------ -------- --------
141,348 130,206 11,142 3,801 7,341
-------- ------- ------ -------- --------
Operating Expenses
Plant Operations 21,700 19,556 2,144 719 1,425
Depreciation 29,296 26,324 2,972 621 2,351
Amortization 1,799 1,712 87 159 (72)
Customer Operations 20,284 19,032 1,252 530 722
Corporate and Other 22,697 22,840 (143) 740 (883)
-------- ------- ------ -------- --------
95,776 89,464 6,312 2,769 3,543
-------- ------- ------ -------- --------
Operating Income $ 45,572 $ 40,742 $4,830 $ 1,032 $ 3,798
======== ======= ====== ========= =========
Telephone Revenues as a
Percent of Total
Revenues 42.5% 50.5%
Additions to Property,
Plant and Equipment* $ 33,797 $ 28,238
Identifiable Assets $835,421 $788,556
Companies 93 92
Access Lines 364,300 344,600
Growth in access lines
in past 12 months:
Acquisitions 2,500 19,300
Internal growth 17,200 12,700
Average monthly revenue
per access line $ 65 $ 65
* Does not include cash expenditures (in thousands) of $6,273 and $5,685,
respectively, which relate to additions in prior periods.
Operating revenues from telephone operations increased
8.6% ($11.1 million) in the first half of 1994 compared to
1993. The increase in revenues was primarily due to internal
access line growth, recovery of increased costs of providing
long-distance services and the effects of acquisitions.
Acquisitions increased telephone revenues 2.9% ($3.8 million)
in 1994. TDS has acquired two telephone companies serving
2,500 access lines since June 30, 1993. Telephone results of
operations include the results of these acquired companies
since the respective dates of acquisition.
Local service revenues increased 13.0% ($4.6 million) in
1994 with acquisitions increasing such revenues 2.1%
($733,000). Internal access line growth and sales of
custom-calling and other features increased revenues 6.3%
($2.2 million). Certain extended area service ("EAS") and
extended community calling ("ECC") revenues previously
reported as network access revenues and changes in settlement
plans increased local service revenues 3.7% ($1.3 million).
-5-
Network access and long-distance revenues increased 5.5%
($4.3 million) in 1994 with acquisitions increasing such
revenues 3.2% ($2.5 million). Increased usage of the network
generated 3.5% ($2.7 million) of additional network access and
long-distance revenue. These revenues increased 3.1% ($2.4
million) due to recovery of increased costs of providing
access to long-distance carriers. Out-of-period adjustments
to revenues earned based on expense and investment in the
network reduced these revenues 1.7% ($1.3 million) in 1994.
These revenues also decreased 2.4% ($1.9 million) in 1994 due
to changes in settlement plans and because certain EAS and ECC
revenues are now reported as local service revenues.
Miscellaneous revenues increased 13.2% ($2.3 million) in
1994 with acquisitions increasing such revenues 3.4%
($591,000). Higher sales and leases of customer premise
equipment increased miscellaneous revenues 4.4% ($765,000),
changes in settlement plans increased these revenues 3.3%
($577,000), and call plan programming services provided to
other carriers increased these revenues 1.5% ($252,000).
Operating expenses increased 7.1% ($6.3 million) in 1994.
Acquisitions increased operating expenses 3.1% ($2.8 million),
while a health and life insurance premium refund reduced
operating expenses 1.2% ($1.0 million).
Plant operations expenses increased 11.0% ($2.1 million)
with acquisitions increasing these expenses 3.7% ($719,000).
The remainder of the increase was primarily due to salary and
work force changes along with the effects of general
inflation. Depreciation expense increased 11.3% ($3.0
million) with acquisitions increasing such expenses 2.4%
($621,000). The remaining increase was due primarily to
increases in plant facilities. Customer operations expenses
increased 6.6% ($1.3 million) with acquisitions increasing
such expenses 2.8% ($530,000). The remaining increase was
primarily due to increases in salary and workforce changes,
customer billing and programming costs and increased marketing
activities. Corporate and other expenses decreased .6%
($143,000). Increases due to acquisitions, 3.2% ($740,000),
were more than offset by decreases due to out-of-period
adjustments.
Operating income from telephone operations increased
11.9% ($4.8 million) in 1994, with acquisitions increasing
such income 2.5% ($1.0 million). The telephone operating
margin was 32.2% in 1994 compared to 31.3% in 1993. The
increase in operating income reflects additional 1994 revenues
from recovery of increased costs of providing long-distance
services and from growth in access lines and minutes of use.
These increases in revenues were offset somewhat by increased
costs for plant operations and customer billing and by
increased depreciation. TDS Telecom's increased operating
margin for the first half of 1994 may not be sustainable for
the remainder of the year. Increased construction
expenditures and seasonality effects are expected to reduce
the operating margin to levels near 30%.
-6-
CELLULAR TELEPHONE OPERATIONS
Six Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- ---------- -----------
(Dollars in thousands,
except per unit amounts)
Operating Revenues
Service* $ 140,426 $ 87,050 $ 53,376
Equipment Sales 6,464 4,970 1,494
--------- -------- ----------
146,890 92,020 54,870
--------- -------- ----------
Operating Expenses
System Operations* 21,804 15,536 6,268
Marketing and Selling 30,031 17,634 12,397
Cost of Equipment Sold 17,021 8,381 8,640
General and Administrative 43,206 33,010 10,196
Depreciation 18,142 11,518 6,624
Amortization 12,167 8,761 3,406
--------- -------- ----------
142,371 94,840 47,531
--------- -------- ----------
Operating Income (Loss) $ 4,519 $ (2,820) $7,339
======== ======== ========
Cellular Telephone Revenues as a
Percent of Total Revenues 44.2% 35.7%
Additions to Property, Plant and
Equipment** $ 59,777 $ 30,500
Identifiable Assets $1,460,030 $ 1,128,163
Majority-Owned, Managed and Consolidated
Markets:
Population equivalents (000s) 18,861 17,004
Total population (000s) 20,344 17,553
Customers 331,000 189,100
Market penetration 1.63% 1.08%
Markets in operation 123 107
Cell sites in service 610 393
Average monthly service revenue
per unit* $ 79 $ 84
Churn rate per month 2.2% 2.0%
Marketing cost per net customer
addition $ 665 $ 692
* Amounts for 1993 have been reclassified to conform to current year
presentation.
** Does not include cash expenditures (in thousands) of $9,674 and $5,026,
respectively, which relate to additions in prior periods.
USM owns, operates and invests in cellular markets. USM
owns or has the right to acquire interests, both majority and
minority, in 208 cellular telephone markets at June 30, 1994,
representing 24,330,000 population equivalents. USM managed
the operations in 141 markets at June 30, 1994, and expects to
manage the operations of five other markets in the future.
The remaining interests in 62 markets are managed by others.
USM's consolidated results of operations include 100% of the
revenues and expenses of the systems serving its majority-
owned and managed markets. The results of operations of 123
markets are included in 1994 consolidated results compared to
107 markets in 1993.
Operating revenues increased 59.6% ($54.9 million) in
1994. The revenue increase is primarily the result of 75.0%
customer growth in the systems serving its majority-owned and
managed markets, growth in roamer revenues and acquisitions.
Acquisitions and start-ups increased revenues 11.5% ($10.6
million). USM changed its financial reporting presentation
for outbound, or pass-through, roamer revenue during the first
quarter of 1994. Pass-through roamer revenue is now treated
as an offset to the expense charged by other cellular carriers
to the Company's markets for this roaming service, and the net
amount is included in system operations expense. Service
revenues and system operations expense for 1993 have been
reclassified for
-7-
the effect of this change in presentation, which allows for
more comparability of USM's revenues and margins to other
companies in the cellular industry. While the number of
customers and amount of revenues earned continued to grow,
average revenue per customer and monthly local minutes of use
per customer declined. Average monthly service revenues per
customer declined to $79 in 1994 from $84 in 1993. Monthly
local minutes of use averaged 96 in the first half of 1994
compared to 104 in the same period in 1993. The decline in
average local minutes of use follows an industry-wide trend
and is believed to be related to the tendency of the early
subscribers in a market to be the heaviest users. It also
reflects USM's and the cellular industry's continued
penetration of the consumer market, which tends to include
more lower-usage customers. Management anticipates that
average local minutes of use and average monthly revenue per
customer will continue to decline as USM adds more customers.
Service revenues from local customers' usage of USM's
systems increased 63.5% ($32.9 million) in 1994. Growth in
the number of customers in USM's consolidated markets was the
primary reason for the increase in local revenue, offset
somewhat by the decrease in average monthly local minutes of
use. The decrease in average minutes of use resulted in a
decrease in average monthly retail revenue per customer, to
$48 in 1994 from $50 in 1993. Inbound roamer revenues, earned
when customers of other systems use USM's cellular systems,
increased 54.6% ($15.8 million). The increase is attributable
to an increase in the number of customers from other systems
using USM's systems as well as an increased number of USM-
managed systems and cell sites within those systems. Monthly
roamer revenue per customer averaged $25 in 1994 and $28 in
1993. Long-distance revenues increased 90.5% ($4.6 million)
as the volume of long-distance calls billed by USM increased.
Equipment sales revenue reflects the sale of 63,200 and
24,300 cellular telephone units in 1994 and 1993,
respectively, plus installation and accessories revenue. The
average revenue per telephone unit sold was $102 in 1994
compared to $204 in 1993. The average revenue decline
partially reflects USM's decision to reduce sales prices on
cellular telephones to stimulate customer growth as well as
reduced manufacturers' prices. Also, during the first half of
1994, USM used promotions which were based on increased
equipment discounting. The success of these promotions led to
both an increase in units sold and a decrease in average
equipment sales revenue per unit.
Operating expenses increased 50.1% ($47.5 million) in
1994. The increase in expenses was primarily the result of
increased customer activations, acquisitions and increased
depreciation and amortization expense related to increases in
fixed assets and license costs. Acquisitions and start-ups
increased operating expenses 15.6% ($14.8 million) in 1994.
System operations expenses increased 40.3% ($6.3 million)
in 1994 as a result of increases in customer usage expenses
and other costs associated with operating USM's increased
number of cellular systems and the growing number of cell
sites within those systems. Customer usage expenses represent
charges from other telecommunications service providers for
local interconnection to the landline network, toll charges
and roamer expenses from USM's customers' use of systems other
than their local systems, offset somewhat by increased pass-
through roamer revenue. Customer usage expenses grew 17.3%
($1.5 million) in 1994. Maintenance, utility and cell site
expenses grew 67.5% ($4.8 million) in 1994, reflecting growth
in the number of cells to 610 in 1994 from 393 in 1993 and in
the number of switches in service, and the effects of
acquisitions and start-ups.
-8-
Marketing and selling expenses increased 70.3% ($12.4
million) in 1994, due primarily to the increased number of
gross customer activations in 1994 and the effects of
acquisitions and start-ups. Marketing and selling expenses
primarily consist of salaries, commissions and expenses of
field sales and retail personnel and offices, agent
commissions, promotional expenses, local advertising and
public relations expenses. Management expects that marketing
and selling costs will continue to increase as additional
customers are added to USM's systems.
Cost of equipment sold reflects the increased unit sales
related to the increase in gross customer activations and the
first half of 1994 promotional sales discussed above, offset
somewhat by falling manufacturers' prices per unit. The
average cost of a telephone unit sold was $269 in 1994
compared to $345 in 1993.
General and administrative expenses increased 30.9%
($10.2 million) in 1994. These expenses include the costs of
operating USM's local business offices and its corporate
expenses. The increase results from the increase in the
number of consolidated markets due to acquisitions as well as
the growth in the customer base in existing systems. General
and administrative expenses increased approximately $1.6
million in 1994 due to legal expenses incurred to successfully
defend the Company against claims totalling more than $200
million. A health and life insurance premium refund decreased
general and administrative expenses by $730,000 in 1994. USM
is using an ongoing clustering strategy to combine local
operations wherever feasible in order to gain operational
efficiencies and reduce its administrative expenses.
Depreciation expense increased 57.5% ($6.6 million) in
1994, reflecting a 55.4% increase in average fixed assets
since June 30, 1993. Amortization expense, primarily
amortization of license costs, increased 38.9% ($3.4 million)
in 1994. This additional amortization reflects the 41.5%
($291 million) increase in license costs for consolidated
operational markets since June 30, 1993.
Operating income was $4.5 million in 1994 compared to an
operating loss of $2.8 million in 1993. Operating margin on
service revenues improved to 3.2% in 1994 from (3.2%) in 1993.
The improvement in operating results was primarily due to
improved results in the more established markets and increased
revenues from growth in the customer base, offset somewhat by
costs associated with the growth of USM's operations and
increased losses on equipment sales. At least 12 additional
markets are expected to be added to consolidated operations
during the remainder of 1994. The addition of these markets
is expected to increase expenses as USM adds to its technical
and administrative staffs to build and serve the systems.
Additionally, management believes there exists a seasonality
in both service revenues and operating expenses, especially
marketing expenses. As a result, decreased operating income,
or operating loss, could be generated over the next several
quarters.
Cellular investment income includes USM's and TDS's share
of the net incomes or losses of cellular markets in which they
have a minority interest and for which they follow the equity
method of accounting, net of amortization of license cost
related to those minority interests.
CELLULAR INVESTMENT INCOME
Net of License Cost Amortization
Six Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
Cellular Systems Managed by USM $ 380 $ (293) $ 673
Cellular Systems Managed by Others 10,504 6,425 4,079
--------- -------- ----------
$ 10,884 $ 6,132 $ 4,752
========= ======== ==========
-9-
Net income from cellular telephone operations was $3.6
million in 1994 compared to a net loss of $11.2 million in
1993. Such net income or loss excludes the USM minority
shareholders' share of such income or loss. Net income or
loss from cellular telephone operations does not include
income taxes from inclusion in the TDS consolidated federal
tax return. Under a tax allocation agreement between TDS and
USM, TDS does not reimburse USM currently for income tax
benefits and credits. Instead, such benefits and credits are
carried forward until they can be used by USM.
TDS owned an aggregate of 63,373,565 shares of common
stock of USM at June 30, 1994, representing over 81% of the
combined total of USM's outstanding Common and Series A Common
Shares and over 96% of their combined voting power. Assuming
USM Common Shares are issued in all instances in which USM has
the choice to issue its Common Shares or other consideration
and assuming all issuances of USM's common stock to be issued
to TDS and third parties for completed and pending
acquisitions and Preferred Stock conversions had been
completed at June 30, 1994, TDS would have owned approximately
80% of the total outstanding common stock of USM and
controlled over 95% of the combined voting power of both
classes of its common stock. In the event TDS's ownership of
USM falls below 80% of the total value of all of the
outstanding shares of USM's stock, TDS and USM would be
deconsolidated for federal income tax purposes. TDS and USM
have the ability to defer or prevent deconsolidation, if
deferring or preventing deconsolidation would be advantageous,
by delivering TDS Common Shares and/or cash, in lieu of USM's
Common Shares in connection with certain acquisitions.
-10-
RADIO PAGING OPERATIONS
Six Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands,
except per unit amounts)
Service Operations
Revenues* $ 36,963 $ 30,103 $ 6,860
--------- -------- ----------
Costs and Expenses
Cost of Services* 8,669 7,730 939
Selling and Advertising 6,098 5,346 752
General and Administrative* 13,484 12,270 1,214
Depreciation 6,363 5,291 1,072
Amortization* 1,203 913 290
--------- -------- ----------
35,817 31,550 4,267
--------- -------- ----------
Service Operating Income (Loss) 1,146 (1,447) 2,593
--------- -------- ----------
Equipment Sales
Revenue 7,186 5,376 1,810
Cost of Equipment Sold 7,114 5,700 1,414
--------- -------- ----------
Equipment Sales Income (Loss) 72 (324) 396
--------- -------- ----------
Operating Income (Loss) $ 1,218 $ (1,771) $ 2,989
========= ======== ==========
Radio Paging Revenues as a
Percent of Total Revenues 13.3% 13.8%
Additions to Property and Equipment** $ 12,594 $ 11,484
Identifiable Assets $ 77,133 $ 65,408
Pagers in Service 535,100 398,800
Average monthly service revenue per unit $ 12.43 $ 14.14
Transmitters in service 856 546
Disconnect rate per month 2.8% 2.9%
Marketing cost per net customer
unit addition $ 83 $ 81
* Amounts for 1993 have been reclassified to conform to year-end 1993
presentation.
** Does not include cash expenditures (in thousands) of $3,156 in 1994
which relate to additions in 1993.
Includes noncash expenditures (in thousands) of $407 in 1993.
Service revenues increased 22.8% ($6.9 million) in the
first half of 1994 from 1993, primarily as a result of the
34.2% growth in the number of pagers in service. A net
additional 136,300 pagers have been placed in service since
June 30, 1993. However, a continuing decline in average
revenue per pager has slowed service revenue growth. Average
monthly service revenue per pager declined 12.1% to $12.43 in
the first half of 1994 from $14.14 in the same period of 1993.
The decline in APP's average service revenue per pager is
consistent with the industry trend. However, APP's average
service revenue per pager remains above the industry average.
Declining average monthly service revenue per pager is related
to competitive factors and a shift toward lower revenue
distribution channels such as resellers and customers
purchasing pagers through retail operations.
Service expenses increased 13.5% ($4.3 million) in 1994
from 1993, primarily as a result of the costs of system
expansion and serving new customers. However, average monthly
operating cost per unit improved 20.7% to $7.45 in 1994 from
$9.39 in 1993 as a result of achieving increasing economies of
scale and operating efficiencies. Cost of services increased
12.1% ($939,000) in 1994 reflecting the additional costs of
providing service to the increased customer base and the costs
of upgrading and expanding the systems to improve system
reliability and coverage. APP's transmitters in service
increased to 856 at June 30, 1994 from 546 at June 30, 1993.
Selling and advertising expense increased 14.1% ($752,000) in
1994 over 1993. Selling and advertising expense increased at
a slower rate than the rate of growth in
-11-
pagers in service due to improved productivity of sales
personnel and increased use of lower-cost distribution
channels such as resellers and retail outlets. General and
administrative expense increased 9.9% ($1.2 million) due
primarily to additional bad debt expense ($484,000),
additional billing costs due to an enhancement of APP's
customer billing system ($210,000) and increases in employee-
related costs ($117,000). These increases in service expenses
were offset somewhat by a refund of health and life insurance
premiums totalling $540,000. Depreciation and amortization
charges increased 22.0% ($1.4 million) in 1994, reflecting
increased investment in pagers and related equipment and
additional amortization expense due to a June 1993
acquisition. Based on a study of useful lives, APP will
shorten the estimated useful lives of pagers and transmitters
beginning July 1, 1994. The change in estimated useful lives
is expected to increase depreciation expense by approximately
$1.5 million for the remainder of 1994 and $3.8 million for
1995.
Equipment sales revenue increased 33.7% ($1.8 million)
due to APP's increased emphasis on selling pagers to
customers, particularly through retail stores and resellers.
Cost of equipment sold increased 24.8% ($1.4 million) also due
to the increased focus on pager sales.
Operating income was $1.2 million in 1994 compared to a
net loss of $1.8 million in 1993. The improvement in
operating results reflects i) rapid growth in revenues due to
the growth in the customer base, offset somewhat by a
continuing decline in average monthly service revenue per
unit, ii) increased operating expenses due to the growth in
customer units, tempered by APP's efforts to reduce costs
through process improvements and economies of scale and iii) a
$540,000 health and life insurance premium refund.
Net income from radio paging operations totalled $222,000
in 1994 compared to a net loss of $2.6 million in 1993.
PARENT AND SERVICE COMPANY OPERATIONS
Other income, net includes the gross income of TDS's
computer, engineering and printing service companies and costs
of corporate operations. Additionally, 1993's amount includes
the $1.1 million charge to cease operations at APN, as
discussed previously.
Six Months Ended June 30,
-------------------------
1994 1993
---------- -----------
(Dollars in thousands)
Additions to Property and
Equipment* $ 3,471 $ 4,784
Identifiable Assets $ 83,915 $ 63,249
* Does not include cash expenditures (in thousands) of $512 and $179,
respectively, related to additions in prior periods.
Three Months Ended 6/30/94 Compared to Three Months Ended
6/30/93
CONSOLIDATED
Operating revenues grew 26.4% ($36.3 million) in 1994
primarily as a result of the growth in customers served.
Operating expenses rose 24.1% ($28.0 million) in 1994 as a
result of the continued rapid growth in USM's cellular
telephone operations and the steady growth in TDS Telecom's
and APP's operations. Operating income increased 39.6% to
$29.0 million in the
-12-
second quarter of 1994 from $20.8 million in 1993. The
increase in operating income reflects improvement in all three
business segments.
Three Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
CONSOLIDATED OPERATING INCOME
Telephone Operations $ 22,834 $ 21,240 $ 1,594
Cellular Telephone Operations 5,523 560 4,963
Radio Paging Operations 648 (1,025) 1,673
--------- -------- ----------
$ 29,005 $ 20,775 $ 8,230
========= ======== ==========
Operating Margins:
Telephone 32.5% 31.1%
Cellular Telephone* 7.2% 1.2%
Radio Paging* 3.4% (6.6)%
* Computed on Service Revenues
Investment and other income increased 21.5% ($1.1
million) in the second quarter of 1994 over the second quarter
of 1993. Cellular investment income increased 98.4% ($3.6
million), reflecting improvement in USM's equity-method
markets managed by others. Minority share of income increased
$1.7 million as shown in the following table. Other income,
net for 1994 includes a charge of $614,000 for USM's sale of
obsolete equipment, while 1993 includes a $1.1 million pretax
charge to cease operations at APN, income of $580,000 related
to USM's sale of the customer base in its reseller operation,
and income of $675,000 related to USM's settlement of a
lawsuit.
Minority share of income includes (a) the minority
shareholders' share of USM's net income or loss, (b) the
minority partners' share of income or loss of the cellular
markets majority-owned by USM and (c) the minority
shareholders' share of income of a telephone company majority-
owned by TDS.
MINORITY SHARE OF INCOME
Three Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
United States Cellular
Minority Shareholders' Share $ (1,085) $ 715 $ (1,800)
Minority Partners' Share (1,196) (1,220) 24
--------- -------- ----------
(2,281) (505) (1,776)
TDS Telecom (407) (528) 121
--------- -------- ----------
$ (2,688) $ (1,033) $ (1,655)
========= ======== ==========
-13-
Interest expense decreased 2.6% ($253,000) in 1994,
primarily due to a decrease in interest expense on higher cost
long-term debt retired with the proceeds from the sale of
$14.5 million of TDS's Medium-Term Notes. Income tax expense
increased 59.4% ($4.2 million) in 1994 compared with 1993 as
pretax income increased. The effective income tax rate was
44% in the second quarter of 1994 and 1993.
Net income increased to $14.3 million in the second
quarter of 1994 from $9.0 million in 1993. Earnings per
common share were $.26 in 1994 and $.18 in 1993. The weighted
average number of common shares outstanding increased 14.5% in
1994.
TELEPHONE OPERATIONS
Three Months Ended June 30,
-----------------------------------------------------
Change Change
Due To Excluding
1994 1993 Change Acquisitions Acquisitions
------- ------- ------ ---------- -----------
(Dollars in thousands)
Operating Revenues
Local Service $20,103 $ 17,976 $ 2,127 $ 87 $ 2,040
Network Access and
Long-Distance 40,497 41,422 (925) 296 (1,221)
Miscellaneous 9,688 8,851 837 48 789
-------- -------- ------- --------- ----------
70,288 68,249 2,039 431 1,608
-------- -------- ------- --------- ----------
Operating Expenses
Plant Operations 10,631 10,320 311 84 227
Depreciation 14,743 13,450 1,293 62 1,231
Amortization 909 879 30 44 (14)
Customer Operations 9,965 10,126 (161) 123 (284)
Corporate and Other 11,206 12,234 (1,028) 101 (1,129)
-------- -------- ------- ---------- ----------
47,454 47,009 445 414 31
-------- -------- ------- ---------- ----------
Operating Income $22,834 $ 21,240 $ 1,594 $ 17 $ 1,577
======== ======== ======= ========== ==========
Operating revenues from telephone operations increased
3.0% ($2.0 million) in the second quarter of 1994 compared to
1993. The increase in revenues was primarily due to internal
access line growth, recovery of increased costs of providing
network access and sales of custom-calling and other features.
Local service revenues increased 11.8% ($2.1 million) in 1994,
network access and long-distance revenues decreased 2.2%
($925,000), and miscellaneous revenues increased 9.5%
($837,000) for reasons generally the same as for the first six
months. Operating expenses increased .9% ($445,000) in 1994,
for reasons generally the same as for the first six months.
-14-
CELLULAR TELEPHONE OPERATIONS
Three Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
Operating Revenues
Service* $ 77,065 $ 47,918 $ 29,147
Equipment Sales 3,592 2,634 958
--------- -------- ----------
80,657 50,552 30,105
--------- -------- ----------
Operating Expenses
System Operations* 12,074 8,686 3,388
Marketing and Selling 15,977 8,323 7,654
Cost of Equipment Sold 9,012 4,510 4,502
General and Administrative 22,480 17,885 4,595
Depreciation 9,520 5,969 3,551
Amortization 6,071 4,619 1,452
--------- -------- ----------
75,134 49,992 25,142
--------- -------- ----------
Operating Income $ 5,523 $ 560 $ 4,963
========= ======== ==========
* Amounts for 1993 amounts have been reclassified to conform to current
year presentation.
Service revenues increased 60.8% ($29.1 million) in the
second quarter of 1994. The revenue increase is primarily the
result of 75.0% customer growth in the systems serving USM's
majority-owned and managed markets, growth in roamer revenues
and the effects of acquisitions and start-ups. Average
monthly service revenue per customer declined to $82 in 1994
from $88 in 1993. Monthly local minutes of use averaged 103
in the second quarter of 1994 compared to 110 in 1993.
Revenues from local customers' usage of USM's systems
increased 64.2% ($18.0 million) in 1994 primarily due to the
increased number of customers served. Inbound roamer revenues
increased 52.5% ($8.6 million) in 1994. The increase in
inbound roamer revenues is primarily due to the increased
number of other carriers' customers using USM's systems and
the growth in the number of cell sites within those systems.
Long-distance revenues increased 86.7% ($2.5 million) as the
volume of long-distance calls billed by USM increased.
Equipment sales revenue reflects the sale of 34,500 and
12,600 cellular telephone units in 1994 and 1993,
respectively. The average revenue per telephone unit sold was
$104 in 1994 compared to $208 in 1993.
Operating expenses increased 50.3% ($25.1 million) in the
second quarter of 1994 for reasons generally the same as for
the first six months.
Operating income was $5.5 million in 1994 compared to
$560,000 in 1993. Operating margin on service revenues
improved to 7.2% in 1994 from 1.2% in 1993. The improvement
in operating income was primarily due to increased revenues
and cost efficiencies, partially offset by the costs
associated with the growth of USM's operations and the
addition of new markets.
Cellular investment income includes USM's and TDS's share
of the net incomes or losses of cellular markets in which they
have a minority interest and for which they follow the equity
method of accounting, net of amortization of license cost
related to those minority interests.
-15-
CELLULAR INVESTMENT INCOME
Net of License Cost Amortization
Three Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
Cellular Systems Managed by USM $ 538 $ 120 $ 418
Cellular Systems Managed by Others 6,763 3,560 3,203
--------- -------- ----------
$ 7,301 $ 3,680 $ 3,621
========= ======== ==========
Net income from cellular telephone operations was $5.1
million in 1994 compared to a net loss of $3.6 million in
1993. Such net income or loss excludes the USM minority
shareholders' share of such income or loss. Net income or
loss from cellular telephone operations does not include
income taxes from inclusion in the TDS consolidated federal
tax return. Under a tax allocation agreement between TDS and
USM, TDS does not reimburse USM currently for income tax
benefits and credits. Instead, such benefits and credits are
carried forward until they can be used by USM.
RADIO PAGING OPERATIONS
Three Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
Service Operations
Revenues* $ 18,824 $ 15,487 $ 3,337
--------- --------- ----------
Costs and Expenses
Cost of Services* 4,462 4,093 369
Selling and Advertising 3,078 2,702 376
General and Administrative* 6,708 6,301 407
Depreciation 3,256 2,735 521
Amortization* 601 403 198
--------- --------- ----------
18,105 16,234 1,871
--------- --------- ----------
Service Operating Income (Loss) 719 (747) 1,466
--------- --------- ----------
Equipment Sales
Revenue 3,816 3,017 799
Cost of Equipment Sold 3,887 3,295 592
--------- --------- ----------
Equipment Sales Loss (71) (278) 207
--------- --------- ----------
Operating Income (Loss) $ 648 $ (1,025) $ 1,673
========= ========= ==========
* Amounts for 1993 have been reclassified to conform to year-end 1993
presentation.
Service revenues increased 21.5% ($3.3 million) in the
second quarter of 1994 from 1993, primarily as a result of the
34.2% growth in the number of pagers in service. Service
expenses increased 11.5% ($1.9 million) in 1994 from 1993,
primarily as a result of the costs of system expansion and
serving new customers. Operating income was $648,000 in 1994
compared to an operating loss of $1.0 million in 1993. Net
income from radio paging operations totalled $210,000 in 1994
compared to a net loss of $1.7 million in 1993.
-16-
FINANCIAL RESOURCES AND LIQUIDITY
----------------------------------
Cash flows from operating activities totalled $104.6
million in the first half of 1994 compared to $63.9 million in
1993. Consolidated operating cash flow totalled $120.3
million in 1994 compared to $90.7 million in 1993. The 32.7%
increase in operating cash flow reflects improved operating
cash flow in all three of TDS's primary business units.
Six Months Ended June 30,
-----------------------------------
1994 1993 Change
---------- --------- ------------
(Dollars in thousands)
OPERATING CASH FLOW
Telephone Operations $ 76,667 $ 68,778 $ 7,889
Cellular Telephone Operations 34,828 17,459 17,369
Radio Paging Operations 8,784 4,433 4,351
--------- -------- ----------
$ 120,279 $ 90,670 $ 29,609
========= ======== ==========
Cash flows from other operating activities (investment
and other income, interest and income tax expense, and changes
in working capital and other assets and liabilities) required
$15.7 million in the first half of 1994 compared to $26.8
million in 1993.
Cash flows from financing activities totalled $60.3
million in the first half of 1994 compared to $74.2 million in
1993. Sales of common stock by TDS and APP and long- and
short-term borrowings provided most of the Company's external
financing requirements during the first half of 1994. Long-
term debt borrowings, primarily under TDS's Medium-Term Note
Program, provided most of the Company's external financing
requirements during the first half of 1993. TDS has used
short-term debt to finance its cellular telephone and radio
paging operations, for acquisitions and for general corporate
purposes. Proceeds from the sale of long-term debt and equity
securities from time to time have retired such short-term
debt.
Cash flows from investing activities required cash of
$174.4 million in the first half of 1994 compared to $149.3
million in 1993. Such cash flows primarily consist of
additions to property, plant and equipment requiring the use
of cash, and cash flows for acquisitions and investments in
cellular telephone partnerships. Cash expenditures for
property, plant and equipment totalled $129.3 million in the
first half of 1994 compared to $85.5 million in 1993. Cash
used for acquisitions totalled $25.5 million and $45.7 million
in the first six months of 1994 and 1993, respectively.
Additions to telephone plant and equipment totalled $33.8
million for the first half of 1994. Management expects that
plant and equipment additions will total about $95 million in
1994, exclusive of acquisitions. This construction budget
includes $40 million for digital switches, $44 million for
outside plant upgrades such as the installation of fiber optic
cables and $11 million for other construction. The Company
plans to finance its telephone construction programs primarily
using internally generated funds supplemented by long-term
financing obtained under federal government programs.
Additions to cellular telephone plant and equipment
totalled $59.8 million for the first half of 1994. Management
expects such cellular telephone expenditures during 1994 to
total about $140 million for enhancements of existing
majority-owned systems and for the construction of switching
offices and cell sites. These additions will be financed by a
combination of the Company's short-term bank financing, vendor
financing and sales of USM equity and/or debt securities.
-17-
Additions to radio paging property and equipment totalled
$12.6 million for the first half of 1994. Management expects
that such property and equipment additions will total about
$25 million in 1994, primarily for the purchase of pagers.
The Company's short-term bank financing along with radio
paging operations' internally generated cash will finance
these property additions.
Other fixed asset additions totalled $3.5 million for the
first half of 1994. Management expects that these additions
will total about $10 million in 1994 and will be financed
primarily using short-term bank notes along with internally
generated cash.
Cash flows used for acquisitions, net of cash acquired,
totalled $25.5 million in the first half of 1994 compared to
$45.7 million in 1993. During the first half of 1994, TDS
purchased controlling interests in eight cellular markets and
several minority cellular interests representing a total of
1.1 million population equivalents. Some of the entities
acquired during 1994 were subject to acquisition agreements
prior to 1993. The aggregate consideration for the
acquisitions completed in 1994 was $123.7 million, consisting
of $26.1 million in cash, 1.9 million TDS Common Shares ($92.9
million), 49,000 USM Common Shares ($1.3 million),
cancellation of a note receivable ($1.4 million) and the
obligation to deliver 42,000 TDS Common Shares ($2.0 million)
in the future.
TDS's active acquisition program may require substantial
external financing during the remainder of 1994. TDS and its
subsidiaries had entered into agreements at June 30, 1994, to
acquire controlling interests in four cellular markets and one
minority interest representing approximately 919,000
population equivalents, three telephone companies and one
paging company for an aggregate consideration of approximately
$145.1 million. If all of these pending acquisitions are
completed as planned, TDS will issue approximately 3.1 million
Common Shares ($122.7 million), 125,000 Preferred Shares
($12.5 million) and will pay approximately $9.9 million in
cash. Any cellular interests acquired by TDS are expected to
be assigned to USM, and at the time this occurs USM will
reimburse TDS for TDS's consideration delivered and costs
incurred in such acquisitions in the form of USM Common
Shares, notes payable and cash. Additionally, USM has
commitments to issue 1.0 million of its Common Shares in 1994
through 1996 in connection with acquisitions closed in 1993
and prior years.
TDS and USM plan to continue to acquire additional
cellular interests in markets that strengthen USM's position,
and are currently negotiating agreements for the acquisition
of additional cellular interests. TDS and APP are also
currently negotiating agreements for the acquisition of
additional telephone and paging companies, respectively.
TDS is a party to a legal proceeding before the Federal
Communications Commission ("FCC") involving a cellular license
in a Wisconsin Rural Service Area. Pending the resolution of
the issues in the Wisconsin proceeding, further FCC grants to
TDS and its subsidiaries will be conditioned on the outcome of
that proceeding. TDS's and USM's ability to sell or exchange
properties with third parties while such proceeding is pending
may be affected. See Note 14 of Notes to Consolidated
Financial Statements, Legal Proceedings (La Star Application),
in the Company's 1993 Annual Report to Shareholders for a
discussion of the proceeding involving the Wisconsin Rural
Service Area and the La Star proceeding. As disclosed in the
Company's Current Report on Form 8-K dated March 30, 1994, the
FCC's decision in the La Star proceeding was vacated and
remanded to the FCC for further proceedings by a federal court
of appeals. The Company is evaluating what impact the court's
decision in the La Star matter may have on the Wisconsin
proceeding.
-18-
Liquidity. Management believes that TDS has adequate
internal and external resources to finance its business
development, construction and acquisition programs. TDS and
its subsidiaries had cash and temporary investments totalling
$65.6 million and longer-term investments totalling $72.0
million at June 30, 1994. These investments are primarily the
result of telephone operations' internally generated cash.
While certain regulated telephone subsidiaries' debt
agreements place limits on intercompany dividend payments,
these restrictions are not expected to affect the Company's
ability to meet its cash obligations.
TDS and its subsidiaries had $110 million of bank lines
of credit for general corporate purposes at June 30, 1994, all
of which were committed. Unused amounts of such lines
totalled $71.5 million, all of which were committed. These
line of credit agreements provide for borrowings at negotiated
rates up to the prime rate.
TDS and USM also have access to debt and equity capital
markets, including shelf registration statements covering
issuance of common stock for acquisitions, and in the case of
TDS, covering the issuance of Common Shares for cash. TDS's
shelf registration statement for Common Shares for
acquisitions had 4.6 million unissued shares at June 30, 1994,
including 1.8 million shares reserved under definitive
agreements. TDS has a universal shelf registration statement
which may be used from time to time to issue debt securities
and/or Common Shares for cash. At June 30, 1994, $277.6
million remained unused on the universal shelf. Of this
unused amount, up to $150 million has been allocated to TDS's
Series C Medium-Term Note Program. The remaining $127.6
million may be used for either debt or equity security
issuances. In February 1994, APP issued 3.5 million Common
Shares in an initial public offering at a price of $14.00 per
share. The $45.6 million proceeds (after underwriting
discount) were used to reduce TDS's short-term debt and for
general corporate purposes.
Management believes that TDS's internal cash flow and
funds available from cash and cash investments provide
substantial financial flexibility. TDS also has substantial
lines of credit and longer-term financing commitments to meet
its short- and longer-term financing needs. Moreover, TDS,
USM and APP have access to public and private capital markets
and anticipate issuing debt and equity securities when capital
requirements (including acquisitions), financial market
conditions and other factors warrant.
-19-
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Unaudited
---------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1994 1993 1994 1993
---------- -------- --------- --------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Telephone $ 70,288 $ 68,249 $ 141,348 $ 130,206
Cellular telephone 80,657 50,552 146,890 92,020
Radio paging 22,640 18,504 44,149 35,479
--------- ---------- ---------- ----------
173,585 137,305 332,387 257,705
--------- ---------- ---------- ----------
OPERATING EXPENSES
Telephone 47,454 47,009 95,776 89,464
Cellular telephone 75,134 49,992 142,371 94,840
Radio paging 21,992 19,529 42,931 37,250
--------- ---------- ---------- ----------
144,580 116,530 281,078 221,554
--------- ---------- ---------- ----------
OPERATING INCOME 29,005 20,775 51,309 36,151
--------- ---------- ---------- ----------
INVESTMENT AND OTHER INCOME
Interest and dividend income 2,456 1,768 4,504 3,546
Minority share of income (2,688) (1,033) (3,885) (278)
Cellular investment income,
net of license cost
amortization 7,301 3,680 10,884 6,132
Gain on sale of cellular
interests --- 119 --- 119
Other income (expense), net (1,060) 412 (291) 596
--------- ---------- ---------- ----------
6,009 4,946 11,212 10,115
--------- ---------- ---------- ----------
INCOME BEFORE INTEREST
AND INCOME TAXES 35,014 25,721 62,521 46,266
Interest expense 9,444 9,697 18,693 18,083
--------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 25,570 16,024 43,828 28,183
Income tax expense 11,250 7,057 19,284 12,413
--------- ---------- ---------- ----------
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES 14,320 8,967 24,544 15,770
Cumulative effect of accounting
changes --- --- (723) ---
--------- ---------- ---------- ----------
NET INCOME 14,320 8,967 23,821 15,770
Preferred Dividend Requirement (510) (596) (1,137) (1,192)
--------- ---------- ---------- ----------
NET INCOME AVAILABLE TO
COMMON $ 13,810 $ 8,371 $ 22,684 $ 14,578
========= ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES (000s) 53,217 46,469 52,758 45,365
EARNINGS PER COMMON SHARE:
Before cumulative effect of
accounting changes $ .26 $ .18 $ .44 $ .32
Cumulative effect of accounting
changes --- --- (.01) ---
--------- ---------- ---------- ----------
Net Income $ .26 $ .18 $ .43 $ .32
========= ========== ========== ==========
DIVIDENDS PER COMMON AND
SERIES A COMMON SHARE $ .09 $ .085 $ .18 $ .17
========= ========== ========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
-20-
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
-----------
Six Months Ended
June 30,
-------------------------
1994 1993
---------- -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,821 $ 15,770
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Cumulative effect of accounting changes 723 ---
Depreciation and amortization 74,211 59,457
Deferred taxes 9,484 3,866
Investment income (12,909) (8,475)
Minority share of income 3,885 278
Gain on sale of cellular interests --- (119)
Other noncash expense 3,022 3,523
Change in accounts receivable (16,403) (9,857)
Change in accounts payable 12,000 (581)
Change in accrued taxes 3,136 (715)
Change in other assets and liabilities 3,620 719
----------- -----------
104,590 63,866
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 10,305 98,576
Repayments of long-term debt (20,996) (17,765)
Change in notes payable 32,416 679
Common stock issued 5,983 1,430
Minority partner capital distributions (1,923) (226)
Redemption of preferred stock (268) (104)
Dividends paid (10,219) (8,605)
Sale of stock by a subsidiary 45,032 242
----------- -----------
60,330 74,227
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (129,254) (85,489)
Investments in and advances to cellular
minority partnerships (12,906) (9,120)
Distributions from partnerships 8,962 5,914
Other investments (14,187) (18,855)
Acquisitions, excluding cash acquired (25,541) (45,677)
Change in temporary investments (1,487) 3,958
----------- -----------
(174,413) (149,269)
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (9,493) (11,176)
CASH AND CASH EQUIVALENTS -
Beginning of period 55,666 40,810
----------- -----------
End of period $ 46,173 $ 29,634
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
-21-
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
June 30, 1994 December 31, 1993
--------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 46,173 $ 55,666
Temporary investments 19,434 17,719
Accounts receivable from customers
and others 98,171 80,796
Materials and supplies, at average
cost, and other current assets 27,659 25,375
------------ -----------
191,437 179,556
------------ -----------
INVESTMENTS
Cellular limited partnership
interests 106,715 101,210
Cellular license acquisition
costs, net 112,576 92,277
Marketable equity securities 21,108 19,368
Other 127,546 115,532
------------ -----------
367,945 328,387
------------ -----------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant and franchise
costs, net 639,308 638,848
Cellular telephone plant and
license costs, net 1,149,663 1,014,103
Radio paging, net 56,643 52,945
Other, net 31,365 32,402
------------ -----------
1,876,979 1,738,298
------------ -----------
OTHER ASSETS AND DEFERRED CHARGES 20,138 12,941
------------ -----------
$2,456,499 $2,259,182
============ ===========
The accompanying notes to financial statements
are an integral part of these statements.
-22-
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
June 30, 1994 December 31, 1993
--------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt
and preferred stock $ 34,676 $ 24,859
Notes payable 38,754 6,309
Accounts payable 76,634 82,878
Advance billings and
customer deposits 18,770 17,273
Accrued interest 8,485 8,968
Accrued taxes 11,471 7,995
Other current liabilities 18,368 15,249
------------ -----------
207,158 163,531
------------ -----------
DEFERRED LIABILITIES AND CREDITS 92,313 90,979
------------ -----------
LONG-TERM DEBT, excluding
current portion 504,266 514,442
------------ -----------
REDEEMABLE PREFERRED STOCK, excluding
current portion 15,294 25,632
------------ -----------
MINORITY INTEREST in subsidiaries 248,916 223,480
------------ -----------
NONREDEEMABLE PREFERRED STOCK 16,636 16,833
------------ -----------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1
per share 45,838 43,504
Series A Common Shares, par
value $1 per share 6,884 6,881
Common Shares issuable
(41,908 and 304,328 shares,
respectively) 1,995 15,189
Capital in excess of par value 1,214,324 1,069,022
Retained earnings 102,875 89,689
------------ -----------
1,371,916 1,224,285
------------ -----------
$2,456,499 $2,259,182
============ ===========
The accompanying notes to financial statements
are an integral part of these statements.
-23-
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The June 30, 1994 consolidated financial statements
included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with
generally accepted accounting principles have been
condensed or omitted pursuant to such rules and
regulations, although the Company believes that the
disclosures are adequate to make the information
presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes
thereto included in the Company's latest annual report on
Form 10-K, and with respect to certain investments in
debt and equity securities, Note 2 of Notes to
Consolidated Financial Statements included in the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994.
The accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only
normal recurring items) necessary to present fairly the
financial position as of June 30, 1994, and the results
of operations and cash flows for the six months ended
June 30, 1994 and 1993. The results of operations for
the six months ended June 30, 1994 and 1993, are not
necessarily indicative of the results to be expected for
the full year. Certain 1993 cellular and paging
operating revenues and expenses have been reclassified to
conform to current year presentation.
2. Earnings per Common Share were computed by dividing Net
Income Available to Common by the weighted average number
of common and common equivalent shares outstanding during
the period. Dilutive common stock equivalents at June
30, 1994, consist of dilutive Common Share options.
3. Assuming that acquisitions accounted for as purchases
during the period January 1, 1993, to June 30, 1994, had
taken place on January 1, 1993, pro forma results of
operations from continuing operations would have been,
for the six months ended June 30, 1994: operating
revenues $333.4 million, net income before cumulative
effect of accounting changes $24.0 million and primary
earnings per common share before cumulative effect of
accounting changes $.43; and would have been, for the six
months ended June 30, 1993: operating revenues $273.3
million, net income before cumulative effect of
accounting changes $9.6 million and primary earnings per
common share before cumulative effect of accounting
changes $.17.
-24-
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Supplemental Cash Flow Information
Cash and cash equivalents includes cash and those short-
term, highly liquid investments with original maturities
of three months or less. Those investments with original
maturities of three months to twelve months are
classified as temporary investments.
TDS acquired certain cellular licenses and operating
companies in 1994 and 1993. TDS also acquired two
telephone companies and one paging company during the
first half of 1993. In conjunction with these
acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred
Shares issued.
Six Months Ended
June 30,
-------------------------
1994 1993
---------- -----------
(Dollars in thousands)
Property, plant and equipment $ 6,648 $ 62,011
Cellular licenses 120,412 227,159
Increase (decrease) in equity method
investment in cellular interests (4,816) 115
Long-term debt --- (21,933)
Deferred credits --- (3,858)
Other assets and liabilities,
excluding cash and cash equivalents (1,234) 2,737
Minority interest 701 (11,884)
Common Shares issued and issuable (94,891) (199,710)
Preferred Shares issued --- (3,000)
USM Stock issued and issuable (1,279) (3,051)
Subsidiary preferred stock issued --- (2,909)
---------- ---------
Decrease in cash due to acquisitions $ 25,541 $ 45,677
========== =========
The following table summarizes interest and income taxes
paid, and other non-cash transactions.
Six Months Ended
June 30,
-------------------------
1994 1993
---------- -----------
(Dollars in thousands)
Interest paid $ 19,095 $ 15,645
Income taxes paid 10,397 8,192
Common Shares issued by TDS for
conversion of TDS and Subsidiary
Preferred Stock $ 197 $ 1,381
-25-
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Subsequent Event
The Company has entered into a standby letter of credit
agreement effective July 20, 1994, with a financial
institution. This standby letter of credit, which will
not exceed $9.9 million, provides supplemental security
in support of a bank loan to an entity minority-owned by
the Company. The bank loan, which is secured primarily
by a first mortgage on the tangible and intangible assets
of a cellular operating system to be constructed by the
minority-owned entity, was arranged to finance the
construction of this cellular system, the acquisition of
customers and the initial operation of the system.
The cellular license for this system was originally
awarded to a third party which constructed its own
cellular system. The third party's license application
was subsequently found to be flawed by the Federal
Communications Commission ("FCC"), and the license was
then awarded to the entity minority-owned by the Company.
The third party is appealing the FCC's decision. If the
appeal is successful, the license will be removed from
the entity minority-owned by the Company. The third
party will then resume providing cellular service and
will not be obligated to purchase the minority-owned
entity's cellular system. Such removal of the license
from the minority-owned entity constitutes an event of
default under its bank loan agreement, and the bank may
call upon the Company's standby letter of credit to
satisfy any amounts still due under this loan agreement.
-26-
PART II. OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security-Holders
------------------------------------------------------------
At the Annual Meeting of Shareholders of TDS, held on
May 6, 1994, the following numbers of votes were cast for the
matters indicated:
1.a. Election of one Class I Director of the Company by the
holders of Common Shares and holders of shares of
Preferred Shares issued before October 31, 1981:
Broker
Nominee For Withhold Non-Vote
-------- --- -------- --------
Donald R. Brown 39,811,519 597,615 -0-
1.b. Election of two Class I Directors of the Company by the
holders of Series A Common Shares and the holders of
Preferred Shares issued after October 31, 1981:
Broker
Nominee For Withhold Non-Vote
------- --- -------- --------
Robert J. Collins 68,701,711 2,923 -0-
Rudolph E. Hornacek 68,696,165 8,469 -0-
2. Proposal to Approve the 1993 Employee Stock Purchase
Plan of the Company:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
108,329,717 512,461 271,590 -0-
3. Proposal to Ratify the Selection of Arthur Andersen &
Co. as Independent Public Accountants for 1994:
For Against Abstain Non-Vote
--- ------- ------- --------
108,909,678 41,772 162,319 -0-
-27-
PART II. OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
(a) Exhibit 11 - Computation of earnings per common
share.
(b) Exhibit 12 - Statement regarding computation of
ratios.
(c) Exhibit 99.1 - Unaudited Consolidated Statements of
Income for the Twelve Months Ended
June 30, 1994 and 1993.
Exhibit 99.2 - Pro Forma Financial Information.
(d) Reports on Form 8-K filed during the quarter ended
June 30, 1994:
TDS filed a Report on Form 8-K dated April 22, 1994
which included the Selling Agency Agreement between
TDS and Salomon Brothers Inc and Merrill Lynch & Co.
with respect to the issue and sale by TDS of up to
$150,000,000 aggregate principal amount of its
Medium-Term Notes, Series C, Due from Nine Months to
Thirty Years from Date of Issue.
No other reports on Form 8-K were filed during the
quarter ended June 30, 1994.
-28-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------
(Registrant)
Date August 12, 1994 /s/ MURRAY L. SWANSON
------------------ ---------------------------------
Murray L. Swanson,
Executive Vice President-Finance
Date August 12, 1994 /s/ GREGORY J. WILKINSON
------------------- ---------------------------------
Gregory J. Wilkinson,
Vice President and Controller
(Principal Accounting Officer)
-29-